-----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, SNSzBNQvxuxE6F+saxgsu8q9CuEEspGTT5LSqcRupcZ/LsEF01BUeKeg6xnfoM3y BCqeIQIq0OyHCdBj494gCA== 0001047469-99-026363.txt : 19990705 0001047469-99-026363.hdr.sgml : 19990705 ACCESSION NUMBER: 0001047469-99-026363 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 39 FILED AS OF DATE: 19990702 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLUESTONE SOFTWARE INC CENTRAL INDEX KEY: 0001039242 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 222964141 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-82213 FILM NUMBER: 99658889 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 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ BLUESTONE SOFTWARE, INC. (Exact name of Registrant as specified in its charter) DELAWARE 7372 22-2964141 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification No.)
------------------------ 1000 BRIGGS ROAD MOUNT LAUREL, NEW JERSEY 08054 (856) 727-4600 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------------------ P. KEVIN KILROY PRESIDENT AND CHIEF EXECUTIVE OFFICER BLUESTONE SOFTWARE, INC. 1000 BRIGGS ROAD MOUNT LAUREL, NEW JERSEY 08054 (856) 727-4600 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: WILLIAM A. SCARI, ESQUIRE WILLIAM J. GRANT, JR., ESQUIRE PAUL T. PORRINI, ESQUIRE WILLKIE FARR & GALLAGHER PEPPER HAMILTON LLP 787 SEVENTH AVENUE 1235 WESTLAKES DRIVE, SUITE 400 NEW YORK, NEW YORK 10019 BERWYN, PENNSYLVANIA 19312 (212) 728-8000 (610) 640-7800
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE (1) (2) REGISTRATION FEE Common Stock, $.001 par value........................................................... $46,000,000 $12,788
(1) Estimated solely for purposes of determining the registration fee in accordance with Rule 457(o) under the Securities Act of 1933. (2) Includes amount subject to the over-allotment option granted to the Underwriters. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS SUBJECT TO COMPLETION 1999 SHARES [LOGO] COMMON STOCK ------------------ We are a leading provider of software that permits businesses to extend information over the World Wide Web in a highly scalable and controlled manner. We are offering shares of common stock in an initial public offering. We have made application to list our common stock for quotation on the Nasdaq National Market under the symbol "BLSW." We expect that the initial public offering price will be between $ and $ per share. The market price of the shares of common stock after this offering may be higher or lower than the initial public offering price. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ---------------------
PER SHARE TOTAL ---------- ---------- Public Offering Price..................................................................... $ $ Underwriting Discount..................................................................... $ $ Proceeds to Bluestone..................................................................... $ $
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We and certain selling stockholders have granted the underwriters a 30-day option to purchase up to additional shares of common stock at the initial public offering price to cover any over-allotments. We expect to issue these shares on , 1999. DEUTSCHE BANC ALEX / / BROWN SOUNDVIEW TECHNOLOGY GROUP C.E. UNTERBERG, TOWBIN LEGG MASON WOOD WALKER INCORPORATED , 1999 [INSIDE FRONT COVER OF PROSPECTUS] GRAPHIC: Single page graphic of a billboard against a blue sky with white clouds. Written in the top right corner of the graphic in the sky is the following text: "XML and EJB Support Since 8/98. Bluestone XML Suite-TM- Now Available!" In the billboard is the following statement: "BLUESTONE APP SERVER JUDGED "HEAD AND SHOULDERS" ABOVE THE REST." The right corner of the billboard contains the Bluestone logo followed by the following text: "Bluestone Software, Enterprise Interaction Management, Get (EIM)powered." Under the graphic of the billboard is the following text, beginning with a graphic of a circular blue stone: "Some of the most prestigious application server software companies in the world recently competed in an independent study. The results were clear: "Bluestone's Sapphire/Web-Registered Trademark- stood head and shoulders above the others in performance, scalability and fault tolerance."* Bluestone is an industry leader in providing end-to-end, enterprise-class Internet commerce solutions. Bluestone's software for Enterprise Interaction Management (EIM)--the controlled exchange of enterprise information in a highly secure environment, gives businesses the power to develop, deploy, integrate and manage applications that extend their information over the Internet, intranets and extranets. Get Informed, get (EIM)powered." The lower center of the page contains the text: "BLUESTONE." Above that text and to the right is the following text: "NetworkWorld--10 Companies To Watch." Below the text "BLUESTONE," to the left is Bluestone's Web site address, "www.bluestone.com" and, to the right is the text, "Get (EIM)powered." The following text is found on the bottom of the page above the list of Bluestone's trademarks: *The application server test was conducted by Doculabs Inc., and is described in "Measuring Up App Servers," PC WEEK, April 5, 1999. - -------------------------------------------------------------------------------- Bluestone-Registered Trademark- and Sapphire/Web-Registered Trademark- are registered trademarks of Bluestone Software, Inc. Sapphire/ Universal Business Server-TM- (UBS), Sapphire/Enterprise Deployment Kit-TM- (EDK), Sapphire/ Application Manager-TM- (SAM), Sapphire/Integration Modules-TM- (SIMS), Enterprise Interaction Management-TM-, Bluestone iCommerce Suite-TM-, Sapphire/Developer-TM-, Sapphire/Developer Enterprise Edition-TM-, Bluestone XML Suite-TM-, Bluestone XML-Contact-TM-, Bluestone XML-Server-TM-, XwingML-TM-, Bluestone Visual-XML-TM-, Hot Versioning-TM-, and IQS-TM- (Internet Quality of Service) are trademarks of Bluestone Software, Inc. PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. GENERALLY, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS BY BLUESTONE AND CERTAIN SELLING STOCKHOLDERS IS NOT EXERCISED. THIS PROSPECTUS GIVES EFFECT TO THE AUTOMATIC CONVERSION OF ALL SHARES OF OUR OUTSTANDING SERIES A, SERIES B AND SERIES C CONVERTIBLE PREFERRED STOCK INTO AN AGGREGATE OF SHARES OF COMMON STOCK WHICH WILL OCCUR IMMEDIATELY UPON COMPLETION OF THIS OFFERING. THE TERMS "BLUESTONE," "WE," "US," AND "OUR" REFER TO BLUESTONE SOFTWARE, INC. FOR AN EXPLANATION REGARDING SOME OF THE TERMS USED IN THIS PROSPECTUS, SEE "GLOSSARY" BEGINNING ON PAGE 61. BLUESTONE We are a leading provider of software for "Enterprise Interaction Management," which enables businesses to extend information over the Web in a controlled manner and supports high volumes of users and interactions. Our flagship product, Sapphire/Web, is currently in Release 6 and has expanded to a product family that we believe is the leading JAVA/Web application server framework in the world. We believe that we are the only Web application server vendor to adequately address the four defining elements of Enterprise Interaction Management--development, deployment, integration and management--and therefore provide the most complete overall solution to our customers. In January 1999, we released Bluestone XML-Server, which represents a new breed of specialized Web application server focused on Internet Commerce. OUR INDUSTRY Businesses are rapidly adopting Web technology to upgrade their enterprise and client-server applications. Starting in the second half of 1998, businesses have shifted information technology resources from the implementation of a simple Web site to the deployment of complex enterprise applications over the Web. To date, most businesses have used Internet technology by employing Web servers to provide marketing material on their Web sites, but have not been able to take full advantage of the potential of the Internet. The existing information technology infrastructure of most companies leaves them unable to utilize, integrate or deploy existing information technology assets for Internet Commerce or use over the Web. Web servers are inherently limited because they are unable to reliably and securely handle a high volume of complicated interactions across the Internet, intranets or extranets. Deploying Web application servers allows dynamic access to complex information through the Web that is otherwise only available internally in an organization through its own applications and legacy databases. This enables a much broader and diverse audience to utilize and interact with a business' core systems and information. Uses of this capability include: - broad dissemination and more effective use of management information for decision support; - employee self-service applications that improve internal efficiencies; - customer relationship management activities that enhance service levels; - supply chain functions that increase coordination among trading partners; and - Internet Commerce initiatives that create entirely new revenue streams and business models. Demand for these capabilities has resulted in significant growth in the market for Web application servers. In an August 1998 report, Forrester Research estimated that the market for application server software would be approximately $700 million in 1999 and grow to approximately $1.8 billion by 2001, representing a compound annual growth rate of approximately 60%. Another independent technology research organization, Ovum, estimated in a June 1999 report that the market for application server 1 technologies, which Ovum defines in a manner that more closely resembles our addressable market, will grow to $17 billion by 2004. As this market develops, businesses are recognizing that a broader set of facilities, beyond simple deployment alone, are required to capture the substantial benefits that Internet computing can provide. OUR SOLUTION We provide a comprehensive framework that enables businesses to deploy information across the Internet, intranets and extranets to employees, customers, suppliers and partners. Our solution furnishes businesses with the ability to Web-enable legacy systems, develop new Web-centric applications, provide enterprise application integration and enable Internet Commerce. Our deployment solution is 100% Pure JAVA and therefore operates in all enterprise computing environments. We believe our solution is the only one available that allows organizations to develop, deploy, integrate and manage enterprise-scale, mission-critical applications. In particular, our solution offers the following facilities: - robust development environment and toolset that is open and highly adaptable and has many features that increase the speed and reduce the cost of systems development; - open, high-performance deployment that enables implementation of systems with high reliability, security and flexibility and supports very high volumes of interactions; - extensive integration capabilities that facilitate the integration of a business' overall computing environment; and - comprehensive management features that provide the necessary means to monitor, administer and report on a business' entire Web infrastructure. OUR GROWTH STRATEGY Our goal is to maintain and extend our position as a leading provider of Web application server technology, enterprise application integration and Internet Commerce solutions. Our key growth strategies are to: - maintain and extend technological leadership; - expand product offerings; - continue to focus on enterprise-scale solutions; - increase marketing and direct sales efforts; and - further develop indirect channels, partners and alliances. OUR CUSTOMERS Our solutions are applicable to a wide variety of industries and are used by many of the world's leading businesses, including: - three of the top five FORTUNE 500 companies in the electronics industry; - five of the top ten FORTUNE 500 companies in the computer equipment industry; - four of the top five FORTUNE 500 companies in the aerospace industry; - seven out of the top ten FORTUNE 500 companies in the telecommunications industry; - three of the top four FORTUNE 500 companies in the entertainment industry; and - five of the top ten FORTUNE 500 companies in the pharmaceuticals industry. 2 We market our products and services through our direct sales force and a network of value added resellers, independent software vendors, and systems integrators. Since 1996, we have sold our Sapphire/Web software products to over 500 customers. Our customers include ARI, AT&T, Deutsche Bank, Dreyfus Corporation, Eli Lilly, Hewlett-Packard, Houghton Mifflin Company, Just For Feet, MCI WorldCom, OpenConnect, Reliance National and Time, Inc. We were originally incorporated in 1989. Our executive offices are located at 1000 Briggs Road, Mount Laurel, New Jersey 08054. Our telephone number is (856) 727-4600. Information contained on our Web site at www.bluestone.com does not constitute a part of this prospectus. THE OFFERING Common stock offered by Bluestone............ shares Common stock outstanding after this offering................................... shares Use of proceeds.............................. product development, sales and marketing and working capital Proposed Nasdaq National Market symbol....... "BLSW"
Common stock outstanding after this offering is based on the number of shares outstanding as of March 31, 1999, pro forma to include our outstanding Series C preferred stock. It excludes: - 7,014,585 shares of common stock issuable upon exercise of options and warrants at a weighted average exercise price of $0.99 per share and 700,000 shares of common stock issuable upon the conversion of a convertible note at a conversion price of $0.71 per share. - 3,858,621 shares reserved for future grants under our stock option and directors' compensation plans. 3 SUMMARY FINANCIAL INFORMATION The following table sets forth certain of our historical, pro forma and adjusted financial data. The pro forma balance sheet data presented below reflects the sale of 9,191,176 shares of Series C preferred stock for $2.72 per share on May 25, 1999 and the conversion of all outstanding preferred stock, including the Series C preferred stock, and accrued dividends on preferred stock into common stock. The pro forma net loss per share amounts presented below reflect the outstanding preferred stock during each period presented on an as converted basis. The adjusted balance sheet data presented below gives effect to the receipt of the net proceeds from the sale of shares of common stock offered by us at an assumed offering price of $ per share, after deducting the estimated underwriting discounts and commissions and our estimated offering expenses. In April 1997, in connection with our sale of Series A preferred stock, we spun off our consulting division to our then sole stockholder. The consulting division spin-off has been reported as a discontinued operation. In April 1998, we decided to focus on internally developed software products and curtail the licensing and services related to third party products. No material license revenues from third party products were recognized after March 31, 1998.
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Software license fees.................................................. $ 1,475 $ 2,337 $ 3,391 $ 432 $ 2,257 Services............................................................... 43 2,179 3,620 937 1,020 Third party products and related services.............................. 6,555 5,225 1,107 785 -- --------- --------- --------- --------- --------- Total revenues..................................................... 8,073 9,741 8,118 2,154 3,277 Cost of revenues: Software license fees.................................................. 113 202 259 39 57 Services............................................................... 305 2,516 4,433 985 1,337 Third party products and related services.............................. 4,261 2,798 643 437 -- --------- --------- --------- --------- --------- Total cost of revenues............................................. 4,679 5,516 5,335 1,460 1,395 --------- --------- --------- --------- --------- Gross profit............................................................. 3,394 4,225 2,783 694 1,882 Operating expenses: Sales and marketing.................................................... 3,005 5,131 9,551 1,544 2,826 Product development.................................................... 702 1,295 2,474 360 904 General and administrative............................................. 1,515 1,616 2,316 447 635 --------- --------- --------- --------- --------- Total operating expenses........................................... 5,222 8,042 14,341 2,352 4,365 --------- --------- --------- --------- --------- Loss from operations..................................................... (1,828) (3,817) (11,558) (1,658) (2,483) Interest expense, net.................................................... (50) (80) (47) (41) (48) --------- --------- --------- --------- --------- Loss from continuing operations.......................................... (1,878) (3,896) (11,605) (1,699) (2,531) Income (loss) from discontinued operations............................... (738) 99 -- -- -- --------- --------- --------- --------- --------- Net loss................................................................. (2,616) (3,798) (11,605) (1,699) (2,531) Accretion of preferred stock redemption value............................ -- (240) (846) (84) (264) --------- --------- --------- --------- --------- Net loss available to common stockholders................................ $ (2,616) $ (4,038) $ (12,451) $ (1,783) $ (2,795) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Basic and diluted net income (loss) per share: Continuing operations.................................................. $ (0.21) $ (0.43) $ (1.29) $ (0.19) $ (0.28) Discontinued operations................................................ (0.08) 0.01 -- -- -- Accretion of preferred stock redemption value.......................... -- (0.03) (0.09) (0.01) (0.03) --------- --------- --------- --------- --------- $ (0.29) $ (0.45) $ (1.38) $ (0.20) $ (0.31) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Shares used in computing basic and diluted net income (loss) per share... 9,000 9,000 9,005 9,001 9,009 Pro forma basic and diluted net loss per share from continuing operations............................................................. $ $ $ $ --------- --------- --------- --------- --------- --------- --------- --------- Shares used in computing pro forma basic and diluted net loss per share..................................................................
MARCH 31, 1999 --------------------------------- ACTUAL PRO FORMA ADJUSTED --------- --------- ----------- (IN THOUSANDS, UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents....................................... $ 598 $ 23,903 Working capital (deficit)....................................... (2,866) 20,440 Total assets.................................................... 3,877 27,182 Long-term obligations, net of current portion................... 1,765 1,765 Mandatorily redeemable convertible preferred stock.............. 17,678 -- Total stockholders' equity (deficit)............................ (20,941) 20,042
4 RISK FACTORS THIS SECTION HIGHLIGHTS SPECIFIC RISKS WITH RESPECT TO AN INVESTMENT IN OUR BUSINESS. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. WE ALSO CAUTION YOU THAT THIS PROSPECTUS INCLUDES FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT'S BELIEFS AND ASSUMPTIONS AND ON INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING THE COMMON STOCK. WE HAVE HAD RECENT LOSSES AND MAY NOT BECOME PROFITABLE. We have incurred significant net losses since 1996, including losses of approximately $3.8 million and $11.6 million for the years ended December 31, 1997 and 1998, respectively. Our losses have resulted in an accumulated deficit of approximately $21.0 million as of March 31, 1999. Any significant shortfall of revenues in relation to our expectations or any material delay of customer orders would have an immediate adverse effect on our business, operating results and financial condition. We may not be profitable in any future period. Our future operating results will depend on many factors, including: - the overall growth rate for the markets in which we compete; - the level of market acceptance of, and demand for, our software products; - the level of product and price competition; - our ability to establish strategic marketing relationships, develop and market new and enhanced products, and control costs; - our ability to implement our business plan; - 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. OUR FUTURE OPERATING RESULTS DEPEND ON THE INTERNET, GROWTH IN ELECTRONIC COMMERCE AND INTERNET INFRASTRUCTURE DEVELOPMENT. Our future sales and any future profits are substantially dependent upon the widespread acceptance and use of the Internet as an effective medium of commerce by consumers and businesses. Rapid growth in the use of the Internet and other online services is a recent development and we are unsure whether that acceptance and use will continue to develop or that a sufficiently broad base of consumers will adopt and continue to use the Internet and other online services as a medium of commerce. To be successful, we must rely on consumers and businesses, who have historically used traditional means of commerce to purchase products, accepting and utilizing new ways of conducting business and exchanging information over the Internet. In addition, the Internet may not be accepted as a viable commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and Web performance improvements. If the Internet continues to experience significant growth in the number of users, frequency of use or an increase in bandwidth requirements, the Internet's infrastructure may not be able to support the demands placed upon it. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation. If Congress, or other governing bodies both within and outside the 5 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 SAPPHIRE/WEB AND ARE NOT SURE WHETHER THE MARKET FOR THESE PRODUCTS WILL CONTINUE TO GROW. We derive most of our software license revenues from our Sapphire/Web software. We expect to continue to be dependent upon the Sapphire/Web software products in the future, and any factor adversely affecting the market for Web application server software in general, or our software in particular, would adversely affect our ability to generate revenues. The market for Web application server software is competitive, highly fragmented and characterized by rapid technological change. Our future financial performance will depend in large part on the successful development, introduction and customer acceptance of our new products and product enhancements in a timely and cost effective manner. After the offering, we expect to commit significant resources to market and further develop the Sapphire/Web software products and enhance the brand awareness of Sapphire/Web products. The market for our software may not continue to grow or may grow at a slower rate than we expect. Furthermore, the market may not accept our products. If this market fails to grow or grows more slowly than we anticipate, or if the market fails to accept our products, our business could suffer. OUR RESULTS WILL DEPEND UPON THE MARKET'S ACCEPTANCE AND ADOPTION OF JAVA AND XML SERVER TECHNOLOGIES. Our Sapphire/Web product is 100% Pure JAVA. Therefore, its continued acceptance 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 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. COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR BUSINESS. The market for our products is intensely competitive, highly fragmented, characterized by rapid technological change and significantly affected by new product introductions. Recent acquisitions of several of our competitors by large software companies and other market activities of industry participants have increased the competition in our market. Our competitors consist of a number of private and public companies including, among others: BEA Systems which acquired WebLogic; IBM; Microsoft; Oracle; and Sun Microsystems, which acquired NetDynamics and the rights to Netscape's Application Server. In addition, we face competition from in-house software developers who may develop some or all of the functionality that our products provide. Many of our competitors have 6 longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition, a broader range of products to offer and a larger installed base of customers than us, any of which could provide them with a significant competitive advantage. We expect to face increased competition in the future from our current competitors. In addition, new competitors, or alliances among existing and future competitors, may emerge and rapidly gain significant market share. We also may face increased competition from existing large business application software vendors that may broaden their product offerings to include Web application server software. Their significant installed customer bases and abilities to offer a broad solution and price these new products as incremental add-ons to existing systems could provide them with a significant competitive advantage. OUR CUSTOMERS ARE CONCENTRATED AND THE LOSS OF ONE OF OUR LARGEST CUSTOMERS COULD CAUSE OUR REVENUES TO DROP QUICKLY AND UNEXPECTEDLY. Our top ten customers for the year ended December 31, 1998 and the quarter ended March 31, 1999 in the aggregate accounted for approximately 39% and 72%, respectively, of our revenues. Hewlett-Packard accounted for more than 10% of our revenues for the year ended December 31, 1998 and OpenConnect accounted for more than 10% of our revenues for the quarter ended March 31, 1999. We expect that a small number of customers will continue to account for a substantial portion of revenues in any given quarter in the foreseeable future, although it is unusual for the same customer to account for a substantial amount of revenues in each of several quarters. As a result, our inability to secure major customers during a given period or the loss of any one major customer could cause our revenues to drop quickly and unexpectedly. OUR SUCCESS DEPENDS UPON THE DEVELOPMENT OF NEW PRODUCTS AND SERVICES IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY. The market for Web application server systems 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. Complex software, like our products, frequently contains undetected errors or "bugs" when first introduced or when new versions are released that, despite testing, are discovered only after a product has been installed and used by customers. Our software may contain errors and these errors may result 7 in a delay or loss of revenues, the diversion of development resources, damage to our reputation, increased service and warranty costs and impaired market acceptance of these products. OUR STOCK HAS NOT TRADED PUBLICLY, AND AFTER THIS OFFERING ITS MARKET PRICE MAY FLUCTUATE WIDELY. Prior to this offering, there has been no public market for our common stock. The market price of our common stock could fluctuate substantially due to: - quarterly fluctuations in operating results; - 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. 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. Stock prices of technology companies, especially Internet-related companies, have been highly volatile. Our initial public offering price may not be indicative of the price of our stock that will prevail in the trading market. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has at times been instituted against that company. If we become subject to securities litigation, we could incur substantial costs and experience a diversion of management's attention and resources. WE NEED TO MANAGE OUR GROWTH EFFECTIVELY OR WE MAY NOT SUCCEED. 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, 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 8 demands that growth may impose on our systems, procedures and structure. Any failure to adequately anticipate and respond to these demands or manage our growth effectively would have a material adverse effect on our future prospects. THE DEVELOPMENT OF INTERNATIONAL OPERATIONS WILL CAUSE US TO FACE ADDITIONAL RISKS. We expect to expand our international operations and international sales and marketing efforts. We have limited experience in marketing, selling and distributing our products and services internationally. International operations are subject to inherent risks, including the following: - 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 SUCCESS DEPENDS ON ONGOING SALES THROUGH A LIMITED NUMBER OF INDIRECT CHANNELS. We derive a significant portion of our revenues through a limited number of independent software vendors, systems integrators, distributors and resellers. Although we intend to increase our marketing and direct sales efforts, we expect that a limited number of these indirect channels will continue to account for a significant portion of our revenues in any given quarter in the foreseeable future. To be successful, we must continue to foster and maintain our existing indirect channels, as well as develop new relationships. The loss of, or reduction in orders through, existing indirect channels or the failure to develop new indirect channel relationships could cause our revenues to decline and have a material adverse effect on our business. IF WE LOSE OUR KEY PERSONNEL, OR FAIL TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL, THE SUCCESS AND GROWTH OF OUR BUSINESS MAY SUFFER. A significant portion of our senior management team has been in place for a relatively short period of time. Our success will depend to a significant extent on their ability to gain the trust and confidence of our other employees and to work effectively as a team. Our future success will also depend significantly on our ability to attract, integrate, motivate and retain additional highly skilled technical, managerial, sales, marketing, and services personnel. Competition for skilled personnel is intense, and we may not be successful in attracting, motivating and retaining the personnel required to grow and operate profitably. Failure to attract, integrate, motivate and retain highly skilled personnel could adversely affect our business, especially our ability to develop new products and enhance existing products. OUR SAPPHIRE/WEB PRODUCT IS SUBJECT TO LENGTHY AND VARIABLE SALES CYCLES. Our Sapphire/Web software is generally used for mission-critical or enterprise-wide purposes and involves a significant commitment of resources by our customers. A customer's decision to license our Sapphire/Web software generally involves the evaluation of the available alternatives by a significant number of personnel in various functional and geographic areas, each often having specific and conflicting requirements. Accordingly, we typically must expend substantial resources educating prospective customers about the value of our Sapphire/Web software solutions. For these reasons, the 9 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. IMPLEMENTATION OF OUR SAPPHIRE/WEB SOFTWARE IS COMPLEX AND REQUIRES SIGNIFICANT COMMITMENT BY CUSTOMERS. Implementation of our Sapphire/Web software often involves a significant commitment of financial and other resources by our customers. The customer's implementation cycle can be lengthy due to the size and complexity of their systems and operations. In addition, our customers rely heavily on third party systems integrators to assist them with the installation of the Sapphire/Web software. Our failure or the failure of our alliance partners, our customers or our third party integrators to implement successfully our Sapphire/Web software could result in dissatisfied customers which could adversely affect our reputation. WE MAY REQUIRE FUTURE ADDITIONAL FUNDING TO STAY IN BUSINESS. Over time, we may require additional financing for our operations. Additionally, we periodically review other companies' product lines and technologies for potential acquisition. Any material acquisitions or joint ventures could require additional financing. This additional financing may not be available to us on a timely basis if at all, or, if available, on terms acceptable to us. Moreover, additional financing may cause dilution to existing stockholders. CAPACITY RESTRICTIONS COULD REDUCE THE DEMAND AND UTILITY OF OUR PRODUCTS. Concurrency restrictions can limit Internet deployment and use capacity. The boundaries of our Sapphire/Web software and Bluestone XML server capacity, in terms of numbers of concurrent users or interactions, are unknown because, to date, no customer or testing environment has reached these boundaries. The Sapphire/Web software's or the Bluestone XML server's capacity boundaries may, at some future time, be reached and, when reached, may be insufficient to enable our customers to achieve their desired levels of information deployment and exchange. We may lose customers or fail to gain new customers if either of the Sapphire/Web software's or the Bluestone XML server's capacity boundary limits the ability of our customers to achieve expected levels of information deployment and exchange or Internet Commerce transactions. WE HAVE A LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND OTHERS COULD INFRINGE ON OR MISAPPROPRIATE OUR PROPRIETARY RIGHTS. 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. 10 The number of intellectual property claims in our industry may increase as the number of competing products grows and the functionality of products in different industry segments overlaps. Although we are not aware that any of our products infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not claim infringement by us with respect to current or future products. Any of these claims, with or without merit, could be time consuming to address, result in costly litigation, cause product shipment delays or require us to enter into royalty or license agreements. These royalty or license agreements might not be available on terms acceptable to us or at all, which could have a material adverse effect on our business. OUR FAILURE TO OBTAIN OR MAINTAIN THIRD PARTY LICENSES COULD HARM OUR BUSINESS. We have in the past and may in the future, resell, under license, certain third party software that enables our software to interact with other software systems or databases. In addition, we license certain software technology used to develop our software. The loss or inability to maintain any of these software licenses could result in delays or reductions in product shipments until equivalent software could be identified and licensed or compiled, which could adversely affect our business. WE MAY BE SUBJECT TO FUTURE PRODUCT LIABILITY CLAIMS AND OUR PRODUCTS' REPUTATIONS MAY SUFFER. Many of our installations involve projects that are critical to the operations of our customers' businesses and provide benefits that may be difficult to quantify. Any failure in a customer's system could result in a claim for substantial damages against us, regardless of our responsibility for the failure. Although our license agreements with our customers typically contain provisions designed to limit contractually our liability for damages arising from negligent acts, errors, mistakes or omissions, it is possible that these provisions will not be enforceable in certain instances or would otherwise not protect us from liability for damages. Although we maintain general liability insurance coverage, this coverage may not continue to be available on reasonable terms or at all, or may be insufficient to cover one or more large claims. We have entered into and plan to continue to enter into agreements with strategic alliance partners whereby we license our software products for integration with the alliance partners' software. If an alliance partner's software fails to meet customer expectations or causes a failure in its customer's systems, the reputation of our software products could be materially and adversely affected even if our software products performed in accordance with their functional specifications. YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS. Many currently installed computer systems and software products are coded to accept only two digit entries in the date field. Beginning in the year 2000, these date fields will need to accept four digit entries to distinguish twenty-first century dates from twentieth century dates. As a result, over the next several months, computer systems and/or software used by many companies may need to be upgraded to comply with these "Year 2000" requirements. Significant uncertainty exists in the software industry concerning the potential effects associated with compliance. While our software products are not time/ date sensitive, many of the third party software applications run by our customers are time/date sensitive. In addition, we have in the past resold third party software that may not be Year 2000 compliant. We may therefore be exposed to potential business disruption or claims, whether with or without merit, resulting from system problems associated with the century change. It is not clear whether our insurance coverage would cover or be adequate to offset these and other business risks related to the Year 2000. If our internal computer systems are not Year 2000 compliant then we or our customers may suffer system failures or miscalculations that could cause disruptions of operations, including, among other 11 things, a temporary inability to process transactions, to send invoices or to engage in similar normal business activities. In addition, we believe that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues in a variety of ways. Many companies are expending significant resources to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by us. Potential customers may also choose to defer purchasing Year 2000 compliant products until they believe it is absolutely necessary, thus potentially resulting in stalled sales within the industry. Conversely, Year 2000 issues may cause other companies to accelerate purchases, thereby causing an increase in short-term demand and a consequent decrease in long-term demand for software products. OUR EXECUTIVE OFFICERS AND DIRECTORS AND THEIR AFFILIATES WILL OWN A LARGE PERCENTAGE OF OUR VOTING STOCK AND WILL HAVE THE ABILITY TO MAKE DECISIONS THAT COULD ADVERSELY AFFECT OUR STOCK PRICE. Following the completion of this offering, our executive officers, directors and their affiliates will beneficially own approximately % of the outstanding shares of common stock, or % if the underwriters over allotment option is exercised in full. As a result, these stockholders will be able to control all matters requiring stockholder approval and, thereby, our management and affairs. Matters that require stockholder approval include: - election of directors; - approval of mergers or consolidations; and - sale of all or substantially all of our assets. This concentration of ownership may delay, deter or prevent acts that would result in a change of control of Bluestone, which in turn could reduce the market price of our common stock. INVESTORS IN THIS OFFERING WILL INCUR IMMEDIATE DILUTION PER SHARE OF THE COMMON STOCK BASED ON ITS BOOK VALUE AFTER THE OFFERING. The anticipated initial public offering price is substantially higher than the book value of our common stock. At the initial offering price of $ per share, the book value of the common stock after the offering will be $ per share. This represents an immediate and substantial dilution per share of the common stock. The dilution per share represents the difference between the amount per share paid by the purchasers of shares of common stock in this offering and the net tangible book value per share of common stock immediately after the completion of this offering. In addition, to the extent outstanding options are exercised, there will be further dilution to new investors. OUR CHARTER AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER. At the time we complete this offering, our charter and our bylaws, in conjunction with Delaware law, will contain provisions that could make it more difficult for a third party to obtain control of Bluestone even if doing so would be beneficial to stockholders. For example, we anticipate that our charter will provide for a classified board of directors and restrict the ability of stockholders to call a special meeting. Our bylaws will allow the board of directors to expand its size and fill any vacancies without stockholder approval. FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE. The market price of our common stock could decline as a result of sales by our existing stockholders or the perception that those sales may occur. These sales could also make it more difficult 12 for us to raise funds through equity offerings in the future at a time and at a price that we think is appropriate. After completion of this offering, the current holders of most of our common stock and all of our preferred stock outstanding prior to this offering, as well as the holders of outstanding warrants, will be entitled to registration rights with respect to their common stock or the common stock underlying their convertible securities. If these holders, by exercising their registration rights, cause a large number of securities to be registered and sold in the public market, these sales could have an adverse effect on the market price for our common stock. If we were to include, in a registration statement initiated by us, shares held by these holders pursuant to the exercise of their registration rights, these sales may have an adverse effect on our ability to raise needed capital. FORWARD-LOOKING STATEMENTS Some statements in this prospectus constitute forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Such factors include those described in "Risk Factors." The forward-looking statements included in this prospectus may prove to be inaccurate. In light of the significant uncertainties inherent in these forward-looking statements, you should not consider this information as a representation by us or any other person that our objectives and plans will be achieved. USE OF PROCEEDS The net proceeds to us from the sale of shares of common stock, at an assumed initial public offering price of $ per share, will be approximately $ million, or $ million if the underwriters' over-allotment option is exercised in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We currently intend to use the net proceeds of this offering for product development, sales and marketing and working capital. Pending application of the net proceeds as described above, we intend to invest the net proceeds of the offering in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY We intend to retain any future earnings to support operations and to finance the growth and development of our business, and we do not anticipate paying cash dividends for the foreseeable future. Under our current credit facility, we are prohibited from paying dividends except those accruing to outstanding preferred stock. As of May 31, 1999, there were $1.4 million in accrued dividends on our convertible preferred stock. Upon the conversion of the preferred stock into common stock, we are required to pay to the holders of the preferred stock being converted all accumulated and unpaid cash dividends, whether or not declared, with respect to the preferred stock. However, if requested by any holder of the shares of preferred stock being converted and approved by the holders of a majority of the then outstanding shares of common stock, the holder may exchange all or any portion of the accumulated and unpaid cash dividends into shares of common stock at the then fair market value of the common stock. 13 CAPITALIZATION The following table sets forth our unaudited total capitalization as of March 31, 1999; - on an actual basis; - on a pro forma basis to reflect the sale of 9,191,176 shares of Series C preferred stock on May 25, 1999 at $2.72 per share and the conversion of all outstanding shares of preferred stock and accrued dividends on preferred stock into shares of common stock; and - on an adjusted basis to give effect to the receipt of the net proceeds from our sale of shares of common stock in this offering at an assumed public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. You should read this information together with our financial statements and the notes thereto included elsewhere in this prospectus.
MARCH 31, 1999 --------------------------------- ACTUAL PRO FORMA ADJUSTED --------- ----------- --------- (IN THOUSANDS) Short-term borrowings, including current portion of long-term debt........................................................ $ 910 $ 910 $ 910 Long-term debt, less current portion.......................... 1,765 1,765 1,765 --------- ----------- --------- Total debt.................................................. 2,675 2,675 2,675 --------- ----------- --------- Mandatorily redeemable convertible preferred stock............ 17,678 -- -- --------- ----------- --------- Stockholders' equity (deficit)(1): Common Stock, par value $0.001; 53,000,000 shares authorized, 9,008,875 shares issued and outstanding actual; shares issued and outstanding pro forma; shares issued and outstanding adjusted.............. 9 Common stock warrants....................................... -- 1,900 Additional paid-in capital.................................. 6 Accumulated deficit......................................... (20,956) (22,057) --------- ----------- --------- Total stockholders' equity (deficit)........................ (20,941) 20,042 --------- ----------- --------- Total capitalization........................................ $ (588) $ 22,717 $ --------- ----------- --------- --------- ----------- ---------
- ------------------------ (1) Excludes (a) 700,000 shares of common stock issuable upon the conversion of a convertible note payable to Mark Baiada, a former director, in the principal amount of $500,000; (b) 6,061,553 shares of common stock issuable upon the exercise of outstanding stock options granted as of March 31, 1999 under our Amended and Restated 1996 Incentive and Non-Qualified Stock Option Plan and 3,358,621 shares reserved for issuance under such plan; (c) 500,000 shares reserved for issuance under our Director Compensation Plan; (d) 31,250 shares of common stock issuable upon the exercise of a warrant to purchase common stock issued to Silicon Valley Bank; (e) 481,434 shares of common stock issuable upon the exercise of a warrant to purchase common stock issued to Deutsche Bank Securities Inc.; and (f) 440,348 shares of common stock issuable upon the exercise of warrants issued to certain holders of the preferred stock. 14 DILUTION Our pro forma net tangible book value as of March 31, 1999 was $20.0 million or $ per share of common stock. We determined our pro forma net tangible book value per share by subtracting our total liabilities from our total tangible assets and dividing that number by pro forma shares of common stock outstanding as of March 31, 1999. The pro forma information provided immediately above and in the two tables below gives effect to: - the issuance of 9,191,176 shares of Series C preferred stock on May 25, 1999; - the conversion of all outstanding shares of preferred stock, including the Series C preferred stock, into common stock; and - the conversion of accrued dividends on preferred stock into common stock. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately following this offering. Assuming an initial offering price of $ per share after giving effect to our sale of shares of common stock in this offering and after deducting the estimated underwriting discount and commissions and our estimated offering expenses, our pro forma net tangible book value as of March 31, 1999 would have been $ or $ per share of common stock. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share......... $ Pro forma net tangible book value per share as of March 31, 1999...................................... $ Increase per share attributable to new investors...... --------- Adjusted pro forma net tangible book value per share as of March 31, 1999..................................... --------- Dilution per share to new investors..................... $ --------- ---------
The following table summarizes on a pro forma basis as of March 31, 1999 the difference between the existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid. The information presented is based upon an assumed initial public offering price of $ per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ---------------------- -------------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE --------- ----------- ------------- ----------- ----------- Existing stockholders..................................... % $ 42,910,000 % $ New investors............................................. % % --------- ----- ------------- ----- Total..................................................... 100% 100% --------- ----- ------------- ----- --------- ----- ------------- -----
The tables above assume no exercise of outstanding stock options or warrants and exclude: (a) 700,000 shares of common stock issuable upon the conversion of a convertible note payable to Mark Baiada, a former director, in the principal amount of $500,000; (b) 6,061,553 shares of common stock issuable upon the exercise of outstanding stock options granted as of March 31, 1999 under our option plan with a weighted average exercise price of $0.88 per share and 3,358,621 shares reserved for issuance under the option plan; (c) 500,000 shares reserved for issuance under our director compensation plan; (d) 31,250 shares of common stock issuable upon the exercise of a warrant to purchase common stock issued to Silicon Valley Bank with an exercise price of $0.80 per share; (e) 481,434 shares of common stock issuable upon the exercise of a warrant to purchase common stock issued to Deutsche Bank Securities Inc. exercisable at $2.72 per share; and (f) 440,348 shares of common stock issuable upon the exercise of warrants issued to certain holders of the preferred stock with a weighted average exercise price of $0.64 per share. To the extent that outstanding options or warrants are exercised or the convertible note is converted, there will be further dilution to new investors. 15 SELECTED FINANCIAL DATA The selected financial data set forth below as of December 31, 1997 and 1998 and for each of the three years in the period ended December 31, 1998 have been derived from our audited financial statements included elsewhere in this prospectus. The selected financial data set forth below as of December 31, 1995 and 1996 and for the year ended December 31, 1995 have been derived from our audited financial statements not included in this prospectus. The selected financial data as of and for the year ended December 31, 1994 and for the three months ended March 31, 1998 and 1999 have been derived from unaudited financial statements which, in the opinion of management, include all adjustments necessary for a fair presentation of our financial position and results of operations. The pro forma balance sheet data reflects the sale of 9,191,176 shares of Series C preferred stock for $2.72 per share on May 25, 1999 and the conversion of all outstanding preferred stock, including the Series C preferred stock, and accrued dividends on preferred stock into common stock. The pro forma net loss per share amounts reflect the outstanding preferred stock during each period presented on an as converted basis. The selected financial data are not necessarily indicative of results to be expected for any future period and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements, including the notes thereto included elsewhere in this prospectus.
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------------------------------- -------------------- 1994 1995 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Software license fees.......................... $ -- $ -- $ 1,475 $ 2,337 $ 3,391 $ 432 $ 2,257 Services....................................... -- -- 43 2,179 3,620 937 1,020 Third party products and related services...... 6,074 6,950 6,555 5,225 1,107 785 -- --------- --------- --------- --------- --------- --------- --------- Total revenues............................. 6,074 6,950 8,073 9,741 8,118 2,154 3,277 Cost of revenues: Software license fees.......................... -- -- 113 202 259 39 57 Services....................................... -- -- 305 2,516 4,433 985 1,337 Third party products and related services...... 3,502 3,975 4,261 2,798 643 437 -- --------- --------- --------- --------- --------- --------- --------- Total cost of revenues..................... 3,502 3,975 4,679 5,516 5,335 1,460 1,395 --------- --------- --------- --------- --------- --------- --------- Gross profit..................................... 2,572 2,975 3,394 4,225 2,783 694 1,882 Operating expenses: Sales and marketing............................ 1,226 1,836 3,005 5,131 9,551 1,544 2,826 Product development............................ 246 458 702 1,295 2,474 360 904 General and administrative..................... 724 841 1,515 1,616 2,316 447 635 --------- --------- --------- --------- --------- --------- --------- Total operating expenses................... 2,196 3,135 5,222 8,042 14,341 2,352 4,365 --------- --------- --------- --------- --------- --------- --------- Income (loss) from operations.................... 376 (160) (1,828) (3,817) (11,558) (1,658) (2,483) Interest expense, net............................ (30) (41) (50) (80) (47) (41) (48) --------- --------- --------- --------- --------- --------- --------- Income (loss) from continuing operations......... 346 (201) (1,878) (3,896) (11,605) (1,699) (2,531) Income (loss) from discontinued operations....... 300 497 (738) 99 -- -- -- --------- --------- --------- --------- --------- --------- --------- Net income (loss)................................ 646 296 (2,616) (3,798) (11,605) (1,699) (2,531) Accretion of preferred stock redemption value.... -- -- -- (240) (846) (84) (264) --------- --------- --------- --------- --------- --------- --------- Net income (loss) available to common stockholders................................... $ 646 $ 296 $ (2,616) $ (4,038) $ (12,451) $ (1,783) $ (2,795) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Basic and diluted net income (loss) per share: Continuing operations.......................... $ 0.04 $ (0.02) $ (0.21) $ (0.43) $ (1.29) $ (0.19) $ (0.28) Discontinued operations........................ 0.03 0.05 (0.08) 0.01 -- -- -- Accretion of preferred stock redemption value........................................ -- -- -- (0.03) (0.09) (0.01) (0.03) --------- --------- --------- --------- --------- --------- --------- $ 0.07 $ 0.03 $ (0.29) $ (0.45) $ (1.38) $ (0.20) $ (0.31) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Shares used in computing net income (loss) per share.......................................... 9,000 9,000 9,000 9,000 9,005 9,001 9,009 Pro forma basic and diluted net loss per share from continuing operations..................... $ $ $ $ --------- --------- --------- --------- --------- --------- --------- --------- Shares used in computing pro forma basic and diluted net loss per share.....................
AS OF DECEMBER 31, AS OF MARCH 31, 1999 ----------------------------------------------------- ---------------------- 1994 1995 1996 1997 1998 ACTUAL PRO FORMA --------- --------- --------- --------- --------- --------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents..................... $ 120 $ 146 $ 1,086 $ 2,330 $ 2,535 $ 598 $ 23,903 Working capital (deficit)..................... 1,119 1,205 (640) (48) (340) (2,866) 20,440 Total assets.................................. 3,303 4,888 6,734 5,815 7,536 3,877 27,182 Long-term obligations, net of current portion..................................... 519 184 191 1,270 1,876 1,765 1,765 Mandatorily redeemable convertible preferred stock....................................... -- -- -- 5,331 17,415 17,678 -- Total stockholders' equity (deficit).......... 1,098 1,375 (1,269) (5,703) (18,147) (20,941) 20,042
16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We were incorporated in 1989 as Bluestone Consulting, Inc. Our primary business initially consisted of general information technology consulting on the UNIX platform and information technology staffing. In January 1991, we entered the software business and became a value added reseller for third party software products. We also began to develop software internally for sale to customers as part of our software business. In October 1995, our proprietary product, Sapphire/Web 1.0, was released. In April 1997, we spun off our consulting business and focused exclusively on our software business. Immediately after the spin-off, our business consisted of two product lines, (1) Sapphire/Web, our proprietary software product, and (2) third party graphical user interface software products, which we resold to our customers. For the year ended December 31, 1997, the Sapphire/Web products and related services generated approximately $4.5 million in revenues, while third party products and related services contributed approximately $5.2 million. In 1998, we decided to focus on internally developed software products and curtail the licensing and services related to third party products. Beginning in March 1998, we increased our sales and marketing efforts and hired new management. We hired a significant number of sales personnel throughout the country in order to develop a nationwide presence and generate increased revenue. The positioning and feature set of the Sapphire/Web product was shifted from a low-cost development tool to an enterprise-wide software solution for Internet, intranet and extranet environments. In January 1999, we released Bluestone XML-Server, which represents a new breed of specialized Web application server focused on Internet Commerce. In May 1999, Release 6 of Sapphire/Web was made generally available. OVERVIEW Our fiscal year end is December 31. References to 1996, 1997 or 1998 mean the fiscal year ended December 31 unless otherwise indicated. We generate revenue from two principal sources: (1) license fees for our software products and (2) professional services and support revenue derived from consulting, training and maintenance services related to our software products. In 1998, one customer accounted for 11% of our total product and services revenues and in the quarter ended March 31, 1999, one customer accounted for 57% of our total product and services revenues. Our top 10 customers represented 34%, 39% and 72% of total revenues in 1997, 1998 and three months ended March 31, 1999, respectively. SOFTWARE LICENSE FEES. Typically, our customers pay an up-front, one-time fee for a perpetual license of our software. The amount of the fee is based on the number of developer seats and server interactions. A pricing model based on the number of processors within a server is also available. We also sell annual and multi-year licenses, primarily to independent software vendors. We generally require a written license contract that typically provides for an initial payment within 30-60 days of contract signing. Certain multi-year license contracts contain payment terms that extend beyond one year. Pursuant to the American Institute of Certified Public Accountants' Statement of Position 97-2, any amounts due under contract beyond one year are not deemed to be fixed and determinable and therefore are deferred and recognized as revenue when the payments become due. Prior to 1998, software licenses were principally the result of direct sales to end-users. Beginning in 1998, we began to focus on channel marketing. This has resulted in significant sales of products sold through independent software vendors, resellers and systems integrators. We believe that these partner arrangements have helped to maximize our exposure in the marketplace. Furthermore, we have experienced, and expect to continue to experience, significant variation in the size of individual 17 licensing transactions, ranging from small sales of perpetual developer licenses to large, multi-year licensing arrangements with independent software vendors. We generally recognize license fee revenue when a formal agreement exists, delivery of the product has occurred, no production, modification, customization or implementation obligations remain, the license fee is deemed fixed and determinable and collectibility is probable. Revenue from arrangements with distributors and resellers is not recognized until our product is delivered to the end-user. SERVICES REVENUE. Services revenue consists principally of revenue derived from consulting services provided to customers during implementation and integration of our software products, training of customers' employees and fees for ongoing maintenance, which consists of customer technical support services and unspecified product enhancements. Consulting and training services are typically delivered on a time and material basis and are typically completed within one month following license contract signing. Consulting services generally consist of simple installations and configurations. We recognize services revenue as the services are performed. Maintenance revenue is generally invoiced in advance and is recognized ratably over the term of the maintenance agreement, which is generally 12 months. COST OF SOFTWARE LICENSE FEES. Cost of software license fees consists primarily of the costs associated with the purchase of product CDs and related documentation and duplication costs. COST OF SERVICES. Cost of services consist primarily of salary and benefit costs of our consulting, support and training organizations, and are expensed when incurred. Additionally, from time to time we engage outside consultants to meet peaks in customer demand. SALES AND MARKETING. We license our products primarily through our indirect channels and direct sales force. Sales and marketing expenses consist primarily of personnel costs, commissions to employees, office facilities, travel and promotional events such as trade shows, advertising and public relations programs. PRODUCT DEVELOPMENT. We maintain an in-house development staff to enhance our existing products and to develop new ones. Product development expenditures are generally charged to operations as incurred. Statement of Financial Accounting Standards No. 86 requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. We establish technological feasibility upon the completion of a working model. To date, we have expensed all software development costs due to the minimal level of development costs incurred subsequent to the establishment of technological feasibility. GENERAL AND ADMINISTRATIVE. General and administrative expenses include our personnel and other costs of our finance, human resources and information services activities. STOCK BASED COMPENSATION. The amount by which the fair market value of our common stock exceeded the exercise price of stock options on the date of grant is recorded as deferred compensation and is amortized to stock based compensation expense as the options vest. 18 RESULTS OF OPERATIONS The following table sets forth statement of operations data for the periods indicated as a percentage of total revenues:
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (AS A PERCENTAGE OF TOTAL REVENUES) Revenues: Software license fees............................ 18% 24% 42% 20% 69% Services......................................... 1 22 44 44 31 Third party products and related services........ 81 54 14 36 -- --- --- --- --- --- Total revenues............................... 100 100 100 100 100 Cost of revenues: Software license fees............................ 1 2 3 2 2 Services......................................... 4 26 55 46 41 Third party products and related services........ 53 29 8 20 -- --- --- --- --- --- Total cost of revenues....................... 58 57 66 68 43 --- --- --- --- --- Gross profit....................................... 42 43 34 32 57 Operating expenses: Sales and marketing.............................. 37 53 118 72 86 Product development.............................. 9 13 30 17 28 General and administrative....................... 19 17 29 21 19 --- --- --- --- --- Total operating expenses..................... 65 83 177 109 133 --- --- --- --- --- Loss from operations............................... (23) (39) (142) (77) (76) Interest expense, net.............................. (1) (1) (1) (2) (1) --- --- --- --- --- Loss from continuing operations.................... (23)% (40)% (143)% (79)% (77)% --- --- --- --- --- --- --- --- --- ---
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 SOFTWARE LICENSE FEES Sapphire/Web license fees were $2.3 million and $432,000 for the three months ended March 31, 1999 and 1998, respectively. This increase of 422.5% was due to our increased presence in the marketplace, and a shift in product position from a low-priced development tool to a high-end, high-priced enterprise software solution. This change in product position has resulted in increased revenues per customer. Additionally, we were able to concentrate solely on our Sapphire/Web products and services once we terminated our graphical user interface product line in April 1998. In addition, we received payment under an extended license fee arrangement with one customer in February 1999, which accounted for approximately $1.9 million of our license fee revenue during the quarter ended March 31, 1999. SERVICES REVENUE Sapphire/Web services revenue was $1.0 million and $937,000 for the three months ended March 31, 1999 and 1998, respectively. Services revenue remained relatively constant between the two periods due to a strategic change in the use of our professional staff. During the end of 1998, the main focus of the services organization shifted to concentrate on short-term, installation-type engagements, usually 2-3 days in duration, rather than long-term implementation activities. These implementation activities are now performed primarily by systems integrators with which we have strategic alliances. 19 THIRD PARTY PRODUCTS AND RELATED SERVICES REVENUE Third party products and related services revenue was zero and $785,000 for the three months ended March 31, 1999 and 1998, respectively. This decrease was due to our decision in 1998 to curtail the licensing and services related to third party products and to focus on our proprietary products. GROSS MARGIN--LICENSE FEES Our license fee gross margin increased to 97.5% for the three months ended March 31, 1999 from 91.0% for the same period in 1998. This increase was primarily due to the increase in revenue per customer. Our focus on positioning the product as an enterprise-wide solution has increased the revenue associated with each sale, while the cost of sales for the product has remained relatively constant. GROSS MARGIN--SERVICES REVENUE Our services gross margin decreased to (31.1)% for the three months ended March 31, 1999 from (5.1)% for the same period in 1998. This was primarily due to the hiring and training of additional services personnel in advance of anticipated services revenue growth. SALES AND MARKETING Sales and marketing expenses were $2.8 million and $1.5 million for the three months ended March 31, 1999 and 1998, respectively, an increase of 83.0%. These costs as a percentage of revenue increased to 86.2% from 71.7% for the three months ended March 31, 1999 and 1998, respectively. These increases were primarily due to increases in payroll and related costs, recruiting costs and travel costs as a result of the growth in the number of sales personnel and increased commissions expense as a result of higher sales volume. We have increased our spending on sales and marketing because we believe that our sales and marketing efforts are essential for us to increase our market position and our product acceptance. The average number of sales and marketing employees for the three months ended March 31, 1999 was 49 compared to 41 for the three months ended March 31, 1998. We also incurred increases in variable marketing expenses due to increased trade show participation, direct mail campaigns and advertising in order to increase market awareness and gain market acceptance of our products. PRODUCT DEVELOPMENT Product development expenses increased 151.1% to $904,000 for the three months ended March 31, 1999 from $360,000 for the same period in 1998. These costs as a percentage of revenue increased to 27.6% from 16.7% for the three months ended March 31, 1999 and 1998, respectively. These increases were primarily associated with the development of Sapphire/Web Release 6 and the release of the Bluestone XML Suite. We believe that our product development investment is essential for us to maintain our market and technological competitiveness. Average development headcount for the three months ended March 31, 1999 and 1998 was 27 and 18, respectively. GENERAL AND ADMINISTRATIVE General and administrative expenses were $635,000 and $447,000 for the three months ended March 31, 1999 and 1998, respectively. This increase of 42.1% was primarily due to payroll and related costs resulting from the addition of personnel to support the growth of our business. These costs as a percentage of revenue remained relatively constant at 19.4% for the three months ended March 31, 1999 and 20.8% for the three months ended March 31, 1998. The average number of general and administrative employees for the three months ended March 31, 1999 and 1998 was 28 and 21, respectively. 20 1998 COMPARED TO 1997 SOFTWARE LICENSE FEES Sapphire/Web license fees were $3.4 million and $2.3 million for 1998 and 1997, respectively. The increase of 45.1% was due to increased market acceptance of the Sapphire/Web software suite. SERVICES REVENUE Sapphire/Web services revenue was $3.6 million and $2.2 million for 1998 and 1997, respectively. This increase of 66.1% was due to the increase in the number of consulting and training engagements associated with our growing customer base. THIRD PARTY PRODUCTS AND RELATED SERVICES REVENUE Third party products and related services revenue was $1.1 million and $5.2 million for 1998 and 1997, respectively. This decrease was due to our decision in 1998 to curtail the sale of third party products and services. GROSS MARGIN--LICENSE FEES Our license fee gross margin was 92.4% in 1998 and 91.4% in 1997, remaining relatively constant. GROSS MARGIN--SERVICES REVENUE Our services gross margin decreased to (22.5)% in 1998 from (15.5)% in 1997. This decrease in the gross margin was primarily due to the hiring and training of additional personnel to support our growing installed base of customers and anticipated increase in future revenues. SALES AND MARKETING Sales and marketing expenses were $9.6 million and $5.1 million in 1998 and 1997, respectively, an increase of 86.1%. These costs as a percentage of revenue increased to 117.7% from 52.7% for 1998 and 1997, respectively. These increases were primarily due to an increase in the number of sales and marketing personnel between March and September 1998, including the addition of a new Senior Vice President, Sales and a Senior Vice President, Marketing, as well as three Sales Vice Presidents. In 1998, we opened seven new remote sales offices in Georgia, California, Texas, Colorado and Illinois. Beginning in March 1998, we focused our marketing efforts on achieving market awareness of Bluestone and acceptance of our products, and subsequently incurred significant costs for trade show participation, advertising and direct mail campaigns. PRODUCT DEVELOPMENT Product development expenses were $2.5 million and $1.3 million for 1998 and 1997, respectively, an increase of 91.0%. These costs as a percentage of revenue increased to 30.5% from 13.3% for 1998 and 1997, respectively. These increases were primarily due to increased recruiting and payroll and related costs for the hiring of additional developers, as well as significant capital expenditures for software, hardware and equipment. GENERAL AND ADMINISTRATIVE General and administrative expenses were $2.3 million and $1.6 million for 1998 and 1997, respectively. This increase of 43.3% was primarily due to increases in staff to support our growth. These costs as a percentage of revenue increased to 28.5% from 16.6% for 1998 and 1997, respectively. 21 1997 COMPARED TO 1996 SOFTWARE LICENSE FEES Sapphire/Web license revenue was $2.3 million and $1.5 million for 1997 and 1996, respectively. The increase of 58.4% was due to increased market acceptance of the Sapphire/Web software suite. SERVICES REVENUE Sapphire/Web services revenue was $2.2 million and $43,000 for 1997 and 1996, respectively. This increase of $2.1 million was primarily due to an increase in the number of consulting and training engagements associated with our growing customer base. THIRD PARTY PRODUCTS AND RELATED SERVICES REVENUE Third party products and related services revenue was $5.2 million and $6.6 million for 1997 and 1996, respectively. This decrease was due to a shift in our attention from third party products and services towards proprietary products and services. GROSS MARGIN--LICENSE FEES Our license fee gross margin was 91.4% in 1997 and 92.3% in 1996, respectively, remaining relatively constant. GROSS MARGIN--SERVICES REVENUE Our services gross margin increased to (15.5%) in 1997 from (609.3%) in 1996. This increase was primarily due to a significant increase in the sales of our product and the related consulting, training and maintenance services. We began to offer our maintenance services in 1996. SALES AND MARKETING Sales and marketing expenses were $5.1 million and $3.0 million for 1997 and 1996, respectively. This increase of 70.7% was primarily due to increases in the number of sales and marketing personnel and an increase in our marketing campaign expenditures during the fourth quarter of 1997. These costs as a percentage of revenue increased to 52.7% in 1997 from 37.2% in 1996. PRODUCT DEVELOPMENT Product development expenses were $1.3 million and $702,000 for 1997 and 1996, respectively, an increase of 84.5%. These costs as a percentage of revenue increased to 13.3% in 1997 from 8.7% in 1996. These increases were primarily due to increased recruiting and payroll and related costs for the hiring of additional developers, as well as significant capital expenditures for software, hardware and equipment. 22 GENERAL AND ADMINISTRATIVE General and administrative expenses were $1.6 million and $1.5 million for 1997 and 1996, respectively. This increase of 6.7% was primarily due to increases in staff to support our growth. These costs as a percentage of revenue decreased to 16.6% in 1997 from 18.8% in 1996. SELECTED QUARTERLY RESULTS OF OPERATIONS The following table sets forth unaudited quarterly statement of operations data for periods indicated. We derived this data from our unaudited financial statements, and, in our opinion, they include all adjustments necessary to present fairly the financial results for the periods. Results of operations for any previous fiscal quarter do not necessarily indicate what results may be for any future period.
QUARTER ENDED ------------------------------------------------------------------------------------- 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 ------- ------- ------- -------- ------- ------- ------- -------- ------- (IN THOUSANDS) Revenues: Software license fees................. $ 430 $ 530 $ 523 $ 854 $ 432 $ 760 $ 1,354 $ 845 $ 2,257 Services.............................. 283 563 624 708 937 769 1,029 885 1,020 Third party software and related services............................ 1,597 1,176 1,181 1,272 785 147 114 61 -- ------- ------- ------- -------- ------- ------- ------- -------- ------- Total revenues.................... 2,310 2,269 2,328 2,834 2,154 1,676 2,497 1,791 3,277 Cost of revenues: Software license fees................. 35 23 67 78 39 57 113 50 57 Services.............................. 346 624 682 865 985 1,093 1,192 1,163 1,338 Third party software and related services............................ 845 647 621 683 436 98 73 35 -- ------- ------- ------- -------- ------- ------- ------- -------- ------- Total cost of revenues............ 1,226 1,294 1,370 1,626 1,460 1,248 1,378 1,248 1,395 ------- ------- ------- -------- ------- ------- ------- -------- ------- Gross profit............................ 1,084 975 958 1,208 694 428 1,119 543 1,882 Operating expenses: Sales and marketing................... 1,036 1,099 1,398 1,598 1,545 2,203 2,930 2,874 2,826 Product development................... 282 299 338 376 360 544 704 866 904 General and administrative............ 361 381 434 439 447 502 666 701 635 ------- ------- ------- -------- ------- ------- ------- -------- ------- Total operating expenses.......... 1,679 1,779 2,170 2,413 2,352 3,249 4,300 4,441 4,365 ------- ------- ------- -------- ------- ------- ------- -------- ------- Loss from operations.................... (595) (804) (1,212) (1,205) (1,658) (2,821) (3,181) (3,898) (2,483) Interest income (expense), net.......... (41) (22) 12 (29) (41) 8 42 (56) (48) ------- ------- ------- -------- ------- ------- ------- -------- ------- Loss from continuing operations......... $ (636) $ (826) $(1,200) $(1,234) $(1,699) $(2,813) $(3,139) $(3,954) $(2,531) ------- ------- ------- -------- ------- ------- ------- -------- ------- ------- ------- ------- -------- ------- ------- ------- -------- -------
QUARTER ENDED ----------------------------------------------------------------------------------------- 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 ------- ------- ------- -------- ------- ------- ------- -------- ------- (AS A PERCENTAGE OF TOTAL REVENUES) Revenues: Software license fees.............. 19% 23% 22% 30% 20% 45% 54% 47% 69% Services........................... 12 25 27 25 44 46 41 49 31 Third party software and related services......................... 69 52 51 45 36 9 5 3 -- ------- ------- ------- --- ------- ------- ------- --- ------- Total revenues................. 100 100 100 100 100 100 100 100 100 Cost of revenues: Software license fees.............. 2 1 3 3 2 3 5 3 2 Services........................... 15 28 29 31 46 65 48 65 41 Third party software and related services......................... 37 29 27 24 20 6 3 2 -- ------- ------- ------- --- ------- ------- ------- --- ------- Total cost of revenues......... 53 57 59 57 68 74 55 70 43 ------- ------- ------- --- ------- ------- ------- --- ------- Gross profit......................... 47 43 41 43 32 26 45 30 57 Operating expenses: Sales and marketing................ 45 48 60 56 72 131 117 160 86 Product development................ 12 13 15 13 17 32 28 48 28 General and administrative......... 16 17 19 15 21 30 27 39 19 ------- ------- ------- --- ------- ------- ------- --- ------- Total operating expenses....... 73 78 93 85 109 194 172 248 133 ------- ------- ------- --- ------- ------- ------- --- ------- Loss from operations................. (26) (35) (52) (43) (77) (168) (127) (218) (76) Interest income (expense), net....... (2) (1) 1 (1) (2) -- 2 (3) (1) ------- ------- ------- --- ------- ------- ------- --- ------- Loss from continuing operations...... (28)% (36)% (52)% (44)% (79)% (168)% (126)% (221)% (77)% ------- ------- ------- --- ------- ------- ------- --- ------- ------- ------- ------- --- ------- ------- ------- --- -------
23 Our quarterly operating results have varied in the past and may vary significantly in the future depending on many factors including, among others: - the size, timing and recognition of revenue from significant orders; - increases in operating expenses required for product development and marketing; - the timing and market acceptance of new products and product enhancements; - customer budget constraints; - our success in expanding our sales and marketing programs; and - general economic conditions. Furthermore, we believe that the purchase of our products is relatively discretionary and generally involves a significant commitment of capital. As a result, purchases of our products may be deferred or canceled in the event of a downturn in any potential customer's business or the economy in general. LIQUIDITY AND CAPITAL RESOURCES From our incorporation in 1989 through 1996, we primarily financed our operations and met our capital expenditure requirements through funds generated from operations and funds borrowed from a lending institutions. From April 1997 through May 1999, we raised approximately $41.6 million of venture capital funding in order to expand the sales and marketing and product development efforts of the business. Including the proceeds of our sale of Series C Convertible Preferred Stock on May 25, 1999, our primary sources of liquidity consisted of cash in excess of $20 million and available borrowings under our $1.75 million revolving line of credit, which is secured by substantially all of our assets. As of May 31, 1999, the balance outstanding on our line of credit was $671,000. Borrowings under the line of credit are subject to a borrowing base of 80% of eligible accounts receivable. Interest on our line of credit is payable monthly at rates of prime plus .75%. We believe that our existing capital resources are sufficient to meet our capital requirements for the next 12 months. Net cash used for operating activities was $3.0 million in 1997, $10.3 million in 1998 and $1.8 million for the three months ended March 31, 1999. The cash used for operating activities was attributable primarily to net losses of $3.8 million, $11.6 million and $2.5 million in 1997, 1998 and the three months ended March 31, 1999, respectively. Net cash used in investing activities was $872,000 in 1997, $1.2 million in 1998 and $34,000 for the three months ended March 31, 1999. The cash used in investing activities related primarily to purchases of computers and software for internal use. Net cash provided by financing activities amounted to $5.1 million in 1997, $11.7 million in 1998 and a use of $64,000 for the three months ended March 31, 1999. In 1997, $4.8 million was provided from the sale of Series A preferred stock to certain venture capital investors, $920,000 was provided from borrowings under the available credit lines and $250,000 was provided from borrowings from a related party. In April 1998, approximately $11.2 million was provided from the sale of Series B preferred stock to certain venture capital investors. In May 1999, we sold 9,191,176 shares of Series C preferred stock for gross proceeds of $25.0 million, $1.35 million of which was comprised of the conversion of indebtedness under bridge financing incurred earlier in 1999. For more information on the bridge financing, see "Certain Transactions--Bridge Financing." YEAR 2000 ISSUES GENERAL. Year 2000 issues relate to computer programs or hardware that have date-sensitive software or embedded chips that may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruption of operations, including, 24 among other things, a temporary inability to process transactions, send invoices or engage in other normal business activities. The term "computer programs and hardware" includes accounting, data processing and telephone/ PBX systems, in addition to other miscellaneous systems. These systems may contain imbedded technology, which complicates our identification, assessment, remediation and testing efforts. STATE OF READINESS. We have designed the current versions of our software products to be Year 2000 compliant, and do not anticipate any Year 2000 issues related to these products. However, some older versions of our software products that we no longer sell may not be Year 2000 compliant. Any customer using an older version of one of our products that is not Year 2000 compliant may need to upgrade to a newer, compatible version or discontinue using the software prior to January 1, 2000. Based on our identification and assessment efforts to date, we believe that the majority of the computer programs and hardware we currently use in our own internal operations will not require replacement or modification as a result of the Year 2000 issue. In the ordinary course of replacing computer programs and hardware, over the past two to three years, we have obtained replacements that we believe are Year 2000 compliant. We believe that our significant vendors and service providers are Year 2000 compliant. In the event that one or more of our significant vendors or service providers are not Year 2000 compliant, we believe that our results of operations will not be materially adversely affected and that our relationships with customers, vendors and others will not be materially adversely affected. COST AND RISK. We have not incurred any significant costs to date related to Year 2000 issues and do not expect the cost of future Year 2000 issues to be material. Furthermore, we believe that Year 2000 issues will not pose significant operational problems for us. However, if all Year 2000 issues are not properly identified or if Year 2000 issues that are identified are not assessed, remediated and tested in a timely fashion, the Year 2000 issue may adversely impact our results of operations or adversely affect our relationships with customers, vendors or others. Additionally, we cannot predict whether the Year 2000 issues of third parties will have a material adverse impact on our systems or results of operations. The costs and completion dates of our Year 2000 identification, assessment, remediation and testing efforts are based upon management's best estimates, which were derived using numerous assumptions regarding future events. These estimates may prove to be inaccurate and actual results could differ materially from those currently anticipated. Specific factors that could cause these material differences include, but are not limited to, the ability to identify, assess, remediate and test all relevant products and services purchased from or by third parties and other similar uncertainties. In addition, variability of definitions of "compliance with Year 2000," and the myriad of different products and services and combinations thereof, used by our customers in connection with our products may lead to claims against us which we cannot currently estimate. The aggregate cost of defending and resolving such claims, if any, may adversely impact our results of operations. Year 2000 issues may affect the purchasing patterns of current and potential customers in a variety of ways. Many companies are expending significant resources to replace or remedy their current hardware and software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by us. Furthermore, our customers could be forced to postpone installations of our products due to dedication of resources to their own Year 2000 issues. We do not believe that there is any practical way to ascertain the extent of, and have no plan to address problems associated with, any reduction in purchasing resources of our customers. Any resulting reduction could have a material adverse effect on our business. 25 CONTINGENCIES. We have not yet completed an analysis of the operational problems and costs, including loss of revenues, that would be reasonably likely to result from our failure and the failure of certain third parties to complete efforts necessary to achieve Year 2000 compliance on a timely basis. We plan to identify the most likely worst case scenario and, if a contingency plan is required, finalize our plan by September 1999. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We develop our products in the U.S. and have sold them primarily in North America. As a result, our financial results have not been affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. In the future, we expect to increase our international operations which could increase our exposure to these factors. Our future interest income will be sensitive to changes in the general level of U.S. interest rates. However, we plan to invest our excess cash in short-term, investment-grade, interest-bearing securities and we have concluded that there is no material market risk exposure relating to these investments. 26 BUSINESS OUR COMPANY We are a leading provider of software for "Enterprise Interaction Management," which enables businesses to extend information over the Web in a controlled manner and support a high volume of users and interactions. Our flagship product, Sapphire/Web, is currently in Release 6 and has expanded to a product family that we believe is the leading JAVA/Web application server framework in the world. We believe that we are the only Web application server vendor to adequately address the four defining elements of Enterprise Interaction Management--development, deployment, integration and management--and therefore provide the most complete overall solution to our customers. In December 1998 at the Giga Information Group's Emerging Technology Conference, we demonstrated that our solution can meet the needs of virtually any enterprise by conducting a live simulation of an Internet Commerce site running at a rate of over 100 million interactions per day. In January 1999, we released Bluestone XML-Server, which represents a new breed of specialized Web application server focused on Internet Commerce. We participate in the following three separate markets: - THE MARKET FOR JAVA/WEB APPLICATION SERVERS. In this market sector, enterprises employ our solutions to "Web-enable legacy systems," or to deploy their existing information technology assets for use in a Web environment, and to create new Web-enabled enterprise applications. We are currently recognized as a leader in this market. - THE MARKET FOR eXTENDING THE SUPPLY CHAIN. In this market sector, our products enable the "virtual corporation" by allowing an enterprise to integrate its information assets with those of its partners, vendors and customers to improve collaboration utilizing Web and XML technology in a highly secure and scalable environment. - THE MARKET FOR ENTERPRISE APPLICATION INTEGRATION. In this market sector, our products facilitate the integration of disparate computer systems within an enterprise. We believe we are particularly well positioned in this market, since the necessary capabilities, including standardizing corporate data formats and providing access to legacy systems, are two of the core strengths of our JAVA/ Web application server technology. Our solutions are used by some of the world's leading companies, including ARI, AT&T, Deutsche Bank, Dreyfus Corporation, Eli Lilly, Hewlett-Packard, Houghton Mifflin Company, Just For Feet, MCI WorldCom, OpenConnect, Reliance National and Time, Inc. OUR INDUSTRY GROWTH IN INTERNET RELATED SOFTWARE The Internet has experienced dramatic growth, both in terms of the number of users and as a means of conducting commercial transactions, and is expected to continue to grow rapidly. According to a report prepared by International Data Corporation, the number of Internet users increased from approximately 14 million in 1995 to approximately 97 million in 1998, and is expected to grow to more than 320 million by 2002. The increase of users and business activities on the Web has created a large and growing market for Web application software as existing businesses and new Web-based enterprises foster new revenue streams, significantly broaden information deployment, enable inter-enterprise collaboration and strive to reduce the cost of maintaining an ever-changing technology infrastructure. According to a Gartner Group survey of selected U.S. corporate information technology users, approximately 92% of all respondents planned to increase spending on Internet, intranet and extranet applications in 1998, as corporations enable legacy applications with Web technology and shift business activities to the Web. 27 An International Data Corporation report estimates that Internet-centric software, which accounted for less than $1.0 billion in revenue in 1996, will approach $10.0 billion in revenue by 2000 due to aggressive corporate adoption. THE RISE OF THE ENTERPRISE APPLICATION SERVER To date, most companies' use of Internet technology has consisted of employing Web servers to provide marketing material through their Web sites. These Web servers allow the presentation of relatively simple information to users, such as pictures and text, through static HTML documents. This static information must be preformatted with the information to be displayed, then manually changed when information is to be updated. Web server technology is still heavily in use today, but cannot sufficiently meet the quickly growing needs of companies to provide complex and dynamic information to their users. The existing information technology infrastructure of most companies leaves them unable to utilize, integrate or deploy existing information technology assets for Internet Commerce or use over the Web. These companies are recognizing that a broader set of facilities is required to capture the substantial benefits offered by Internet computing. These facilities include development capabilities that are specifically geared to a Web-based environment, interaction environments that are scalable and reliable, integration faculties that allow seamless linkages between the Internet and an enterprise's existing information infrastructure, and the ability to effectively monitor and manage Web-based applications and infrastructure. Web application servers have emerged to provide these facilities. Web application servers, by design, allow scalable, secure dynamic access to complex information through the Web that is otherwise only available internally in an organization through its own applications and legacy databases by providing: - load balancing--spreading the workload across multiple processors; - transaction management--tracking and assuring the completion of transactions; - integration to multiple back-end sources--making all enterprise information available for use; - an integrated development environment--a graphical tool to assist software developers; - application management--monitoring and reporting on all application server activity; and - multiple user support--the ability to individually serve a community of disparate users. Demand for these capabilities has resulted in significant growth in the market for Web application servers. In an August 1998 report, Forrester Research estimated that the market for Application Server software would be approximately $700 million in 1999 and would grow to approximately $1.8 billion by 2001, representing a compound annual growth rate of approximately 60%. Another independent technology research organization, Ovum, estimated in June 1999 that the market for application server technologies, which they define in a manner that more closely resembles our addressable market, will grow to $17 billion by 2004. OUR SOLUTION We provide a comprehensive framework that enables businesses to deploy information across the Internet, intranets and extranets to employees, customers, suppliers and partners. Our solution furnishes businesses with the ability to Web-enable legacy systems, develop new Web-based applications, and enable Internet Commerce. Our deployment solution is certified as 100% Pure JAVA and therefore operates in all enterprise computing environments. We have recently introduced the capability to support "Hot Swapping," which enables the movement of applications from one computer to another, and "Hot Versioning," which enables software programs to be updated between user clicks. These features allow businesses to upgrade or fix their hardware and software without interrupting user interactions permitting true 24x7 operations. This is particularly critical for companies engaged in 28 Internet Commerce where down time can be very costly. We believe our solution is the only one available that provides the features and capabilities necessary for use in enterprise-scale, mission-critical applications. In particular, our solution offers the following facilities: ROBUST DEVELOPMENT ENVIRONMENT AND TOOLSET. Our solution allows for maximum use of best-of-breed development tools due to its open and highly adaptable environment. Development speed increases from automated routines to generate user interfaces and the ability to import existing user interfaces from other sources. Our solution includes an integrated development environment that can use industry-standard components to easily assemble applications and provides improved support for users with varying skill levels. SCALABLE, OPEN, HIGH-PERFORMANCE DEPLOYMENT. The Web application server framework within our solution enables deployment of systems with high reliability, security and flexibility. Our Web application server supports very high volumes of interactions and high numbers of concurrent users with caching, load balancing and fault-tolerance features, which optimize response times and ensure the integrity of applications. In addition, our standards-based, 100% Pure JAVA architecture allows for a high level of flexibility in operating systems, programming languages, and database access and communication protocols, with no proprietary technology lock-in. EXTENSIVE INTEGRATION CAPABILITIES. Our solution goes beyond Application Programming Interfaces, or APIs, to facilitate integration of a business' overall computing environment, with pre-built modules for Web-enabling today's dominant applications and protocols, such as SAP, PeopleSoft, Tuxedo, MQ Series, CICS, Open Market, LDAP and e-mail. Our solution also includes tools that allow users to rapidly build new integration modules for other applications, and generally enable complex information answers to be generated from any data source within the enterprise, no matter how remote or proprietary. These capabilities allow businesses to marry existing systems to new information delivery platforms, thereby preserving legacy investments. COMPREHENSIVE MANAGEMENT. Our solution provides the necessary means to monitor, administer and report on a business' entire Web infrastructure. These advanced features provide the means to perform administrative and management tasks easily and quickly, allow for dynamic reconfiguration of the information infrastructure, assure minimum and/or differentiated levels of service, and integrate with system management utilities such as CA Unicenter, IBM Tivoli, BMC Patrol and HP OpenView. Our solution automatically generates alarms, alerts and reports, which allows for optimal performance of and powerful insight into a business' Web infrastructure. OUR GROWTH STRATEGY Our goal is to maintain and extend our position as a leading provider of Web application server technology, enterprise application integration and Internet Commerce solutions. Our key growth strategies are to: MAINTAIN AND EXTEND TECHNOLOGICAL LEADERSHIP. We believe that our technology, solution and features represent a significant competitive advantage and provide customer benefits that are not available from other solutions. Highly advanced technological elements incorporated in our solutions collectively contribute to the speed, scalability, reliability, manageability, flexibility and extensibility of our product set. For more information on these technological elements, see "--Technology." We believe that our consistent record of technological industry firsts, as demonstrated recently by the release of the industry's first dynamic XML Server, will continue into the future. EXPAND PRODUCT OFFERINGS. We intend to continue to develop new products and enhancements to existing products to fuel continued growth. Recently, we introduced our XML suite of products, which expands the markets and applications for our technology, with a focus on Internet Commerce and 29 inter-enterprise information exchange. Upcoming enhancements to the Sapphire/Web suite consist of enhanced Internet Commerce services including Internet Quality of Service (IQS), improved content and presentation management capabilities, and significantly increased bandwidth, transaction processing and security. Additional upcoming enhancements will include improved high-end management features, new business application capabilities and increased ease of use. We expect to continue to make considerable investments in product development to maintain this pace of innovation. CONTINUE TO FOCUS ON ENTERPRISE-SCALE SOLUTIONS. An April 5, 1999 article in PCWEEK ONLINE reported on an independent evaluation of our Web application server framework against two competitive products. The evaluation employed a simulated E-Commerce site developed by Doculabs, an independent information advisory company. In this evaluation, our solution posted throughput and response time results that were 50% higher than our nearest competitor. In addition, our solution was the only product able to meet the fault-tolerance requirements of mission-critical and E-Commerce applications. At the December 1998 Emerging Technology Conference sponsored by Giga Information Group, we performed a live demonstration based on a PCWEEK Labs-designed benchmark and successfully processed a variety of complex transactions at a rate of over 100 million interactions per day. Consequently, we believe that we are uniquely positioned as a performance leader in our industry and will benefit as an increasing number of large mission-critical systems move to the Web and as Internet Commerce grows. INCREASE MARKETING AND DIRECT SALES EFFORTS. We intend to leverage our previous customer successes by devoting significant marketing and direct sales resources to specific industry verticals, including telecommunications, insurance, brokerage, pharmaceuticals and E-Commerce. We intend to increase the number of field sales offices and field sales representatives over the next 12 months. Our direct sales organization is organized around named accounts, geographic regions and, increasingly, industry verticals. As of March 31, 1999, we had 49 employees in marketing and sales, 19 of which were quota-carrying field sales representatives. FURTHER DEVELOP INDIRECT CHANNELS, PARTNERS AND ALLIANCES. Our sales efforts are leveraged by indirect channels and partners, and we intend to continue to foster these relationships to fuel additional growth. These channels, partners and alliances significantly extend our market reach and overall opportunity set, and include the following: - independent software vendors, including Hewlett-Packard, Sanchez Computer Associates and Platinum technology; - systems integrators, including American Management Systems, Grant Thornton, KPMG, PricewaterhouseCoopers and approximately 65 others; and - value added distributors (VADs) and value added resellers (VARs), including Intraware and Merisel. OUR PRODUCTS SAPPHIRE/WEB SUITE SAPPHIRE/DEVELOPER. Sapphire/Developer delivers the capability to build Web-enabled applications that can find, access and deliver enterprise-class information to users. It connects any back-end data source to any front-end data user. It supports a wide variety of technology, including XML, HTML, JAVA, ActiveX, HDML, DHTML, Cascading Style Sheets, JAVAScript and VBScript, that can be bound to any database, flat file, mainframe customer information control systems (CICS) transactions or other enterprise applications. Sapphire/Developer's ability to incorporate new technology, tools and development approaches allows increased productivity and faster deployment of Web applications. 30 SAPPHIRE/DEVELOPER ENTERPRISE EDITION. Sapphire/Developer Enterprise Edition incorporates the Sapphire/Developer Enterprise Deployment Kit (EDK), a software tool kit that provides the flexibility to choose from a variety of distributed computing models, with Sapphire/Developer. EDK allows a company to use any or all existing object models: CORBA, COM, DCOM, JAVA Beans or Enterprise JAVA Beans (EJB). This allows customers to utilize any combination of Microsoft, Sun and/or IBM technologies, among others. SAPPHIRE/UNIVERSAL BUSINESS SERVER (UBS). UBS is the Web application server deployment architecture of Sapphire/Web. UBS creates a dynamic, Web-enabled environment that scales applications to meet fluctuating needs, balances loads to prevent performance decline and manages transactions across the Web infrastructure. UBS delivers scalability and high application availability to mission-critical, enterprise-class Web applications. SAPPHIRE/APPLICATION MANAGER (SAM). SAM is a management engine that proactively collects and provides real-time performance and status information on a company's entire Web infrastructure, including all components of the Sapphire/Web application server framework. SAM monitors all user interactions and bolsters the quality, performance and integrity of work being performed over the Web using the Sapphire/Web application server. SAPPHIRE/INTEGRATION MODULES (SIMS). SIMs provide a solution for integrating a company's existing information assets without the need for extensive and costly re-engineering of applications and infrastructure. SIMs create reusable objects that access all of a company's information resources and make them easily available to the development and deployment environments. We provide SIMs to popular applications and protocols, such as SAP, PeopleSoft, CICS and MQ Series. THE BLUESTONE XML SUITE BLUESTONE XML-SERVER. Our Bluestone XML-Server, released in January 1999, is a specialized application server that automatically converts back-end data sources to XML documents and then uses the XML documents to communicate with other applications. This enables independent software vendors and businesses in the areas of business-to-business data interaction, Internet Commerce, application integration and supply chain integration to distribute and deploy XML applications. BLUESTONE VISUAL-XML. Our Bluestone Visual-XML product, announced in February 1999 and released in May 1999, is a tool kit designed to allow business users to develop XML-based applications through a graphical drag-and-drop environment. XWINGML. Our XwingML product is an open source application that was released in February 1999 and is used to create JAVA graphical user interfaces based on XML documents. BLUESTONE XML-CONTACT. Our Bluestone XML-Contact is open source software that lets Palm Computing device users exchange contact information with any corporate database, turning personal productivity tools into corporate information resources with the power of XML. SERVICES AND SUPPORT We offer short-term mentoring, consulting and customer training services through our Advanced Technology Group. We use our Advanced Technology Group resources to assist our partners and clients in the early implementation efforts, which tend to be less than one month in duration, and rely on our systems integration partners to deliver longer-term professional integration services. This strategy allows us to offer a higher degree of pre- and post-sales support to our prospects, partners and licensees in support of furthering the sales of our software products. 31 We have a Customer Support Group that provides ongoing maintenance and support to customers through maintenance contracts. We furnish support through the telephone and e-mail, as well as through a portion of our Web site called Explore Web, which provides users with access to a comprehensive knowledge base of the Sapphire/Web and XML suite solutions. We offer extensive training and certification for Sapphire/Web products as well as course training in related topics, such as JAVA, JAVAScript, XML and the Web in general. Additionally, we also offer formal instruction through "Interactive Distance Learning," which furnishes instruction through an innovative mix of video, computer-based training and e-mail. We provide ongoing technical support on a contractual basis to our licensees with annual maintenance agreements. SALES AND MARKETING As of March 31, 1999, our sales and marketing organization consisted of 49 individuals, all of whom were based in North America. We had 19 field sales representatives and 15 inside sales representatives, all of whom carry quotas. The sales force is comprised of three primary organizations: Named Accounts, Direct Sales and Indirect Sales. We have diversified our sales activities to support a target distribution of 70% indirect and 30% direct. We have sales offices in Sacramento, Los Angeles, Atlanta, Dallas, Chicago, Boulder, San Francisco, Toronto and Mount Laurel, New Jersey. Sales outside North America are generated by third party resellers in London, Seoul and Sydney. We expect to open regional offices in Europe and Asia Pacific by the end of 1999. We support our sales efforts through corporate and field marketing initiatives in North America. Our marketing organization focuses on creating market awareness, generating leads, promoting our technology leadership and educating independent research analysts. These efforts include public relations, advertising, trade shows, alliance programs, seminars, direct mail, telemarketing and marketing collateral that includes a Web site, brochures, white papers and demonstrations. STRATEGIC ALLIANCES We are building and maintaining significant working relationships with complementary vendors that we believe will contribute to our ongoing success. These relationships fall into four categories: strategic technology alliances, independent software vendors, systems integrators and value added distributors and resellers. Within our strategic technology alliances, we engage in collaborative technology exchanges with BEA Systems, Computer Associates, Informix, IBM, Level III Communications/PKS SI, Microsoft, Netscape, OpenConnect, Oracle, Platinum technology, Sanchez Computer Associates and Sun Microsystems, among others. We have relationships with independent software vendors, including Hewlett-Packard, Platinum technology, OpenConnect, Sanchez Computer Associates and Foundation Technologies. These partners deliver their application software products with some element of our technology embedded therein. We maintain a close working relationship with these partners and will continue to develop relationships of this nature. We also maintain relationships with third party systems integrators who deliver services to our end-user clients. These companies have been recruited to deliver long term project support and are required to maintain a level of proficiency in our products. These relationships include American Management Systems, KPMG, Grant Thornton, PricewaterhouseCoopers and Level III Communications/PKS SI. We have entered into formal two-tier distribution agreements with Intraware and Merisel to deliver our suite of software products. These agreements provide Intraware and Merisel with the right to distribute our products in North America. We are a member in good standing of the Enterprise JAVA Bean Council, the World Wide Web Consortium (W3C), the Object Management Group (OMG) and the Enterprise Integration Council. 32 CUSTOMERS From 1996 through 1998, we sold licensed copies of our Sapphire/Web software to more than 500 customers. Most of these customers began using our Sapphire/Web products to Web-enable separate departmental systems and many of them are now expanding their usage of Sapphire/Web to a company-wide basis. Accordingly, we have observed a recent shift by our customers from creating Web applications to creating enterprise applications that are Web-enabled. Our solutions are applicable to a wide variety of industries and are used by many of the world's leading businesses. For example, Sapphire/Web users include: - three of the top five FORTUNE 500 companies in the electronics industry; - five of the top ten FORTUNE 500 companies in the computer equipment industry; - four of the top five FORTUNE 500 companies in the aerospace industry; - seven out of the top ten FORTUNE 500 companies in the telecommunications industry; - three of the top four FORTUNE 500 companies in the entertainment industry; and - five of the top ten FORTUNE 500 companies in the pharmaceuticals industry. Our customers include ARI, AT&T, Deutsche Bank, Dreyfus Corporation, Eli Lilly, Hewlett-Packard, Houghton Mifflin Company, Just For Feet, MCI WorldCom, OpenConnect, Reliance National and Time, Inc. Examples of successful Sapphire/Web implementations include the following: - We helped ARI, a large international leasing company, establish its first Web application in 1998. That application enabled ARI's customers to inquire directly into ARI's leasing system to manage delivery and maintenance information for ARI's fleet. - Reliance National, a major insurance company, has been using Sapphire/Web software since 1997. Reliance National began with small departmental solutions. In 1998, Reliance National expanded its usage to include a system that decentralized its operations by communicating its risk management system to all of its associated brokers, thereby significantly expanding the speed in which the broker can prepare premium quotes and the manner in which Reliance National serves its customers. - AT&T and MCI WorldCom have each chosen our products to be used in customer loyalty and retention programs. These companies have engaged in projects to Web-enable their billing and reporting systems, thereby allowing their customers to review and approve bills through their Web site. - Several major publishers have used our products to further their Internet Commerce initiatives. For example, Time, Inc. has utilized the Sapphire/Web solution to Web-enable the acquisition of pictures from its large database so that its customers can search for and purchase the images from its Web site. In another example, Houghton Mifflin Company, a text book publisher, has utilized the Sapphire/Web solution to provide an index of products available on its Web site, thereby considerably enhancing its customer service capabilities. - Several independent software vendors have entered into licensing arrangements with us in which our Sapphire/Web software becomes a core component for the next generation of their respective software products. For example, Platinum technology uses Sapphire/Web software as its next generation technology to move beyond the Web extension of legacy applications. In another example, Sanchez Computer Associates, a banking software provider, uses the Sapphire/ Web software as a foundation for its voice response and ATM systems. Additionally, Hewlett-Packard, a workflow and process management software vendor, uses Sapphire/Web software as its application integration engine, thereby giving it access to back-end legacy applications. 33 COMPETITION The market for our products is intensely competitive, highly fragmented and characterized by rapid technological change and new product introductions. Recently, several of our competitors have been acquired by large software companies. Our competitors consist of a number of private and public companies including, among others: - BEA Systems, which acquired WebLogic; - IBM; - Microsoft; - Oracle; and - Sun Microsystems, which acquired NetDynamics and the rights to Netscape's Application Server. In addition, we face competition from in-house software developers. Many of our competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition, a broader product range and a larger base of installed customers than us. We expect to face increased competition in the future from our current competitors. In addition, new competitors, or alliances among existing and future competitors, may emerge and rapidly gain significant market share. We may also face increased competition in the future from existing large business application and Internet software vendors that may broaden their product offerings to include Web application server software. To the extent these vendors are able to offer systems that are functionally comparable or superior to our products, their significant installed customer bases, ability to offer a broad solution and ability to price their products as incremental add-ons to existing systems could provide them with a significant competitive advantage over us. TECHNOLOGY Our technology is based upon two concepts: (1) binding front-end objects to back-end objects and (2) providing a level of abstraction that protects the customers and our code from being locked-in to a particular implementation. Specific technology features of the Bluestone Solution include: 100% PURE JAVA APPLICATION SERVER. The JAVA platform offers enormous benefits to us and our customers. These products run on any platform where JAVA is available and has been verified on Windows95, Windows98, WindowsNT, all UNIX platforms including Sun, IBM and HP as well as Linux, the IBM OS400 and Mainframe OS390. JAVA has also brought large productivity gains to our development team, decreasing development time, eliminating porting costs and speeding time to market. LOAD BALANCING. This is the fundamental technology that provides the high performance and scalability for large applications and contributes to the fault tolerant design of the applications. A Load Balance Broker runs in any number of Web servers in a Web server farm and manages the load across any number of Sapphire/UBS instances in that server farm. In addition, the Load Balance Broker can be deployed as a JAVA Bean or an Enterprise JAVA Bean to allow utilization from non-Web based applications. The Load Balance Broker has a unique competitive advantage with a zero-feedback loop design that provides maximum speed and no practical limits in terms of numbers of Load Balance Brokers and Web application servers deployed. PERSISTENT STATE SERVER. The persistent state server is also a key component of fault tolerance. State servers are where "shopping cart" information is held on Internet Commerce sites while a user is shopping. It is important that even if one of the application servers fails, the state information is still 34 available. A recent PCWEEK test substantiated Sapphire/Web's significant lead in this high performance implementation of fault tolerance. FAULT TOLERANT DESIGN. Sapphire/Web has been designed to provide fault tolerance in a Web environment. There are two key pieces to this technology. First, in the event of an application server failure, the Load Balance Broker will redirect any requests from Web browsers to other application servers. Second, the Persistent State Server will make the user state information continuously available, even if the application servers fail. LIVE OBJECT CACHE. The Live Object Cache provides very high performance for Internet Commerce applications. The Live Object Cache holds objects within the memory of the application server, saving overhead of database access for frequently used data. It is also designed to contribute to fault tolerance by working in conjunction with the persistent state server. CONTENT GENERATION OBJECTS. Sapphire/Web has a powerful template processing facility to generate Web pages dynamically. Content Generation Objects are reusable JAVA classes that can create content in a consistent manner. This increases programmer productivity and provides Web developers a simple mechanism to maintain a consistent look and feel to their Web pages. SAPPHIRE/DEVELOPER DESIGN ENVIRONMENT. This provides developers a highly productive design environment for binding front-end objects to back-end objects. Sapphire/Developer also maintains an open environment for integrating other industry leading tools. BLUESTONE XML-SERVER COMMUNICATIONS SERVICES. This program recognizes the protocol of incoming communications and translates it to a request for service to the XML-Server. XML documents can be passed to and from the XML server from any combination of HTTP, SSL, FTP, e-mail, JAVA Beans, Enterprise JAVA Beans, RMI, IIOP and others. This separates the communications from the processing of XML documents, so additional communications services can be added without changing any code. BLUESTONE XML-SERVER DOCUMENT HANDLER SERVICES. Bluestone's Document Handlers are the JAVA programs that process XML documents. The Bluestone XML-Server is unique in its ability to handle any XML document type via this mechanism and its ability to dynamically load new document handler classes. BLUESTONE VISUAL-XML DESIGN ENVIRONMENT. This open tool provides easy to use creation of Bluestone XML-Server applications and creates XML documents in a stand-alone mode. This tool is available on all platforms including Linux, UNIX and Windows. We believe this tool expands the XML market to non-programmers. HOT VERSIONING AND HOT SWAPPING. These new capabilities of Sapphire/Web Release 6 are unique in providing companies the ability to run a full 24x7 Web site. Hot Versioning allows Web applications to be upgraded between user clicks with no session interruption. It includes testing in a production environment and roll-forward and roll-back capabilities for versions of an application. Sapphire/Web Release 6 also supports Hot Swapping so that applications can be moved from server to server without interrupting service to the user. INTERNET QUALITY OF SERVICE. This innovative capability provides for differentiation of service based on each particular user. This allows for priority customers to always get performance preference over other visitors to a Web site. 35 PRODUCT DEVELOPMENT Historically, we have invested heavily in product development. Our future success depends in large part on our ability to enhance existing products and create new products that maintain and expand our technology lead. Accordingly, we intend to continue to invest heavily in product development. As of March 31, 1999, we had 29 people in the product development group, which includes a core group of senior developers and product development leaders, junior developers, quality assurance and documentation personnel. Our development team is located at our headquarters in Mount Laurel, New Jersey. Almost all of our software is being developed in JAVA, thereby improving productivity and reducing porting and testing costs. In an attempt to move our products at Internet-speed, we employ a small-team approach with an interactive design/development/testing methodology that has evolved over the past five years. To date, our product development group has benefitted from a very low turnover rate. We are currently developing new releases to our Sapphire/Web and XML product families. We anticipate that these new releases will bring even stronger Internet Commerce, high-end management, and ease of use capabilities, together with integrated Internet Commerce solutions for SAP and PeopleSoft in joint development with our systems integration partners. We expect these new releases to continue to position our products as the most "feature-rich" in the market. EMPLOYEES As of March 31, 1999, we had 153 employees, of which 49 were employed in sales and marketing, 45 were employed in services, 29 were employed in product development and 30 were employed in general and administrative positions. None of our employees are represented by unions. We believe that our relations with our employees are good. PROPERTIES Our principal executive and administrative offices are located in approximately 41,000 square feet of office space in Mount Laurel, New Jersey. We also maintain sales offices in Sacramento, Los Angeles, Atlanta, Dallas, Chicago, Boulder, San Francisco, Toronto and Mount Laurel, New Jersey. Annual lease payments on the Mount Laurel facility are approximately $480,000. This lease expires in November 2003. We do not own any real property. LEGAL PROCEEDINGS We are from time to time a party to litigation arising in the ordinary course of our business. We are not currently a party to any material litigation. 36 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION - --------------------------------------- --- ------------------------------------------------------------------ P. Kevin Kilroy........................ 45 President, Chief Executive Officer and Director S. Craig Huke.......................... 37 Senior Vice President and Chief Financial Officer Robert W. Bickel....................... 42 Senior Vice President, Products John H. Capobianco..................... 47 Senior Vice President, Marketing Joseph K. Krivickas.................... 37 Senior Vice President, Worldwide Sales Mel Baiada............................. 41 Chairman of the Board of Directors and Founder Gregory M. Case........................ 36 Director William C. Hulley...................... 40 Director Anton Simunovic........................ 33 Director Andrew J. Filipowski................... 48 Director Paul E. Blondin........................ 48 Director
P. KEVIN KILROY has served as our President since January 5, 1999 and our Chief Executive Officer since June 10, 1999. From March 1998 to January 4, 1999, Mr. Kilroy served as our Senior Vice President, Worldwide Sales. Before joining Bluestone, Mr. Kilroy served as the Senior Vice President of Worldwide Distribution for Seer Technologies, Inc., an application development software company, from March 1996 to March 1998. From April 1993 to October 1995, Mr. Kilroy served as President of Mantech Systems Corporation and Mantech Solutions Corporation and Vice President of Mantech International Corporation. S. CRAIG HUKE has served as our Senior Vice President and Chief Financial Officer since April 15, 1999. Before joining Bluestone, Mr. Huke was Vice President, Finance of MetroNet Communications Corp., a broadband telecommunications services provider, from April 1998 to April 1999. Prior to joining MetroNet he was Vice President and Corporate Controller of Seer Technologies, Inc. from November 1994 to April 1998. From September 1991 through October 1994, Mr. Huke held several positions with Legent Corporation, a publicly held software development company, including Director of Financial Planning and Analysis and Assistant Controller. ROBERT W. BICKEL has served as our Senior Vice President, Products since January 1998. From April 1997 to January 1998, Mr. Bickel served as our Chief Operating Officer, and from May 1992 to April 1997, as the Director of Products at Bluestone Consulting, Inc., a New Jersey corporation and our predecessor. JOHN H. CAPOBIANCO has served as our Senior Vice President, Marketing since February 1998. Before joining Bluestone, Mr. Capobianco served as a Senior Vice President of Marketing at SAP America from March 1997 to February 1998. From 1996 to March 1997, Mr. Capobianco served as the Vice President, Corporate Marketing of Sybase, Inc., from 1995 to 1996 as Vice President, Marketing of PRIMAVERA Systems, Inc. and from 1985 to 1995 as Vice President, Marketing of Computer Associates International, Inc. JOSEPH K. KRIVICKAS has served as our Senior Vice President, Worldwide Sales since May 1999. From August, 1998 to May 1999 Mr. Krivickas was Vice President, Sales and Service for E-Commerce products at Sanga International. From January 1996 to July 1997, Mr. Krivickas was co-founder and 37 served as Chief Technology Officer for Kazz Digital Studios. From 1988 to 1995, Mr. Krivickas held various sales and marketing management positions at Sun Microsystems. MEL BAIADA has served as our Chairman of the Board of Directors since our incorporation. From April 1997 to January 1999, Mr. Baiada served as our President and Chief Executive Officer. From April 1989 to April 1997, Mr. Baiada served as the President and Chief Executive Officer of Bluestone Consulting Inc., a New Jersey corporation and our predecessor. Mr. Baiada also serves as the President and a director of Bluestone Consulting, Inc., a Delaware corporation spun off from us in April 1997. GREGORY M. CASE has served as a director of Bluestone since April 1997. Mr. Case has been a Managing Director of Patricof & Co. Ventures, Inc. since May 1995 and a Vice President of Patricof & Co. Managers, Inc. since May 1996. From January 1994 through May 1995, Mr. Case served as a Vice President of Patricof & Co. Ventures, Inc. WILLIAM C. HULLEY has served as a director of Bluestone since April 1997. Mr. Hulley co-founded Adams Capital Management, Inc. in 1994 and is a Vice President and General Partner. Adams Capital Management, Inc. is a Managing Partner of several venture capital partnerships, including Adams Capital Management, L.P. and the P/A Fund. From 1989 through December 1994, Mr. Hulley was employed by Fostin Capital Corp and has been a General Partner of Fostin Capital Partners II, L.P. since 1993. Mr. Hulley is a director of On Technology Corporation, a publicly traded company. ANTON SIMUNOVIC has served as director of Bluestone since April 1998. Mr. Simunovic is a Senior Vice President of the Equity Capital Group at General Electric Capital Corporation and has served as such since September 1996. From June 1993 through August 1996, Mr. Simunovic served as Manager at Barents Group LLC. ANDREW J. FILIPOWSKI has served as director of Bluestone since June 1999. Mr. Filipowski is currently the Chief Executive Officer of Divine Interventures, Inc. Mr. Filipowski was the co-founder, Chairman of the Board, President and Chief Executive Officer of Platinum technology, inc. since its formation in April 1987 until its sale to Computer Associates in May 1999. Mr. Filipowski is a director of System Software Associates, Inc., Blue Rhino and Platinum Entertainment, Inc., all publicly traded companies. PAUL E. BLONDIN has served as a director of Bluestone since June 1999. Mr. Blondin has been the President and Chief Executive Officer of IP Highway since February 1999. From January 1998 until February 1999, Mr. Blondin was President and Chief Executive Officer of Netect, Ltd., an Israeli Company. Prior thereto, he served as Chairman of the Board of Open Development Corporation until October 1997. From March 1993 until May 1997, Mr. Blondin served as the Vice President, Finance and Administration, Chief Financial Officer and Treasurer of Cascade Communications. KEY EMPLOYEE MARK S. NIGRO, age 40, has served as our Senior Vice President and Chief Technology Officer since October 1997. From September 1996 to October 1997, Mr. Nigro served as Chief Technology Officer for us and our predecessor, Bluestone Consulting Inc., a New Jersey corporation. From June 1993 to September 1996 he served as our predecessor's Lead Product Developer. CLASSIFICATION OF DIRECTORS Following the closing of this offering, our certificate of incorporation will classify the board of directors into three classes. The directors' terms will be staggered by class. 38 BOARD COMMITTEES The Audit Committee consists of Mel Baiada, Paul E. Blondin and Gregory M. Case. The Audit Committee makes recommendations to the board of directors regarding the selection of independent public accountants, reviews the results and scope of the audit and other services provided by our independent public accountants and reviews and evaluates our control functions. The Compensation Committee consists of Andrew J. Filipowski, William C. Hulley and P. Kevin Kilroy. The Compensation Committee administers the issuance of stock options under our stock option plan, makes recommendations regarding nonqualified stock options and various incentive compensation and benefit plans and determines salaries for the executive officers and incentive compensation for our employees and consultants. DIRECTOR ELECTION RIGHTS Pursuant to our certificate of incorporation, the board of directors is required to consist of seven members. General Electric Capital Corporation, a holder of preferred stock, is entitled to designate one member to the board of directors. The holders of Series A preferred stock, as a class, are entitled to designate two members to the board of directors. The holders of common stock, as a class, are entitled to designate one member to the board of directors. The holders of common stock and preferred stock, as a class, are entitled to designate three members to the board of directors. These director election rights are in effect until immediately prior to the closing of this offering, after which time the board of directors will be elected by the holders of common stock. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mel Baiada, our chairman and former chief executive officer, was a member of our compensation committee in 1998. Mr. Baiada is a director, executive officer and a member of the compensation committee of Bluestone Consulting, Inc. For additional information regarding Bluestone Consulting, Inc., its spin-off from, and relationship with, us and Mr. Baiada's transactions with us and Bluestone Consulting, Inc., see "Certain Transactions." DIRECTOR COMPENSATION On June 10, 1999, the board of directors adopted the Directors' Compensation Plan and reserved 500,000 shares of common stock to be used in connection with the plan. The plan provides that non-employee directors will receive options at the intervals and for the number of shares of common stock as follows: - 20,000 shares upon the initial election to the board of directors; - 10,000 shares upon the anniversary date each year after their election, provided there is continuous service; - 2,500 shares upon appointment to serve on the Compensation, Audit or other duly constituted committee of the board of directors, plus an additional 2,500 shares on each anniversary date of their appointment, provided there is continuous service on the committee; and - 10,000 shares upon appointment to serve as the chairperson of the board of directors. The options will be fully vested upon issuance. In addition to these option grants, non-employee directors shall be entitled to compensation as follows: - $4,000 for in-person board meetings, of which four are anticipated each year; - $1,000 for telephone board meetings, of which six are anticipated each year; and 39 - $500 for Audit and Compensation Committee meetings, if held independently of an in-person board meeting. In addition, reasonable travel and related expenses shall be paid to non-employee directors for attending board of director meetings or while on Bluestone approved business. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table summarizes the compensation paid to or earned by Bluestone's Chief Executive Officer and all other executive officers whose salary and bonus for services rendered in all capacities to Bluestone for the fiscal year ended December 31, 1998 exceeded $100,000. We will use the term "named executive officers" to refer collectively to these individuals later in this prospectus.
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------- --------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION (1) OPTIONS COMPENSATION (2) - --------------------------------------- ---------- --------- ---------------- ------------- ------------------- P. Kevin Kilroy, President and Chief Executive Officer (3)................ $ 148,077 $ 9,140 $ 83,509 468,022 $ 260 Mel Baiada, Chairman of the Board (4).................................. 158,654 22,215 -- -- 2,715 John H. Capobianco, Senior Vice President, Marketing................. 170,077 74,294 -- 456,690 218 Robert W. Bickel, Senior Vice President, Products.................. 151,730 19,554 -- 181,690 796 Enrico J. Ballezzi (5)................. 123,557 19,992 -- 128,346 600
- ------------------------ (1) Represents commissions paid in 1998. (2) Includes amounts paid by us in 1998 with respect to life insurance premiums for the benefit of the named executive officers and our contributions to the 401(k) accounts of these officers as follows: (a) Mr. Kilroy, $260 for life insurance premiums; (b) Mr. Baiada, $2,715 for life insurance premiums; (c) Mr. Capobianco, $218 for life insurance premiums; (d) Mr. Bickel, $600 in 401(k) contributions and $196 for life insurance premiums; and (e) Mr. Ballezzi, $600 in 401(k) contributions. (3) During 1998, Mr. Kilroy served as our Senior Vice President, Worldwide Sales. He became President on January 5, 1999 and Chief Executive Officer on June 10, 1999. (4) During 1998, Mr. Baiada served as our Chairman, President and Chief Executive Officer. (5) During 1998, Mr. Ballezzi served as our Chief Financial Officer. 40 OPTION GRANTS IN LAST FISCAL YEAR The following table summarizes the options granted to each of our named executive officers during the fiscal year ended December 31, 1998.
POTENTIAL REALIZABLE VALUE AT ASSUMED INDIVIDUAL GRANTS ANNUAL ---------------------------------------------------------------------------- RATES OF STOCK PRICE PERCENT OF TOTAL APPRECIATION FOR NUMBER OF OUR SHARES OPTIONS GRANTED TO OPTION TERM (2) UNDERLYING OPTIONS OUR EMPLOYEES IN EXERCISE PRICE EXPIRATION ---------------------- NAME GRANTED FISCAL YEAR PER SHARE (1) DATE 5% 10% - ---------------------------- --------------------- ----------------------- --------------- ----------- ---------- ---------- P. Kevin Kilroy............. 200,000 8% $ 0.70 2/28/08 $ 228,045 $ 363,124 157,741 6 0.96 5/18/08 246,666 392,774 57,000 2 0.96 10/13/08 89,133 141,930 53,281 2 0.96 12/31/08 83,318 132,669 Mel Baiada.................. -- -- -- -- -- John H. Capobianco.......... 300,000 12 0.70 2/21/08 342,068 544,686 156,690 6 0.96 5/18/08 245,022 390,157 Robert W. Bickel............ 156,690 6 0.96 5/18/08 245,022 390,157 25,000 1 0.96 10/13/08 39,093 62,250 Enrico J. Ballezzi.......... 128,345 5 0.96 5/18/08 200,698 319,578
- ------------------------ (1) The exercise price equals the fair market value of the common stock as of the grant date as determined by the board of directors. (2) The potential realizable value is calculated based on the term of the option at the time of the grant (10 years). Assumed stock price appreciation of 5% and 10% is based on the fair market value at the time of the grant. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table presents information with respect to stock options owned by the named executive officers at December 31, 1998 and with respect to stock options exercised by the named executive officers during the fiscal year ended December 31, 1998.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT DECEMBER 31, 1998 AT DECEMBER 31, 1998 (1) -------------------------- ---------------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------------------------------- ----------- ------------- ----------------- --------------------- P. Kevin Kilroy........................................... -- 468,022 Mel Baiada................................................ -- -- John H. Capobianco........................................ -- 456,690 Robert W. Bickel.......................................... 240,845 240,845 Enrico J. Ballezzi........................................ 114,173 114,172
- ------------------------ (1) There was no public trading market for the common stock as of December 31, 1998. Accordingly, these values have been calculated on the basis of the assumed initial public offering price of $ per share, less the applicable exercise price per share, multiplied by the number of shares underlying these options. 41 EMPLOYMENT AGREEMENTS We entered into an employment agreement with Mel Baiada in April 1997 which was modified in January 1999 and which expired without being renewed on June 30, 1999. Under this agreement, in 1998 we paid Mr. Baiada a salary of $158,654 and a $22,215 bonus. This agreement imposes a one year period after termination in which Mr. Baiada may not compete against us. This agreement also provides that Mr. Baiada will retain a position on the board of directors until the later of (1) the date his ownership interest in our outstanding common stock, assuming conversion of all outstanding convertible securities, drops below 10%, and (2) June 30, 2000. For the twelve months commencing on July 1, 1999, Mr. Baiada will receive $150,000 plus customary benefits and tax reimbursements as severance under his agreement. On July 1, 1999, Mr. Baiada's shares of common stock deemed to be contingent under his stock repurchase agreement dated April 18, 1997 became vested. For more information about Mr. Baiada's stock repurchase agreement see "Certain Transactions--Stock Repurchase Agreement." We also entered into an employment agreement with Robert Bickel in April 1997 which may be terminated by us or Mr. Bickel at any time, with or without cause. Under this agreement, in 1998 we paid Mr. Bickel a base salary of $155,330 and a bonus of $19,554. Future increases to these amounts are at the discretion of the board of directors. This employment agreement calls for the payment of customary fringe benefits. Under this employment agreement, Mr. Bickel has agreed not to compete against us for a period of one year after the termination of his employment. In addition, as part of this employment agreement, we granted to Mr. Bickel an option to purchase 300,000 shares of common stock at an exercise price of $0.70 per share, the fair market value of the common stock on the date of grant. The option vests in 16 equal installments on a quarterly basis over a four-year period beginning as of the date of grant. SEVERANCE AGREEMENTS Messrs. Kilroy, Bickel, Capobianco and Ballezzi are parties to separate severance agreements with us which call for the following payments and benefits to be received upon the termination of their employment other than for cause: - 12 months of salary and benefits; - accrued vacation; - 6 months of outplacement services up to $12,000; and - 50% vesting on all outstanding unvested options and the extension of the exercise period on all vested options to five years. EMPLOYEE CONFIDENTIALITY AGREEMENTS We enter into agreements with all of our employees containing provisions regarding confidentiality and assignment of inventions. STOCK OPTION PLAN On July 1, 1998, the board of directors adopted the Amended and Restated Bluestone Software, Inc. 1996 Incentive and Non-Qualified Stock Option Plan, which replaced all of our previous plans. Our option plan is administered by our board of directors or a committee of at least two persons appointed by the board of directors. The option plan permits the payment of the exercise price to be in the form of cash, check, cashless exercise and such other consideration and method of payment as the administrator of the plan may, from time to time determine. Optionees are required to execute a stock purchase and restriction agreement at the time he or she exercises any options. 42 Under the option plan, a total of 9,429,049 shares of common stock are authorized for issuance to directors, officers, employees and consultants selected by the administrator of the plan. As of March 31, 1999, 6,061,553 shares of common stock were issuable upon the exercise of stock options granted under the option plan. No individual is permitted to receive over the term of the option plan options to acquire more than 2,500,000 of the total shares authorized under the option plan. Until the option plan terminates, any unpurchased shares of common stock underlying all options that expire, are terminated or become unexercisable for any reason, are returned to the option plan and become available for future grants. The number of shares of common stock underlying an option, the total number of shares of common stock authorized under the option plan but for which no options have been granted, and the exercise price per share of the common stock underlying all outstanding options are proportionately adjusted for any increase or decrease in the number of outstanding shares of common stock resulting from stock splits, reverse stock splits, stock dividends, reclassifications and recapitalizations. The option plan provides for the grant of either incentive stock options ("ISOs") or non-qualified stock options ("NQSOs"), except that consultants of Bluestone who are not also employees are not entitled to receive ISOs under the option plan. Exercise prices for ISOs may not be less than the fair market value per share of common stock on the date of grant, or 110% of the fair market value in the case of ISOs granted to any person who owns our stock possessing 10% or more of the total voting power of all of our capital stock. Exercise prices for NQSOs may be less than the fair market value per share, but must be at least $0.01 per share. Until there is an established market for the common stock, the board of directors, at its discretion, determines the fair market value of a share of common stock. Unless otherwise specified by the terms of an option agreement, options granted under the option plan vest at a rate of 25% of the shares underlying the option per year during the consecutive 4 year period beginning on the date of grant and expire 10 years after the date of grant, or 5 years after the date of grant with respect to ISOs granted to any person who owns our stock possessing 10% or more of the total voting power of all of our capital stock. The number of shares of common stock covered by ISOs granted to any optionee is limited such that the total fair market value of stock, determined as of the date of grant, with respect to which ISOs are exercisable for the first time by such optionee in any calendar year does not exceed $100,000. Any options in excess of such limits would be treated as NQSOs. In the event of a sale of Bluestone, as defined in the option plan, 50% of all options that have not vested as of the date of the sale become immediately vested and exercisable. All remaining options vest in accordance with the vesting schedule set forth in the applicable option agreement. In the event of a change in control of Bluestone, as defined in the option plan, the board of directors has the right, in its sole discretion, to accelerate the vesting of all options that have not vested as of the date of the change in control or establish an earlier date for the expiration of the exercise of an option or both. In addition, in the event of a change in control of Bluestone, the board of directors may, in its sole discretion, subject to and conditioned upon a sale of Bluestone, arrange for the successor entity to assume all of the rights and obligations under the option plan. Alternatively, the board of directors may, in its sole discretion, terminate the option plan and (a) with respect to those options that are vested as of the date of the sale of Bluestone, pay an amount equal to the amount over which the fair market value of a share of common stock, exceeds the underlying exercise price for those options, (b) arrange for the exchange of all options for options to purchase common stock in the successor entity, or (c) distribute to each optionee other property in an amount equal to and in the same form as the optionee would have received from the successor entity if the optionee had owned the shares of common stock underlying options that were vested as of the date of the sale of Bluestone rather than the option at the time of the sale of Bluestone. In this instance, the fair market value will be determined as of the termination date of the option plan. The form of payment or distribution to the optionee is to be determined by the board of directors, in its sole discretion. 43 401(k) PLAN We maintain a 401(k) Plan/Profit Sharing Plan. Under our 401(k) plan, a participant may contribute, subject to some limitations contained in the Internal Revenue Code, up to 15% of his or her compensation to the 401(k) plan. Employees who are at least 21 years old are eligible to participate after six consecutive months of employment with Bluestone. We may make discretionary matching contributions into participants' accounts of an annually determined percentage. This percentage is subject to a maximum of 6% of a participant's total eligible compensation. In addition, we may make additional annual discretionary profit sharing contributions to participants' accounts each year at the discretion of the board of the directors. Any profit sharing allocations made are allocated in the ratio that a participant's total eligible compensation bears to the total eligible compensation of all eligible participants for the applicable 401(k) plan year. To be eligible for a discretionary profit sharing contribution, a participant must be employed with Bluestone on the last day of the applicable 401(k) plan year and must have completed at least 500 hours of service for Bluestone during that year. The portion of a participant's account attributable to his or her own contributions is 100% vested. The portion of the account attributable to our contributions vests as to 20% of these contributions each year over 5 years beginning after completion of 2 years of service with us and ending after 6 years of service with us. Distributions from the 401(k) plan may be made in the form of installment distributions or lump-sum cash payments. LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by the Delaware General Corporation Law, as amended, our certificate of incorporation provides that our directors shall not be liable to us or our stockholders for monetary damages for breach of fiduciary duty as directors to the fullest extent permitted by the Delaware General Corporation Law as it now exists or as it may be amended. The Delaware General Corporation Law permits limitations of liability for a director's breach of fiduciary duty other than liability: - for any breach of the director's duty of loyalty to us or our stockholders; - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or - for any transaction from which the director derived an improper personal benefit. In addition, our bylaws provide that we shall indemnify all of our directors, officers, employees and agents for acts performed on our behalf. 44 CERTAIN TRANSACTIONS REINCORPORATION MERGER; SPIN-OFF OF CONSULTING BUSINESS We are the successor by merger to Bluestone Consulting Inc., a New Jersey corporation (the "Former New Jersey Corporation"). The Former New Jersey Corporation was incorporated on March 17, 1989. On March 13, 1997, for the sole purpose of enabling the Former New Jersey Corporation to change its state of incorporation from New Jersey to Delaware and to change its name to "Bluestone Software, Inc.," we were formed as a Delaware corporation. On March 13, 1997, the Former New Jersey Corporation merged with and into us. We were the surviving corporation in the merger. For purposes of this description of the reincorporation merger and spin-off of the consulting business, references to "Bluestone," "we," "us," and "our" include the Former New Jersey Corporation for periods prior to March 13, 1997. All of the issued and outstanding stock of the Former New Jersey Corporation was owned by Mel Baiada, and, at the time of and as a result of the merger, all of the issued and outstanding common stock of Bluestone was owned by Mel Baiada. At the time of the merger, we had two operating businesses, (1) the software products business and (2) the professional consulting services business. In order to enable investors to provide capital in connection with the software products business, we separated the services business and the products business by spinning off the services business to Mel Baiada. To accomplish the spin-off, we created Bluestone Consulting, Inc., a newly formed Delaware corporation ("BCI") and entered into a Contribution and Distribution Agreement dated April 17, 1997 with BCI. Pursuant to the Contribution and Distribution Agreement, among other things, we contributed to BCI those assets and liabilities that constituted the services business in exchange for all of the stock of BCI. We then distributed all of the stock of BCI to Mel Baiada. At the time of the distribution, both Bluestone and BCI were "S" corporations for federal income tax purposes. On April 18, 1997, we issued the Series A preferred stock, after which Mel Baiada held more than a 50% interest in our outstanding stock and a 100% interest in the outstanding stock of BCI. We, as successor to the Former New Jersey Corporation, began our active involvement in the services business in 1989, and continued it without interruption through the date of the spin-off, when it was continued by BCI. MARK BAIADA CONVERTIBLE SUBORDINATED NOTE In connection with the spin-off, we agreed to assume one-half of the $1.0 million principal amount of a convertible note payable by the Former New Jersey Corporation to Mark Baiada, a former director of Bluestone and the brother of Mel Baiada. BCI retained the liability for the other one-half of the note. We effected this assumption by issuing an Amended and Restated Convertible Subordinated Note dated April 17, 1997 to Mark Baiada in the principal amount of $500,000. The note payable to Mark Baiada bears interest at a rate of 10% per annum, compounded annually. We are required to make interest payments in arrears on each anniversary date of this note until paid in full. The principal amount of the note is payable in full on December 31, 2002. We are permitted to prepay the note in whole or in part without penalty or premium. The amount outstanding under the note is convertible into 700,000 shares of our common stock at any time prior to the time it matures or the date paid in full at a rate equal to $0.71 per share, subject to proportionate adjustment in the event we pay out stock dividends in shares of common stock and subdivisions and combinations of our outstanding common stock. 45 MEL BAIADA PROMISSORY NOTE AND PURCHASE OF SERIES A PREFERRED STOCK As part of the spin-off, Mel Baiada agreed to cancel a promissory note in the principal amount of $403,066 originally issued by the Former New Jersey Corporation in exchange for (1) our issuance of a promissory note to Mel Baiada in the principal amount of $250,000 and (2) BCI's issuance of a promissory note in the principal amount of $107,495. Concurrently with our issuance of the Series A preferred stock on April 17, 1997, Mel Baiada contributed the note payable to him to our capital in exchange for 263,158 shares of Series A preferred stock. PROMISSORY NOTE TO BCI As part of the spin-off, we issued a subordinated promissory note dated April 17, 1997 in favor of BCI in the principal amount of $500,000. That note bears interest at a rate of 10% per annum. We are required to make interest payments in arrears on each anniversary date of the note until paid in full. The principal amount of the note is payable in full on December 31, 2005. We are permitted to prepay the note in whole or in part without penalty or premium. TAX ALLOCATION AND INDEMNITY AGREEMENT As part of the spin-off, Bluestone, BCI, Mel Baiada and the holders of the Series A preferred stock entered into a Tax Allocation and Indemnity Agreement dated as of April 18, 1997. The parties entered into this agreement to set forth their respective rights and obligations with respect to taxes and liabilities that may be imposed upon them and to determine how taxes were to be allocated upon the termination of our status as an "S" corporation for federal and state income tax purposes by reason of our issuance of Series A preferred stock. We agreed with BCI to allocate (1) certain taxes ("Other Taxes"), other than income taxes and taxes for which one or more of the bases for determining the tax due is net income or profit ("Income Taxes") and (2) state corporate income taxes between us and BCI to the extent it is mutually determined by us and BCI. If any Other Taxes or state corporate income taxes paid are later adjusted by any taxing authority, then appropriate adjustment is to be made to the amount of Other Taxes or state corporate income taxes paid by BCI. If any Other Taxes or state corporate income taxes are refunded or repaid to Bluestone, then we are required to repay BCI the portion of the refund or repayment that we and BCI determine is attributable to BCI. We agreed to indemnify and defend Mel Baiada from and against all losses with respect to (a) Income Taxes imposed upon Mr. Baiada resulting from any increase in items of income or gain or any decrease in items of loss, deduction or credit reported to Mr. Baiada by Bluestone (including the Former New Jersey Corporation) for the period during which we were taxed as an "S" corporation for federal and state income tax purposes and (b) any excess Income Tax liability imposed upon Mr. Baiada as a result of the invalidity or termination of our status as an "S" corporation for federal and state income tax purposes on or before April 18, 1997 (other than by reason of our issuance of Series A preferred stock). Our indemnification obligations to Mr. Baiada with respect to the items described in (a) above are applicable only to the extent of (1) an increase in an item of income or gain with respect to a taxable year within the period when we were taxed as an "S" corporation (an "S Year") and in a corresponding decrease in an item of income or gain with respect to a taxable year that we were not taxed as an "S" corporation (a "C Year"), or (2) a decrease in any item of loss, deduction or credit with respect to an S Year and in a corresponding increase of any item of loss, deduction or credit with respect to a C Year. Mr. Baiada agreed to indemnify and defend us from and against all losses with respect to Income Taxes imposed upon Bluestone as a result of (a) an increase in an item of our income or gain in any C Year and a corresponding decrease in an item of income or gain reported to Mr. Baiada with respect to an S Year, (b) a decrease in an item of loss, deduction or credit reported to Mr. Baiada in any C 46 Year and a corresponding increase in an item of loss, deduction or credit reportable by Mr. Baiada with respect to an S Year, and (c) the invalidity or termination of our status as an "S" corporation for federal and state income tax purposes on or before April 18, 1997, other than by reason of our issuance of Series A preferred stock. Mr. Baiada's indemnification obligations with respect to any of the events described in (a), (b), or (c) above are applicable only to the extent that Mr. Baiada has received a tax benefit and we suffered a tax detriment as a result of the applicable event. SERVICE MARK LICENSE AGREEMENT As part of the spin-off, we entered into a Service Mark License Agreement dated April 17, 1997 with BCI. Under this license agreement, we granted BCI a non-exclusive, perpetual, worldwide royalty-free license to use some of our registered and unregistered trade marks in connection with any services performed by BCI. We have the right to terminate the license agreement upon (1) certain events of default by BCI or (2) upon a change in control of BCI, subject to BCI's right to continue the license agreement for a period of not more than 1 year from the date of the change in control. RESELLER AGREEMENT WITH BCI We are a party to a reseller agreement with BCI, dated January 1, 1998, under which BCI sells our software products. SUBLEASE AGREEMENT WITH BCI As part of the spin-off, we entered into a sublease agreement with BCI, effective as of April 30, 1997. BCI subleases approximately 7,780 square feet of our Mount Laurel facility. BCI pays us an annual base rent of $94,000, which is paid in equal monthly installments in advance on the first day of every calendar month during the term of the BCI sublease. BCI also pays us 19% of all taxes, common area costs, utility costs and other services paid for by us under our lease. The BCI sublease expires when our lease expires or is terminated for any reason, including our default under our lease. ISSUANCE OF SERIES A PREFERRED STOCK On the day immediately after the date of the spin-off, and pursuant to a Stock Purchase Agreement dated April 18, 1997, we issued 5,526,316 shares of Series A preferred stock for a total purchase price of $5.25 million or $0.95 per share, including 263,158 shares of Series A preferred stock to Mel Baiada. STOCK REPURCHASE AGREEMENT As part of our issuance of shares of Series A preferred stock, we entered into a Stock Repurchase Agreement dated April 18, 1997 with Mel Baiada. Pursuant to the repurchase agreement, 1,350,000 shares of the 9,000,000 shares of common stock then held by Mr. Baiada were designated as "contingent shares." At the beginning of each calender quarter, beginning with the third calender quarter of 1997 and until the second calender quarter of 2001, 84,375 of the contingent shares were to be designated as "vested shares." This increased the total number of "vested shares" by 84,375 at the beginning of each calender quarter. Because Mr. Baiada's employment agreement was not renewed all outstanding contingent shares automatically became vested shares. Prior to his shares becoming vested, if Mr. Baiada had ceased to be employed by us for any reason other than his death or disability, then we would have had the right to purchase all, but not less than all, of the contingent shares as of the date upon which Mel Baiada ceased to be employed at a purchase price equal to the fair market value per share as determined by our board of directors. 47 SALE OF MEL BAIADA SERIES A PREFERRED STOCK On April 22, 1998, Mel Baiada sold all 263,158 of his shares of Series A preferred stock to certain of the then existing holders of Series A preferred stock for a total purchase of $341,053 or $1.296 per share. ISSUANCE OF SERIES B PREFERRED STOCK Pursuant to a stock purchase agreement dated April 22, 1998, we issued 8,782,695 shares of Series B preferred stock for a total purchase price of $11.4 million or $1.296 per share. BRIDGE FINANCING On January 21, 1999, we entered into the Note and Warrant Purchase Agreement with substantially all of the holders of the Series B preferred stock. Under the Note and Warrant Purchase Agreement, the Series B preferred stockholders agreed to provide subordinated secured debt financing of up to $5.0 million. To the extent this financing was utilized, we would have been obligated to issue 10% Convertible Subordinated Secured Notes and warrants to purchase up to 1,612,903 shares of common stock at an exercise price equal to $0.62 per share to the Series B preferred stockholders. We were permitted to draw on the Committed Principal Amount at any time until May 30, 1999. As of May 25, 1999, we had drawn down approximately $1.35 million of the $5.0 million available and issued 440,348 warrants to the Series B preferred stockholders. This outstanding $1.35 million debt was converted into Series C preferred stock as part of our issuance of 9,191,176 shares of Series C preferred stock at $2.72 per share on May 25, 1999. The issuance of the warrants to the Series B preferred stockholders triggered anti-dilution protection afforded to Silicon Valley Bank pursuant to an antidilution agreement between us and Silicon Valley Bank dated November 24, 1997 whereby the number of shares of common stock underlying the warrant issued to Silicon Valley Bank and the exercise price under the Silicon Valley Bank warrant were readjusted. See "--Silicon Valley Bank Warrant." ISSUANCE OF SERIES C PREFERRED STOCK Pursuant to a stock purchase agreement dated May 25, 1999, we issued 9,191,176 shares of Series C preferred stock for a total purchase price of $25.0 million or $2.72 per share. REGISTRATION RIGHTS Pursuant to the Second Restated Investors' Rights Agreement dated May 25, 1999 by and among us and our preferred stockholders, the holders of preferred stock are entitled to certain rights with respect to the registration under the Securities Act for resale to the public of the common stock issuable upon the conversion of preferred stock. The Second Restated Investors' Rights Agreement permits the preferred stockholders to twice require us, whether or not we propose to register our common stock for sale, to register all or part of those preferred stockholders' common stock, issued upon conversion of the preferred stock, so long as the securities that would be covered by the registration statement have an aggregate gross offering price of at least $20.0 million. If any registration involves an underwritten offering, preferred stockholders that wish to participate in that offering must enter into customary agreements with us and the underwriter. The underwritten offering will be subject to certain limitations and restrictions that may be imposed by the underwriters thereof, including, the right of the underwriters to exclude a portion of the securities owned by the preferred stockholders from the offering. The Second Restated Investors' Rights Agreement also provides demand registration rights to the preferred stockholders requiring us to register all or part of the registrable securities on Form S-3, 48 provided, that, among other things: (1) Form S-3 is available to us and the preferred stockholders for this offering; (2) the offering price of the securities to be registered by the preferred stockholders, together with securities of held by other persons entitled to participate in the registration, is at least $1.0 million in the aggregate, net of any underwriters' discounts or commissions; and (3) the board of directors determines that the registration would not be seriously detrimental to us and our stockholders at that time. In this event, the registration of such securities may be delayed for up to 60 days. Pursuant to the Second Restated Investors' Rights Agreement, the preferred stockholders have the right, subject to certain exceptions, to have their registrable securities included in any registration statement filed by us. Each preferred stockholder that wishes to participate in the offering must enter into a customary agreement with us and the underwriter, which agreement may limit in whole or in part the inclusion of that preferred stockholder's registrable securities in the registration statement, as determined by the underwriters in their sole discretion. We are required to pay all expenses relating to any of these registrations other than underwriting discounts and commissions relating to shares sold by the preferred stockholders. The registration rights provided in the Second Restated Investors' Rights Agreement extend for a period of five years following this offering. SILICON VALLEY BANK WARRANT In connection with our credit facility with Silicon Valley Bank, we issued to Silicon Valley Bank a warrant dated November 24, 1997 to purchase up to 31,250 shares of common stock at an exercise price equal to $0.80 per share. The warrant may be exercised at any time prior to November 24, 2004. The exercise price of the warrant and the number of shares of common stock into which the warrant is exercisable are subject to proportionate adjustment in the event of stock dividends payable in shares of common stock and combinations and splits of common stock. In addition, pursuant to an antidilution agreement between us and Silicon Valley Bank dated November 24, 1997, the exercise price of the warrant and the number of shares of common stock into which the warrant is exercisable are subject to adjustment on a broad-based weighted average basis for issuance of securities after November 24, 1997 for less than the then applicable exercise price for the warrant. Pursuant to a registration rights agreement between us and Silicon Valley Bank dated November 24, 1997, Silicon Valley Bank has the right, subject to certain exceptions, to have its shares of common stock issuable upon the exercise of its warrant included in any of our registration statements. We will pay all expenses relating to any registration other than underwriting discounts and commissions relating to shares sold by Silicon Valley Bank. FILIPOWSKI CONSULTING AGREEMENT We entered into a consulting agreement with Andrew Filipowski in May 1999 under which Mr. Filipowski will provide consulting services to us from that date until May 2001. In consideration of these consulting services, we granted to Mr. Filipowski a fully vested option to purchase 70,000 shares of our common stock at an exercise price of $1.29 per share. FUTURE AFFILIATE TRANSACTIONS All future transactions, including loans, between us and our officers, directors, principal stockholders and their affiliates, will be approved by a majority of the board of directors, including a majority of the independent and disinterested outside directors on the board of directors, and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 49 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information as of May 31, 1999 regarding the beneficial ownership of our common stock by: (1) each person, entity or group known by us to own beneficially more than 5% of our outstanding common stock; (2) each director; (3) each of the named executive officers; and (4) all directors and executive officers as a group. The ownership amounts are calculated as if the outstanding preferred stock was fully converted into common stock as of May 31, 1999. Unless otherwise indicated, the address of each person identified is c/o Bluestone Software, Inc., 1000 Briggs Road, Mount Laurel, New Jersey 08054.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED PRIOR TO OFFERING AFTER OFFERING ---------------------- ---------------------- NAME AND ADDRESS NUMBER PERCENT(1) PERCENT (1) - -------------------------------------------------------------------------------- ---------- ---------- ---------------------- Mel Baiada (2).................................................................. 9,000,000 21.4% General Electric Capital Corporation(3)......................................... 8,913,663 21.1% Entities affiliated with Patricof & Co. Ventures, Inc. (4)...................... 17,247,266 40.7% Fostin Capital Partners II, L.P. (5)............................................ 5,233,947 12.4% P. Kevin Kilroy (6)(7).......................................................... 350,000 * Enrico J. Ballezzi (6).......................................................... 159,775 * Robert W. Bickel (6)............................................................ 505,562 1.2% John H. Capobianco (6).......................................................... 179,525 * Gregory M. Case (8)............................................................. 17,247,266 40.7% William C. Hulley (9)........................................................... 5,233,947 12.4% Anton Simunovic (10)............................................................ 8,913,663 21.1% Andrew J. Filipowski (6)(11).................................................... 90,000 * Paul E. Blondin (6)(12)......................................................... 20,000 * All directors and executive officers as a group (11 persons) (13)............... 36,306,016 83.1%
- ------------------------ * Represents less than 1% of the outstanding shares of Common Stock. (1) The percentages shown are based on 42,110,289 shares of common stock outstanding prior to the offering and shares of common stock outstanding after the offering and does not include the conversion of the accrued dividends on preferred stock. Pursuant to Rule 13d-3 under the Exchange Act, shares of common stock which a person has the right to acquire pursuant to the exercise of stock options and warrants held by that holder that are exercisable within 60 days are deemed outstanding for the purpose of computing the percentage ownership of that person, but are not deemed outstanding for computing the percentage ownership of any other person. (2) Includes 1,800,000 shares of common stock held in two trusts in which Mr. Baiada is the sole trustee and 511,890 shares of common stock held in a trust in which Mr. Baiada's wife is a co-trustee. Mr. Baiada intends to grant the underwriters the right to purchase shares pursuant to the underwriters' over-allotment option. (3) The address for General Electric Capital Corporation is 260 Long Ridge Road, Stamford, CT 06927. Includes 3,858,025 shares of Series B preferred stock which is convertible into 8,075,078 shares of common stock, 676,524 shares of Series C preferred stock convertible into an equivalent amount of common stock, and 162,061 shares of common stock underlying warrants. General Electric Capital Corporation is a subsidiary of the General Electric Company. General Electric Capital Corporation intends to grant the underwriters the right to purchase shares pursuant to the underwriters' over-allotment option. 50 (4) The address for Patricof & Co. Ventures, Inc. ("Patricof") is 445 Park Avenue, New York, NY 10022. The share amount is comprised of: (A) shares held by the P/A Fund, L.P., consisting of 2,372,034 shares of Series A preferred stock convertible into an equivalent amount of common stock, 1,247,585 shares of Series B preferred stock convertible into 2,611,270 shares of common stock, 202,205 shares of Series C preferred stock convertible into an equivalent amount of common stock, and 48,438 shares of common stock underlying warrants. Fostin Capital Partners II, L.P. and APA Pennsylvania Partners II, L.P. (a Patricof affiliate) are the general partners of The P/A Fund, L.P. The address of the P/A Fund, L.P. is 455 South Gulph Road, Suite 410, King of Prussia, PA 19406. The P/A Fund intends to grant the underwriters the right to purchase shares pursuant to the underwriters' over-allotment option. (B) shares held by APA Excelsior IV, L.P., consisting of 2,629,437 shares of Series A preferred stock convertible into an equivalent amount of common stock, 3,069,060 shares of Series B preferred stock convertible into 6,423,727 shares of common stock, 802,529 shares of Series C preferred stock convertible into an equivalent amount of common stock and 192,245 shares of common stock underlying warrants. Patricof & Co. Managers, Inc. is the general partner of APA Excelsior IV Partners, which is the general partner of APA Excelsior IV, L.P. The address of APA Excelsior IV, L.P. is 445 Park Avenue, New York, NY 10022. APA Excelsior IV, L.P. intends to grant the underwriters the right to purchase shares pursuant to the underwriters' over-allotment option. (C) shares held by APA Excelsior IV/Offshore, L.P., consisting of 464,019 shares of Series A preferred stock convertible into an equivalent amount of common stock, 541,599 shares of Series B preferred stock convertible into 1,133,599 shares of common stock, 141,623 shares of Series C preferred stock convertible into an equivalent amount of common stock and 33,927 shares of common stock underlying warrants. Patricof & Co. Managers, Inc. is the general partner of APA Excelsior IV Partners, which is the general partner of APA Excelsior IV/Offshore, L.P. The address of APA Excelsior IV/Offshore, L.P. is c/o Patricof & Co. Ventures, Inc. 445 Park Avenue, New York, NY 10022. APA Excelsior IV/Offshore, L.P. intends to grant the underwriters the right to purchase shares pursuant to the underwriters' over-allotment option. (D) shares held by Patricof Private Investment Club, L.P. including 50,300 shares of Series A preferred stock convertible into an equivalent amount of common stock, 58,710 shares of Series B preferred stock convertible into 122,884 shares of common stock, 15,352 shares of Series C preferred stock convertible into an equivalent amount of common stock and 3,677 shares of common stock underlying warrants. Patricof & Co. Managers, Inc. is the general partner of APA Excelsior IV Partners, which is the general partner of Patricof Private Investment Club, L.P. The address of Patricof Private Investment Club, L.P. is 445 Park Avenue, New York, NY 10022. Patricof Private Investment Club, L.P. intends to grant the underwriters the right to purchase shares pursuant to the underwriters' over-allotment option. (5) Fostin Capital Partners II, L.P. is a general partner of The P/A Fund, L.P. The address for Fostin Capital Partners II, L.P. is 518 Broad Street, Sewickley, PA 15143. (6) Represents the total number of shares of our common stock issuable upon exercise of stock options which are currently exercisable and which are exercisable within 60 days after May 31, 1999. (7) Mr. Kilroy intends to grant the underwriters the right to purchase shares pursuant to the underwriters' over-allotment option. (8) The address for Mr. Case is c/o Patricof & Co. Ventures, Inc., 455 South Gulph Road, Suite 410, King of Prussia, PA 19406. Mr. Case is a Vice President of Patricof & Co. Managers, Inc., the 51 general partner of each of APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P. and Patricof Private Investment Club, L.P. Mr. Case is a Managing Director of Patricof & Co. Ventures, Inc., the investment advisor of APA Excelsior IV/Offshore, L.P. Mr. Case is a general partner of APA Pennsylvania Partners II, L.P., a general partner of The P/A Fund, L.P. Mr. Case shares voting and investment powers with respect to the shares owned by these funds. Mr. Case does not own any of our outstanding securities as an individual. (9) The address for Mr. Hulley is c/o The P/A Fund, L.P., 578 Broad Street, Sewickley, PA 15143. Mr. Hulley is a general partner of Fostin Capital Partners II, L.P., which is a general partner of The P/A Fund L.P. Mr. Hulley shares voting and investment powers with respect to the shares owned by The P/A Fund L.P. Mr. Hulley does not own any of our outstanding securities as an individual. (10) The address for Mr. Simunovic is c/o General Electric Capital Corporation, 260 Long Ridge Road, Stamford, CT 06927. Mr. Simunovic is a Senior Vice President of the Equity Capital Group at General Electric Capital Corporation, a subsidiary of General Electric Company. Mr. Simunovic shares voting and investment powers with respect to the shares owned by General Electric Capital Corporation. Mr. Simunovic does not own any of our outstanding securities as an individual. (11) Mr. Filipowski was appointed as a director on June 10, 1999. The address for Mr. Filipowski is c/o Platinum technology, inc., 1815 South Meyers Road, Oakbrook Terrace, IL 60181. (12) Mr. Blondin was appointed as a director on June 16, 1999. The address for Mr. Blondin is 50 Battery Street, Boston, MA 02109. (13) Includes 1,035,087 shares of our common stock issuable upon the exercise of stock options which are currently exercisable and which are exercisable within 60 days after May 31, 1999. 52 DESCRIPTION OF SECURITIES Our current authorized capital stock consists of 53,800,000 shares of common stock, $0.001 per share and 23,500,187 shares of preferred stock, $0.001 per share, of which 5,526,316 shares are designated as "Series A preferred stock," 8,782,695 shares are designated as "Series B preferred stock", and 9,191,176 shares are designated as "Series C preferred stock." Immediately prior to the closing of this offering, we will authorize additional shares of common and preferred stock and all of the outstanding preferred stock will automatically convert to common stock. The following is a summary of certain provisions of our common stock, our preferred stock and our third amended and restated certificate of incorporation. COMMON STOCK As of May 31, 1999, there were 9,010,089 shares of common stock held of record by 6 stockholders. Holders of common stock, together with the holders of the preferred stock, who are entitled to vote on an "as converted" basis as described below, are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Subject to the applicable provisions of the Delaware General Corporation Law, stockholders holding a majority of the issued and outstanding shares entitled to vote constitute a quorum for the purposes of convening a stockholders' meeting. Accordingly, a majority of a quorum may elect directors standing for election, subject to the director election rights of the stockholders described below. Holders of common stock are entitled to receive ratably any dividends as may be declared on the common stock by the board of directors. Upon liquidation, dissolution or winding up of Bluestone, holders of common stock are entitled to receive ratably the net assets of Bluestone available for distribution after the payment of all debts and other liabilities subject to the prior and superior liquidation preference rights of holders of preferred stock, if any are outstanding. Holders of common stock have no preemptive or subscription rights with respect to other issuances of securities. Our common stock has no conversion rights and is not redeemable. PREFERRED STOCK All of our presently authorized preferred stock is outstanding. Immediately prior to this offering's closing, all outstanding preferred stock will automatically convert into common stock as follows: - Series A: one share for one share; - Series B: one share of Series B for 2.09 shares of common stock; and - Series C: one share for one share. Holders of our outstanding preferred stock are entitled to receive annual dividends as follows: - Series A: $0.057 per share; - Series B: $0.078 per share; and - Series C: $0.1632 per share. The Series A preferred stock dividends have accrued since April 17, 1997, the Series B preferred stock dividends have accrued since April 22, 1998 and the Series C preferred stock dividends have accrued since May 25, 1999. Aggregate accrued dividends on the preferred stock as of May 31, 1999 amounted to approximately $1.4 million. We are required to pay any federal or state income taxes to which the holders of preferred stock may be subject with respect to the accrued and unpaid cash dividends, whether or not earned or declared. Accumulated but unpaid dividends will be reduced by these tax payments. Upon the 53 conversion of our preferred stock into common stock, we are required to pay to the holders of the preferred stock being converted all accumulated and unpaid cash dividends, whether or not declared, with respect to the preferred stock. However, if requested by any holder of the shares of preferred stock being converted and approved by the holders of a majority of the then outstanding shares of common stock, the holder may exchange all or any portion of the accumulated and unpaid cash dividends into shares of common stock at the then fair market value of the common stock. ANTI-TAKEOVER EFFECTS OF BLUESTONE'S CERTIFICATE OF INCORPORATION AND BYLAWS AND PROVISIONS OF DELAWARE LAW Following the closing of this offering, our certificate of incorporation and bylaws and provisions of Delaware corporate law may hinder or delay a third party's attempt to acquire us. They may also make it difficult for the stockholders to remove incumbent management. CLASSIFIED BOARD OF DIRECTORS; VACANCIES. Following the closing of this offering, the certificate of incorporation will divide the board of directors into three classes. The directors' terms will be staggered by class. Our classified board of directors is intended to provide continuity and stability in board membership and policies. However, the classified board of directors makes it more difficult for stockholders to change the board composition quickly. In addition, a majority of the directors then in office can increase the size of the board of directors and fill board of directors vacancies and newly created directorships resulting from any increase in the size of the board of directors. This is true even if those directors do not constitute a quorum or if only one director is left in office. These provisions could prevent stockholders, including parties who want to take over or acquire us, from removing incumbent directors without cause and filling the resulting vacancies with their own nominees. ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER NOMINATIONS OF DIRECTORS. The bylaws will establish an advance notice procedure regarding nominations of directors by stockholders and other stockholder proposals. The advance notice procedure will not apply to nominations of directors by the board of directors. For matters a stockholder wishes to bring before an annual meeting of stockholders, the stockholder must deliver to us a notice not less than 90 days nor more than 120 days before the first anniversary of the preceding year's annual meeting of nominations and other business to be brought before our annual meeting. The stockholder must put information in the notice regarding: - the stockholder and its holdings; - the background of any nominee for director; - the written consent to being named as a nominee and to serving as a director if elected; - any business desired to be brought before the meeting; - the reasons for conducting the business at the meeting; and - any material interest of the stockholder in the business proposed. At a special meeting of stockholders called to elect directors, stockholders can make a nomination only if they deliver to us a notice that complies with the above requirements no later than the tenth day following the day on which public announcement of the special meeting is made. The bylaws could preclude a nomination for the election of directors or the conduct of certain business at a particular meeting if the proper procedures are not followed. This may discourage or deter a third party from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of us. SPECIAL STOCKHOLDERS' MEETINGS. Our certificate of incorporation and bylaws will permit special meetings of the stockholders to be called only by the board of directors, the chief executive officer or 54 the president or holders of at least 75% of our securities that are outstanding and entitled to vote in an election of directors. AUTHORIZED BUT UNISSUED SHARES. We will be able to issue shares of common stock without stockholder approval, up to the number of shares authorized for issuance in its certificate of incorporation, except as limited by Nasdaq rules. We could use these additional shares for a variety of corporate purposes. These purposes include future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. Our ability to issue these additional shares could make it more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise. SECTION 203 OF DELAWARE LAW. After this offering is completed, Section 203 of the Delaware General Corporation Law will apply to us. This section will prohibit us from engaging in a "business combination" with an "interested stockholder." This restriction will apply for three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes (1) mergers, (2) asset sales and (3) other transactions resulting in a financial benefit to an interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of our voting stock. Section 203 could delay, defer or prevent a change in control of us. It might also reduce the price that investors might be willing to pay in the future for shares of common stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is . LISTING We have applied for listing our common stock on the Nasdaq National Market under the trading symbol "BLSW." 55 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. Upon completion of this offering, we will have outstanding an aggregate of shares of our common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options. Of these shares, all of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining shares of common stock to be held by existing stockholders will be "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act, which rules are summarized below. As a result of the lock up agreements described below and the provisions of Rule 144, additional shares will be available for sale in the public market as follows: - 6,250 shares of common stock currently outstanding will be available for sale into the public market following the effectiveness of this registration statement; - 6,058,553 shares of common stock issuable upon exercise of currently outstanding options will be eligible for sale as the options vest and following the effectiveness of a registration statement on Form S-8 covering the stock options, which we expect to file shortly after the completion of this offering; and - the remainder of the restricted securities will be eligible for sale from time to time after the expiration of the lock up period and upon expiration of their respective one-year holding periods. LOCK-UP AGREEMENTS All of our officers and directors and some of our stockholders are expected to enter into lock-up agreements under which they agreed not to transfer or otherwise dispose of, directly or indirectly, without the consent of Deutsche Bank Securities Inc., any shares of our common stock or any securities convertible into or exchangeable or exercisable for shares of our common stock for a period of 180 days following the effective date of the registration statement of which this prospectus is a part. Transfers or dispositions can be made during the lock-up periods in the case of gifts for estate planning purposes where the donee signs a lock-up agreement. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this registration statement, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or - the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 of the sale with the SEC. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. 56 RULE 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell their shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. RULE 701 In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchases shares from us in connection with a compensatory stock or option plan or other written agreement are eligible to resell their shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with some restrictions, including the holding period, contained in Rule 144. REGISTRATION RIGHTS After this offering, the holders of shares of our common stock, or their transferees, as well as the holders of outstanding warrants, will be entitled to rights to register their common stock or the common stock underlying their warrants under the Securities Act. After registration, those shares will be freely tradable without restriction under the Securities Act. STOCK OPTIONS Shortly after completion of this offering, we plan to file a registration statement on Form S-8 under the Securities Act covering shares of common stock reserved for issuance under our stock option and director compensation plans. As of March 31, 1999, options to purchase 6,058,553 shares of common stock were issued and outstanding, 2,929,275 of which are vested. This registration statement is expected to be filed and become effective as soon as practicable after the date of this prospectus. Accordingly, shares registered under the S-8 registration statement will, subject to lock-up agreements, vesting provisions and Rule 144 volume limitations applicable to our affiliates, be available for sale in the open market immediately after the registration statement becomes effective. 57 PLAN OF DISTRIBUTION Subject to the terms and conditions of the underwriting agreement, the underwriters, named below through their representatives Deutsche Bank Securities Inc., SoundView Technology Group, Inc., C.E. Unterberg, Towbin and Legg Mason Wood Walker, Incorporated have severally agreed to purchase from us the following respective numbers of shares of common stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus.
UNDERWRITER NUMBER OF SHARES - --------------------------------------------------------------------------- ----------------- Deutsche Bank Securities Inc............................................... SoundView Technology Group, Inc............................................ C.E. Unterberg, Towbin..................................................... Legg Mason Wood Walker, Incorporated....................................... ----------------- Total.................................................................... ----------------- -----------------
The underwriting agreement provides that the obligations of the underwriters are subject to conditions precedent and that the underwriters will purchase all of the shares of common stock offered hereby if any of such shares are purchased. We have been advised by the representatives of the underwriters that the underwriters propose to offer the shares of our common stock to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $ per share. The underwriters may allow to some other dealers, and those dealers may reallow, a concession not in excess of $ per share. After the initial public offering, the offering price and other selling terms may be changed by the representatives of the underwriters. We and certain stockholders have granted the underwriters an option, exercisable not later than 30 days after the date of this prospectus, to purchase up to additional shares of common stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of the option shares that the number of shares of common stock to be purchased by it in the above table bears to . The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the common stock offered in this offering. If purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered. We and the selling stockholders have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act. We have agreed not to offer, sell, sell short, transfer, hypothecate, pledge or otherwise dispose of any shares of our common stock or other securities convertible into or exchangeable or exercisable for shares of our common stock or derivatives of our common stock, or enter into an agreement for our common stock, for a period of 180 days after the date of our registration statement, of which this prospectus is a part, directly or indirectly, by us or otherwise, except as consideration for business acquisitions, on exercise of currently outstanding stock options or on the issuance of options to key employees and directors under our stock option plans and the exercise of such options, without the prior written consent of Deutsche Bank Securities Inc. 58 All of our officers and directors and certain of our stockholders have entered into lock-up agreements under which they agreed not to transfer or otherwise dispose of, directly or indirectly, without the consent of Deutsche Bank Securities Inc. any shares of our common stock or any securities convertible into or exchangeable or exercisable for shares of our common stock for a period of 180 days following the date of this registration statement. Transfers or dispositions can be made during the lock-up periods in the case of gifts for estate planning purposes where the donee signs a lock-up agreement. The representatives of the underwriters have advised us that the underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. To facilitate this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of our common stock. Specifically, the underwriters may over-allot shares of our common stock in connection with this offering, creating a short position in the underwriters' syndicate account. Additionally, to cover the over-allotments or to stabilize the market price of our common stock, the underwriters may bid for, and purchase, shares of our common stock in the open market. Any of these activities may maintain the market price of our common stock at a level above that which might otherwise prevail in the open market. The underwriters are not required to engage in these activities and may end any of these activities at any time. The representatives of the underwriters, on behalf of the syndicate of underwriters, also may reclaim selling concessions allowed to an underwriter or dealer if the syndicate repurchases shares distributed by that underwriter or dealer. The underwriters and their respective affiliates may be lenders to, engage in transactions with and perform services for us in the ordinary course of business. We paid $1.4 million and issued a warrant to purchase up to 481,434 shares of common stock at an exercise price of $2.72 per share to Deutsche Bank Securities Inc. for providing placement agent services to us in connection with the offering of Series C preferred stock that was consummated on May 25, 1999. The amount paid for these services was determined by arms' length negotiations between us and Deutsche Bank Securities Inc. We believe that this amount is within standard industry parameters for a transaction of that nature. Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for our common stock will be determined by negotiations between us and the representatives of the underwriters. Among the factors to be considered in these negotiations will be prevailing market conditions, the results of our operations in recent periods, the market capitalizations and stages of development of other companies which we and the representatives of the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Pepper Hamilton LLP. Some legal matters related to this offering will be passed upon for the underwriters by Willkie Farr & Gallagher. EXPERTS Our financial statements as of December 31, 1997 and 1998, and for the years ended December 31, 1996, 1997 and 1998 included in this prospectus and registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein upon the authority of said firm as experts in giving said reports. 59 WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form S-l pursuant to the Securities Act with respect to the common stock offered in this offering. The prospectus, which is part of the registration statement, does not contain all the information set forth in the registration statement. Statements contained in the prospectus as to the contents of any contract, agreement or other document filed with the registration statement as exhibits are necessarily summaries of such documents, but are complete in all material respects, and are qualified in their entirety by reference to the copy of the applicable document filed as an exhibit to the registration statement. For further information about us and the securities offered in this offering, reference is made to the registration statement and to the financial statements, schedules and exhibits filed as a part of the registration statement. Upon completion of the offering, we will be subject to the information requirements of the Exchange Act, and, in accordance therewith, will file reports and other information with the SEC. The registration statement, the exhibits and schedules forming a part of the registration statement and the reports and other information filed by us with the SEC in accordance with the Exchange Act may be inspected without charge at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional offices of the SEC: 7 World Trade Center, Suite 1300, New York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661-2511. Copies of these materials may also be obtained from the Public Reference Room of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet Web site at http://www.sec.gov that contains reports, proxy statements and other information. 60 GLOSSARY ACTIVEX: A brand name from Microsoft for various technologies based on its Component Object Model (COM), many of which are targeted for the Internet. API: Application Program Interface--A language or message format prescribed by a computer application, program or operating system to communicate with another computer application, program or operating system. CACHE: An area of memory that stores most recently accessed or most frequently requested instructions and data. When a computer needs data once, chances are it will need it again soon. Computer designers therefore realized they could speed up the computer by storing the most recently accessed data in a high-speed storage area. There are several types of cache on your computer: - DISK CACHE. It reserves an area of Random Access Memory (RAM) to store data that has been accessed from the hard drive. - BROWSER CACHE. Storage area for recently accessed websites. The browser retrieves data from the cache instead of taking the time to get it from the Internet. - APPLICATION CACHE. This type of cache is similar to the others, except it is application specific. For example, an application may access a database and cache the data it retrieves for subsequent use as the application executes. - PROCESSOR CACHE. An area of memory located inside a processor or printed circuit board. CASCADING STYLE SHEET: (CSS)--A styling language that defines in great detail the physical appearance of text on web pages. For example, you can say that all headings should be displayed in a sans-serif font, or "special" text is to be displayed in italic times-roman 12-point text, or this page should use this color scheme with this background image. CSS can completely replace older HTML tags like [font] and [i] although the older tags are still supported for backward compatibility. COM: Component Object Model--Microsoft's software architecture to facilitate the development of interoperable software modules known as "objects". The COM architecture is essentially a set of interfaces that allows client and server software components to communicate within the same computer. It runs on Windows95, Windows98 or WindowsNT. CORBA: Common Object Request Broker--An architecture and specification for creating, distributing, and managing distributed program objects on a network. It allows programs at different locations and developed by different vendors to communicate in a network through an "interface broker." CORBA was developed by a consortium of vendors through the Object Management Group (OMG). Note: CORBA and DCOM (or COM+) are competing distributed computing architectures. DCOM: Distributed Component Object Model--Microsoft's approach to distributed object computing. DCOM is a set of program interfaces in which objects or software modules can request services from programs on other computers within a network. DCOM can be used on a network within an enterprise or on other networks such as the Internet. ENTERPRISE JAVA BEANS: Also referred to as EJBs or EJB components. Software modules that abide by the EJB Specification. The EJB specification defines how components interact with other software programs, thereby providing a common way to access and run applications in a distributed manner. EXTRANET: An extranet is a network application that uses the Internet protocols and the public telecommunication system to securely share part of a business's information or operations with 61 suppliers, vendors, partners, customers, or other businesses. Whereas an intranet resides behind a firewall and is accessible only to people who are members of the same company or organization, an extranet provides various levels of accessibility to outsiders. FAULT TOLERANT: Fault Tolerance is a means of protecting data and services from hardware or software failure. A fault tolerant system provides for non-stop operations and protects against the loss of both data and time. Fault tolerant systems are built into hardware, software, and network architectures using various techniques including proactive system monitoring, artificial intelligence, automatic load balancing, dynamic restart of hardware and software components, and hardware and software redundancy. FTP: File Transfer Protocol--A protocol used to transport files over a TCP/IP network such as the Internet. HDML: Hand Held Device Markup Language--A simple language used to define content and applications for hand-held devices with small displays such as cellular phones, pagers, and wireless PDA's. HDML is designed to leverage the infrastructure and protocols of the World Wide Web. HTML: HyperText Markup Language--A set of symbols or "tags" inserted in a file intended for display on a World Wide Web browser. The "tags" tell the Web browser how to display a Web page's words and images for the user. Uniform Resource Locators (URLs), the global address of documents and other resources on the World Wide Web are frequently inserted between HTML "tags" to form hypertext links to other Web pages. HTTP: HyperText Transfer Protocol--The underlying protocol used by the World Wide Web. HTTP defines how messages are formatted and transmitted, and what actions Web Servers and browsers should take in response to various commands. For example, when you enter a URL in your browser, this actually sends an HTTP command to the Web server directing it to fetch and transmit the requested Web page. HTTP only supports the transmission of text and is called a stateless protocol because each command is executed independently, without any knowledge of the commands that came before it. These are the main reasons that it is difficult to implement Web Sites that react intelligently to user input. IIOP: Internet Inter-ORB Protocol--A protocol developed by the Object Management Group (OMG) to implement CORBA solutions over the World Wide Web. IIOP enables browsers and servers to exchange integers, arrays, and more complex objects unlike HTTP, which only supports transmission of text. INTRANET: A network belonging to an organization, usually a corporation, accessible only by the organization's members, employees, or others with authorization, that is based on the same communications protocol as the Internet. Intranet sites look and act just like any other Web sites, but the firewall surrounding an intranet prevents unauthorized access. Like the Internet itself, intranets are used to share information. JAVA: An object-oriented programming language developed by Sun Microsystems that is an open, standard, universal platform for network computing that scales from the simplest consumer devices to mission-critical applications. JAVA was modeled after the C++ programming language but unlike C++ is designed to run using small amounts of memory and is thus optimized for web application programming. JAVA code is compiled into "byte code" (so a computer can read it) which can not be run by itself without a JAVA Virtual Machine or JVM. JVM's can run on a variety of computers and devices including mobile phones, desktop computers with JAVA-enabled browsers or applications, network computers, and servers with JAVA applications or servlets. The JVM is essentially a translator that turns compiled JAVA instructions into commands that make the devices do their work. Like other programming languages, JAVA is royalty free to developers. However the JVM, which executes JAVA applications, is licensed to the companies that incorporate it into their browsers and servers. 62 JAVA BEANS: JAVA Beans are portable, platform-independent application components written in the JAVA programming language. JAVA Beans enable developers to write reusable application components once and run them anywhere. JAVA Beans act as reusable software components and can be manipulated visually by JAVA programming tools. JAVA Beans can be combined to create traditional applications, or smaller web-oriented applets. LDAP: LDAP is a client-server protocol for accessing a directory service. A directory service is like a database and can store text, photos, URLs, pointers to whatever, binary data, public key certificates, etc. The information in a directory is generally read much more often than it is written. As a consequence, directories don't usually implement the complicated transaction or roll-back schemes regular databases use for doing high-volume complex updates but instead use the simpler LDAP protocol. LEGACY DATA: Existing organizational data stored in mainframes and miniframes, known as legacy systems like DB2, CICS, IMS, or VSAM technologies. LINUX: A derivative of the Unix operating system, which runs on x86, Alpha and Power PC machines. Linux is freeware. LOAD BALANCING: The ability of a computer system, application server, network or disk subsystem to evenly distribute the data and processing load across available resources including servers, processors, network hubs and disk arrays. MQ SERIES: A software product from IBM that provides a scalable, industrial-strength messaging and information infrastructure. MQ Series is the most widely used message-queuing software used to address business integration issues, especially by financial services companies. MQ Series provides connectivity and real-time delivery of messages between various sites and business partners. PURE JAVA: Refers to initiatives from Sun Microsystems that specify 100% compliance with its JAVA specification. The goal is to maintain a consistent, single interface for JAVA so that all JAVA Virtual Machines can run all JAVA programs. RMI: Remote Method Invocation. A standard from Sun Microsystems for distributed objects written in JAVA. RMI is a remote procedure call that allows JAVA objects stored on the network to be run remotely and communicate. The RMI system operates only in the environment of the JAVA Virtual Machine. SCALABLE: Refers to a computer, product or systems ability to expand and adapt to changing load conditions. SSL: Secure Sockets Layer. Data passed on the web is encrypted using Secure Sockets Layer (SSL) technology, the industry-standard method for protecting web communications developed by Netscape Communications Corporation. The SSL security protocol provides data encryption, server authentication, message integrity, and optional client authentication for a TCP/IP connection. TCP/IP: (Transmission Control Protocol/Internet Protocol). A communication protocol developed under contract from the U.S. Department of Defense to internetwork dissimilar systems. TCP/IP is the standard protocol of the Internet and has become the global standard for communications. THIN CLIENT: A data processing scheme, whereby very little data processing is performed at the client or the device employed directly by a user. The client processes only keyboard input and screen output, while all application processing is performed by one or more servers. In a thin client architecture, it is typical for no application code to reside at the client. 63 UNIX: A multi-user, multi-tasking operating system that is widely used on workstations and servers and competes directly with Microsoft's WindowsNT operating system. There are many derivative versions of Unix on the market and almost every hardware and software vendor offers Unix support for their respective products. VBSCRIPT: Visual Basic Script. This programming language based on Microsoft's Visual Basic product is optimized for web delivery and thus consumes less memory. VBScript components are delivered to the desktop via Microsoft's ActiveX technology. WEB SERVER: A computer that provides access to web pages via the HTTP protocol. The term also refers to the software that accepts requests from web browsers. XML: Extensible Markup Language. A document format for the Web that is more flexible than HTML. While HTML uses only predefined tags to describe elements within the page, XML allows tags to be defined by the developer of the page. Thus, tags for virtually any data items, such as product, sales representative and amount due, can be used for specific applications, allowing Web pages to function like database records. 64 INDEX TO FINANCIAL STATEMENTS
PAGE --------- Report of Independent Public Accountants................................................................... F-2 Balance Sheets............................................................................................. F-3 Statements of Operations................................................................................... F-4 Statements of Mandatorily Redeemable Preferred Stock and Stockholders' Equity (Deficit).................... F-5 Statements of Cash Flows................................................................................... F-6 Notes to Financial Statements.............................................................................. F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Bluestone Software, Inc.: We have audited the accompanying balance sheets of Bluestone Software, Inc. (a Delaware corporation), formerly Bluestone Consulting, Inc., as of December 31, 1997 and 1998, and the related statements of operations, mandatorily redeemable convertible preferred stock and stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bluestone Software, Inc. as of December 31, 1997 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Philadelphia, PA /s/ Arthur Andersen LLP March 31, 1999 (except with respect to matters discussed in Note 2, as to which the date is May 25, 1999) F-2 BLUESTONE SOFTWARE, INC. BALANCE SHEETS
DECEMBER 31, MARCH 31, 1999 ------------------------- --------------------------- 1997 1998 ACTUAL PRO FORMA ---------- ------------ ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents... $2,330,372 $ 2,534,819 $ 597,549 $ 23,902,648 Restricted certificate of deposit................... 400,000 -- -- -- Accounts receivable, net of allowance of $37,012, $44,473 and $70,314....... 1,747,672 3,369,514 1,530,542 1,530,542 Prepaid expenses and other..................... 312,011 149,318 381,563 381,563 Due from related party...... 79,011 -- -- -- ---------- ------------ ------------ ------------ Total current assets.... 4,869,066 6,053,651 2,509,654 25,814,753 ---------- ------------ ------------ ------------ PROPERTY AND EQUIPMENT: Equipment................... 1,465,570 2,418,590 2,452,196 2,452,196 Furniture and fixtures...... 86,852 183,767 183,767 183,767 Leasehold improvements...... 20,552 131,845 131,845 131,845 ---------- ------------ ------------ ------------ 1,572,974 2,734,202 2,767,808 2,767,808 Less--Accumulated depreciation and amortization.............. (640,741) (1,284,921) (1,435,842) (1,435,842) ---------- ------------ ------------ ------------ Net property and equipment............. 932,233 1,449,281 1,331,966 1,331,966 ---------- ------------ ------------ ------------ DEPOSITS...................... 13,744 32,997 35,377 35,377 ---------- ------------ ------------ ------------ $5,815,043 $ 7,535,929 $ 3,876,997 $ 27,182,096 ---------- ------------ ------------ ------------ ---------- ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Line of credit.............. $1,610,561 $ 473,365 $ 473,365 $ 473,365 Current portion of long-term debt...................... 83,971 356,728 436,648 436,648 Accounts payable............ 781,703 1,094,286 1,224,027 1,224,027 Accrued wages............... 478,970 579,371 846,228 846,228 Other accrued expenses...... 401,468 477,246 548,644 548,644 Due to related parties...... -- 188,898 155,082 155,082 Deferred revenues........... 1,560,632 3,223,338 1,691,307 1,691,307 ---------- ------------ ------------ ------------ Total current liabilities........... 4,917,305 6,393,232 5,375,301 5,375,301 ---------- ------------ ------------ ------------ LONG-TERM DEBT................ 269,676 875,642 765,051 765,051 ---------- ------------ ------------ ------------ SUBORDINATED NOTES DUE TO RELATED PARTIES............. 1,000,000 1,000,000 1,000,000 1,000,000 ---------- ------------ ------------ ------------ MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK....................... 5,330,727 5,672,339 5,756,663 -- ---------- ------------ ------------ ------------ MANDATORILY REDEEMABLE SERIES B CONVERTIBLE PREFERRED STOCK....................... -- 11,742,212 11,921,443 -- ---------- ------------ ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 12) STOCKHOLDERS' EQUITY (DEFICIT): Common stock, $.001 par value, 53,000,000 shares authorized, 9,000,000, 9,008,125, 9,008,875 and shares issued and outstanding............... 9,000 9,008 9,009 [] Common stock warrants....... -- -- -- 1,900,000 Additional paid-in capital................... -- 5,679 6,324 [] Accumulated deficit......... (5,711,665) (18,162,183) (20,956,794) (22,056,794) ---------- ------------ ------------ ------------ Total stockholders' equity (deficit)...... (5,702,665) (18,147,496) (20,941,461) 20,041,744 ---------- ------------ ------------ ------------ $5,815,043 $ 7,535,929 $ 3,876,997 $ 27,182,096 ---------- ------------ ------------ ------------ ---------- ------------ ------------ ------------
The accompanying notes are an integral part of these statements. F-3 BLUESTONE SOFTWARE, INC. STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH YEAR ENDED DECEMBER 31, 31, ---------------------------------------- ------------------------- 1996 1997 1998 1998 1999 ----------- ----------- ------------ ----------- ----------- (UNAUDITED) NET REVENUES: Software license fees............ $ 1,475,368 $ 2,337,199 $ 3,391,226 $ 431,980 $ 2,256,567 Services.......... 42,908 2,178,664 3,619,997 937,353 1,020,272 Third party products and related services........ 6,555,095 5,225,429 1,106,688 784,814 -- ----------- ----------- ------------ ----------- ----------- Total revenues.... 8,073,371 9,741,292 8,117,911 2,154,147 3,276,839 COST OF REVENUES: Software license fees............ 112,732 202,219 258,572 38,638 57,420 Services.......... 305,109 2,516,451 4,433,309 984,936 1,337,370 Third party products and related services........ 4,261,078 2,797,656 643,120 436,766 -- ----------- ----------- ------------ ----------- ----------- Total cost of revenues.... 4,678,919 5,516,326 5,335,001 1,460,340 1,394,790 ----------- ----------- ------------ ----------- ----------- Gross profit.... 3,394,452 4,224,966 2,782,910 693,807 1,882,049 OPERATING EXPENSES: Product development..... 701,789 1,295,148 2,473,771 360,245 904,132 Sales and marketing....... 3,004,760 5,130,799 9,551,284 1,544,492 2,825,578 General and administrative... 1,515,456 1,615,787 2,316,017 447,053 635,006 ----------- ----------- ------------ ----------- ----------- Total operating expenses.... 5,222,005 8,041,734 14,341,072 2,351,790 4,364,716 ----------- ----------- ------------ ----------- ----------- Operating loss........ (1,827,553) (3,816,768) (11,558,162) (1,657,983) (2,482,667) Interest expense, net............... (50,458) (79,701) (46,520) (41,085) (48,389) ----------- ----------- ------------ ----------- ----------- Loss from continuing operations........ (1,878,011) (3,896,469) (11,604,682) (1,699,068) (2,531,056) Income (loss) from discontinued operations........ (737,699) 98,898 -- -- -- ----------- ----------- ------------ ----------- ----------- Net loss............ (2,615,710) (3,797,571) (11,604,682) (1,699,068) (2,531,056) Accretion of preferred stock redemption value............. -- (240,399) (845,836) (84,324) (263,555) ----------- ----------- ------------ ----------- ----------- Net loss available to common stockholders...... $(2,615,710) $(4,037,970) $(12,450,518) $(1,783,392) $(2,794,611) ----------- ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- BASIC AND DILUTED NET LOSS PER SHARE: Continuing operations...... $ (0.21) $ (0.43) $ (1.29) $ (0.19) $ (0.28) Discontinued operations...... (0.08) 0.01 -- -- -- Accretion of preferred stock redemption value........... -- (0.03) (0.09) (0.01) (0.03) ----------- ----------- ------------ ----------- ----------- $ (0.29) $ (0.45) $ (1.38) $ (0.20) $ (0.31) ----------- ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- Shares used in computing net loss per share........... 9,000,000 9,000,000 9,005,137 9,000,833 9,008,717 ----------- ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- -----------
The accompanying notes are an integral part of these statements. F-4 BLUESTONE SOFTWARE, INC. STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
STOCKHOLDERS' DEFICIT ---------------------------------------------------------- SERIES A SERIES B CONVERTIBLE CONVERTIBLE COMMON STOCK ADDITIONAL PREFERRED PREFERRED ----------------- PAID-IN- ACCUMULATED STOCK STOCK SHARES AMOUNT CAPITAL DEFICIT TOTAL ----------- ----------- --------- ------ ---------- ------------ ------------ BALANCE, DECEMBER 31, 1995.............. $ -- $ -- 9,000,000 $9,000 $ -- $ 1,366,254 $ 1,375,254 Distribution of foreign tax credits... -- -- -- -- -- (28,501) (28,501) Net loss.............................. -- -- -- -- -- (2,615,710) (2,615,710) ----------- ----------- --------- ------ ---------- ------------ ------------ BALANCE, DECEMBER 31, 1996.............. -- -- 9,000,000 9,000 -- (1,277,957) (1,268,957) Spin-off of consulting division to majority stockholder................ -- -- -- -- -- (395,738) (395,738) Issuance of Preferred stock, net of financing costs..................... 5,090,328 -- -- -- -- -- -- Accretion of Preferred stock redemption value.................... 240,399 -- -- -- -- (240,399) (240,399) Net loss.............................. -- -- -- -- -- (3,797,571) (3,797,571) ----------- ----------- --------- ------ ---------- ------------ ------------ BALANCE, DECEMBER 31, 1997.............. 5,330,727 -- 9,000,000 9,000 -- (5,711,665) (5,702,665) Issuance of Preferred stock, net of financing costs..................... -- 11,237,988 -- -- -- -- -- Accretion of preferred stock redemption value.................... 341,612 504,224 -- -- -- (845,836) (845,836) Exercise of common stock options...... -- -- 8,125 8 5,679 -- 5,687 Net loss.............................. -- -- -- -- -- (11,604,682) (11,604,682) ----------- ----------- --------- ------ ---------- ------------ ------------ BALANCE, DECEMBER 31, 1998.............. 5,672,339 11,742,212 9,008,125 9,008 5,679 (18,162,183) (18,147,496) Accretion of preferred stock redemption value (unaudited)........ 84,324 179,231 -- -- -- (263,555) (263,555) Exercise of common stock options (unaudited)......................... -- -- 750 1 645 -- 646 Net loss (unaudited).................. -- -- -- -- -- (2,531,056) (2,531,056) ----------- ----------- --------- ------ ---------- ------------ ------------ BALANCE, MARCH 31, 1999 (unaudited)..... $ 5,756,663 $11,921,443 9,008,875 $9,009 $6,324 $(20,956,794) $(20,941,461) ----------- ----------- --------- ------ ---------- ------------ ------------ ----------- ----------- --------- ------ ---------- ------------ ------------
The accompanying notes are an integral part of these statements. F-5 BLUESTONE SOFTWARE, INC. STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------------- ------------------------ 1996 1997 1998 1998 1999 ----------- ----------- ------------ ----------- ----------- (UNAUDITED) OPERATING ACTIVITIES: Net loss.................................................. $(2,615,710) $(3,797,571) $(11,604,682) $(1,699,068) $(2,531,056) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization........................... 302,010 239,835 656,654 48,554 152,528 Provision for doubtful accounts......................... 94,217 95,883 32,800 12,761 25,964 Accrued interest on subordinated notes.................. 30,048 103,109 109,352 24,900 25,000 Changes in operating assets and liabilities-- Accounts receivable................................... (975,630) (310,896) (1,654,641) 230,103 1,813,008 Prepaid expenses and other assets..................... (81,801) (84,169) 130,619 74,289 (236,233) Accounts payable and accrued expenses................. 1,308,129 408,822 379,410 (345,394) 442,996 Deferred revenues..................................... 221,186 314,263 1,662,706 (148,769) (1,532,031) ----------- ----------- ------------ ----------- ----------- Net cash used in operating activities............... (1,717,551) (3,030,724) (10,287,782) (1,802,624) (1,839,824) ----------- ----------- ------------ ----------- ----------- INVESTING ACTIVITIES: Purchases of property and equipment....................... (273,936) (871,717) (1,160,882) (169,171) (33,605) ----------- ----------- ------------ ----------- ----------- FINANCING ACTIVITIES: Net proceeds from (repayments of) line of credit.......... 2,190,000 604,311 (1,137,196) 729,161 -- Proceeds from long-term debt.............................. 54,000 315,620 919,481 -- -- Proceeds from subordinated notes.......................... 750,000 250,000 -- -- -- Repayments of long-term debt.............................. (63,030) (122,056) (40,758) (15,509) (30,671) Proceeds from issuance of Preferred stock, net............ -- 4,840,328 11,237,988 -- -- Restricted cash........................................... -- (400,000) 400,000 -- -- Spin-off of consulting division to sole stockholder....... -- (274,538) -- -- -- Net advances from (repayments to) related party........... -- (66,532) 267,909 37,472 (33,816) Proceeds from exercise of common stock options............ -- -- 5,687 -- 646 ----------- ----------- ------------ ----------- ----------- Net cash provided by (used in) financing activities........................................ 2,930,970 5,147,133 11,653,111 751,124 (63,841) ----------- ----------- ------------ ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 939,483 1,244,692 204,447 (1,220,671) (1,937,270) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 146,197 1,085,680 2,330,372 2,330,372 2,534,819 ----------- ----------- ------------ ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 1,085,680 $ 2,330,372 $ 2,534,819 $ 1,109,701 $ 597,549 ----------- ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest.................................... $ 169,870 $ 133,409 $ 170,232 $ 40,253 $ 148,371 ----------- ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- -----------
The accompanying notes are an integral part of these statements. F-6 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 1. BACKGROUND: Bluestone Software, Inc. (the "Company"), formerly Bluestone Consulting, Inc., was incorporated in New Jersey on March 17, 1989. The Company develops, markets and supports web application server software products that enable its customers to deploy information across the Internet, intranets and extranets. On April 17, 1997, in connection with the sale of Series A Convertible Preferred Stock (see Note 7), the Company spun off its consulting division to its then sole stockholder for no consideration. The Company reincorporated in Delaware as Bluestone Software, Inc. The consulting division, Bluestone Consulting, Inc. ("BCI") provides its clients information technology staffing resources and in 1997 provided the Company with certain administrative services under a shared services agreement (see Note 11). The consulting division spin-off is reported in the accompanying financial statements as a discontinued operation (see Note 3). 2. LIQUIDITY: The Company has recurring operating losses that have continued subsequent to year-end. The losses are primarily due to product development costs, marketing expenditures and administrative infrastructure costs related to the expansion of the Company's business. On January 21, 1999, the Company and substantially all of the Series B Preferred stockholders (collectively, the "Investors") entered into the Note and Warrant Purchase Agreement, whereby the Company could, from time to time before May 30, 1999, request that the Investors purchase 10% convertible subordinated secured notes totaling an aggregate of $5 million. Upon the purchase of a note, the Investors would be granted a warrant to purchase the number of shares of the Company's Common stock equal to the note amount multiplied by .32258, at an exercise price of $0.62 per share. The Company issued warrants to purchase an aggregate of 435,483 shares of common stock in connection with notes purchased in April 1999 and May 1999. The Company also issued warrants to purchase an aggregate of 4,865 shares of common stock at an exercise price of $2.72 per share related to interest on the notes. The notes were converted into 496,322 shares of Series C Preferred stock on May 25, 1999 (see below). On March 31, 1999, the Company amended its bank loan agreement, which had expired on February 7, 1999. The amendment extended the Company's credit facility through April 1, 2000 and reset certain financial covenants. The amended agreement provides for the interest rate on the credit facility to increase by 0.50% and for certain quarterly fees to be paid if the Company does not meet certain quarterly net revenue requirements, as defined in the amendment. On May 25, 1999, the Company sold 9,191,176 shares of Series C Convertible Preferred Stock to certain venture capital investors, including certain Series B Preferred investors for $25 million in cash. The Series C Preferred will be senior to the Series A Preferred and Series B Preferred and is automatically convertible into Common stock upon a public stock offering, as defined. Dividends on the Series C Preferred are cumulative at $0.1632 per share per annum. The Series C Preferred stockholders participate in Common stock dividends and have Common stock voting rights on an as converted basis. The Company believes that the proceeds from the sale of the Series C Convertible Preferred Stock and borrowing availability under its amended credit facility will provide adequate funding to sustain the F-7 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) Company's operations through 1999. However, there is no assurance that the funding will be sufficient to sustain operations until the Company begins generating positive cash flows. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: INTERIM FINANCIAL STATEMENTS The financial statements as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 are unaudited and, in the opinion of management, include adjustments necessary for a fair presentation of results for those interim periods. The results of operations for the three months ended March 31, 1998 and 1999 are not necessarily indicative of the results to be expected for the entire year. PRO FORMA FINANCIAL INFORMATION The unaudited pro forma balance sheet as of March 31, 1999 reflects the sale of 9,191,176 shares of Series C Preferred stock for $2.72 per share on May 25, 1999 and the conversion of all outstanding preferred stock, including the Series C, and all accrued preferred stock dividends as of March 31, 1999 into common stock immediately before the completion of the contemplated public offering. The proceeds from the sale of the Series C Preferred stock are net of $2,494,901 of transaction costs, which include a warrant to purchase 481,434 shares of common stock at $2.72 per share issued to the placement agent that was valued at $800,000. The pro forma balance sheet also reflects warrants to purchase 440,348 shares of common stock at a weighted average exercise price of $0.64 per share issued in connection with the bridge notes (see Note 2) that were valued at $1,100,000 and will be charged to operations during the three months ended June 30, 1999. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting periods. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. PREPAID EXPENSES AND OTHER Prepaid expenses and other at December 31, 1997 includes $243,834 of deferred costs related to support contracts purchased from third parties for resale in connection with the sale of third party product. F-8 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation is provided using accelerated methods over the estimated useful lives of the related assets, generally three to seven years. Leasehold improvements are amortized over the lease term. PRODUCT DEVELOPMENT Product development expenditures are charged to operations as incurred. Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. The Company has determined that technological feasibility for its products is generally achieved upon completion of a working model. Since software development costs have not been significant after the completion of a working model, all such costs have been charged to product development expense. REVENUE RECOGNITION The Company sells perpetual licenses to end-users and annual and multi-year licenses primarily to independent software vendors. The Company also sells its software through value added resellers and system integrators. The Company derives its services revenues from annual maintenance agreements, which consist of customer technical support services and unspecified product enhancements, and consulting and training services. License fee revenue is generally recognized when a formal agreement exists, delivery of the product has occurred, the license fee is deemed fixed and determinable and collectibility is probable. License revenue from arrangements with resellers and system integrators is not recognized until the product is delivered to end-users. Maintenance revenue is recognized on a straight-line basis over the term of the contract. Revenues from training and consulting services are recognized as services are performed. Deferred revenues generally consist of advance customer payments on maintenance contracts. Certain of the Company's multi-year license agreements provide for payment terms that extend beyond 12 months. Revenue on such long-term arrangements are recognized when payments become due. Included in accounts receivable and deferred revenues at December 31, 1998 is $1,865,294 related to an extended term license fee where the Company received payment and recorded revenue in February 1999. CONCENTRATION OF CREDIT RISK One customer accounted for approximately 11% of the Company's net revenues for the year ended December 31, 1998 and one customer accounted for approximately 55% of net accounts receivable at December 31, 1998. One customer accounted for approximately 57% of net revenues for the three months ended March 31, 1999. No one customer accounted for greater than 10% of net revenues for the years ended December 31, 1996 and 1997 or greater than 10% of net accounts receivable at December 31, 1996 and 1997. F-9 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising expense for continuing operations for the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 was $781,634, $615,374, $882,761, $105,406 and $378,074, respectively, including $394,808, $251,640, $549,487, $100,714 and $77,428, respectively, related to attending trade shows. INCOME TAXES Prior to April 17, 1997, the Company was taxed as a subchapter S corporation under the Internal Revenue Code for federal and state income tax purposes. Accordingly, all S Corporation taxable income or losses were included in the sole stockholder's tax return. In connection with the Series A Convertible Preferred Stock sale (see Note 7), the Company's subchapter S election was terminated. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates. The Company accounts for certain income and expense items for financial reporting purposes differently than for income tax purposes. The principal differences relate to the Company's conversion to the accrual basis of accounting for income taxes and certain financial statement reserves that are not currently deductible for income tax purposes. STOCK COMPENSATION The Company has elected to follow Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock options. Under APB No. 25, if the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of the grant, no compensation expense is recognized. If the exercise price of an option is below the market price of the underlying stock on the date of grant, compensation cost is recorded and is recognized in the statements of operations over the vesting period (see Note 9). EARNINGS PER SHARE The Company follows SFAS No. 128, "Earnings Per Share," which requires a dual presentation of "basic" and "diluted" earnings per share ("EPS") on the face of the statements of operations. Basic EPS is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted EPS includes the dilutive effect, if any, from the potential exercise or conversion of securities like stock options, which would result in the issuance of additional shares of common stock. For each of the three years in the period ended December 31, 1998 and the three months ended March 31, 1998 and 1999, the impact of stock options was not considered as their effect on EPS would be anti-dilutive. FAIR VALUE OF FINANCIAL INSTRUMENTS Cash, accounts receivable, prepaid expenses, accounts payable and accrued expenses are reflected in the accompanying financial statements at fair value due to the short-term nature of those instruments. The carrying amount of long-term debt obligations approximate fair value at the balance sheet dates. F-10 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal years beginning December 31. 1997, SFAS No. 130 establishes standards for the reporting and display of comprehensive income in a set of financial statements. Comprehensive income is defined as the change in net assets of a business enterprise during a period from transactions generated from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company has no other comprehensive income items, therefore, the adoption of SFAS No. 130 had no impact on the financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 applies to all public companies and is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires that business segment financial information be reported in the financial statements utilizing the management approach. The management approach is defined as the manner in which management organizes the segments within the enterprise for making operating decisions and assessing performance. Subsequent to the spin-off of the consulting segment, management believes the Company operates in one business segment, therefore, the adoption of SFAS No. 131 had no impact on the financial statements. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company adopted SOP 98-1 in January 1999. The adoption had no material effect on the Company's financial position or results of operations. DISCONTINUED OPERATIONS On April 17, 1997, in connection with the sale of Series A Convertible Preferred Stock (see Note 7), the Company spun off its consulting division, which operated as a separate segment, to its then sole stockholder for no consideration. The spin-off, which included cash of $274,538, has been recorded as a deemed distribution in the accompanying financial statements. The discontinued operation generated net revenues of $13,369,459 and $4,537,147 for the years ended December 31, 1996 and 1997, respectively. RECLASSIFICATIONS Prior year financial statements have been reclassified to conform with the current year presentation. 4. LINE OF CREDIT: On December 8, 1997, the Company entered into an agreement with a bank that provides for a $1,750,000 revolving line of credit and a $500,000 equipment line (see Note 5). The revolver is collateralized by substantially all of the Company's assets and a $400,000 certificate of deposit at December 31, 1997. Borrowings under the line are subject to a borrowing base of 80% of eligible accounts receivable, as defined. The restricted certificate of deposit was sold in 1998 as it was no longer required collateral. The line bore interest at prime plus 1.5%, through August 16, 1998 at which date the interest rate was changed to prime plus .75% in conjunction with the equipment line modification F-11 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) (see Note 5), and expired on December 7, 1998. In December 1998, the Company and the bank agreed to extended the term of the credit facility to February 7, 1999. The line is cross-defaulted and cross-collateralized with the equipment line with the bank (see Note 5). The loan agreement also requires the Company to maintain certain financial and nonfinancial covenants, as defined. On March 31, 1999, the Company amended its bank loan agreement. The amendment extended the Company's credit facility through April 1, 2000 and reset certain financial covenants. The amended agreement provides for the interest rate on the credit facility to increase to prime plus 1.25% and for certain quarterly fees to be paid if the Company does not meet certain quarterly net revenue requirements, as defined in the amendment. At March 31, 1999, no additional borrowings were available under the line. A warrant to purchase 31,250 shares of the Company's Common stock at $.80 per share, as adjusted was issued to the bank in December 1997 in conjunction with the loan agreement. The warrant is fully exercisable, has a seven-year term and is subject to an anti-dilution provision, as defined. No value has been assigned to the warrant as it is not material to the Company's financial statements. 5. LONG-TERM DEBT:
DECEMBER 31, ------------------------ MARCH 31, 1997 1998 1999 ---------- ------------ ------------ Equipment line with bank.................................................. $ 237,620 $ 1,157,101 $ 1,137,186 Capital leases............................................................ 116,027 75,269 64,513 ---------- ------------ ------------ 353,647 1,232,370 1,201,699 Less- Current portion..................................................... (83,971) (356,728) (436,648) ---------- ------------ ------------ $ 269,676 $ 875,642 $ 765,051 ---------- ------------ ------------ ---------- ------------ ------------
At December 31, 1997, the Company's equipment line provided for borrowings of up to $500,000 for approved capital expenditures, as defined and interest payable monthly on the outstanding balance at a rate of prime plus 1.5%. In June 1998, the outstanding borrowings as of that date of $237,620 converted to a term note payable in 36 monthly installments. On August 16, 1998, the Company and the bank modified the equipment line to provide for additional borrowings of up to $1,762,380 for approved capital expenditures, as defined. Interest is payable monthly on the outstanding balance at a rate of prime plus 1.25%. On March 31, 1999, in connection with the loan agreement amendment, the then outstanding balance of $959,086 was converted to a term note payable in 36 monthly installments and no additional borrowings are available under the equipment line. The equipment line is secured by equipment and is cross-defaulted and cross-collateralized with the Company's line of credit (see Note 4). F-12 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 6. SUBORDINATED NOTES DUE TO RELATED PARTIES: Note payable to Bluestone Consulting, Inc..................................................................... $ 500,000 Convertible subordinated note to related party................................................................ 500,000 ---------- $1,000,000 ---------- ----------
In January 1996, the Company entered into a $1,000,000, subordinated 10% loan agreement with the brother of the Company's founder. The agreement, as amended in connection with the BCI spin-off, provided for the loan to be structured as a $500,000 convertible note with the Company and a $500,000 convertible note with BCI. Also in connection with the BCI spin-off, the Company issued BCI a $500,000, 10% note. Interest on both notes is payable annually. Principal on the convertible note is due on December 31, 2002 and principal on the note with BCI is due on December 31, 2005. At December 31, 1997 and 1998 and March 31, 1999 other accrued expenses includes $97,526, $206,878 and $124,600, respectively, related to interest on the notes. The $500,000 convertible subordinated note is convertible into 700,000 shares of the Company's Common stock at the option of the holder. 7. MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK: On April 18, 1997, the Company sold 5,526,316 shares of $0.001 par value Series A Convertible Preferred Stock to certain venture capital investors, an individual investor and the Company's former sole shareholder for $5,250,000. This includes 263,158 shares sold to the former sole stockholder in exchange for canceling a $250,000 note payable due him. The Series A Preferred stock is convertible into an equal number of shares of Common stock, subject to adjustment, as defined, and is automatically convertible upon a public stock offering, as defined. Dividends on the Series A Preferred are cumulative at $0.057 per share per annum and the Series A Preferred has a liquidation preference of $0.95 per share. At December 31, 1997 and 1998 cumulative dividends accrued but not declared were $222,658 and $537,658, respectively. Beginning in April 2003, the holders may require the Company to redeem the Preferred at $0.95 per share plus accrued dividends over a three-year period. The Series A Preferred stockholders participate in Common stock dividends and have Common stock voting rights on an as converted basis. 8. MANDATORILY REDEEMABLE SERIES B CONVERTIBLE PREFERRED STOCK: On April 23, 1998, the Company sold 8,782,695 shares of Series B Convertible Preferred Stock to certain venture capital investors, including its original investors (see Note 7) for approximately $11.4 million in cash. The Series B Preferred is senior to the Series A Preferred and was originally convertible into an equal number of shares of Common stock. In 1998, in accordance with the original terms of the Series B Preferred stock purchase agreement, the conversion ratio was adjusted so that each share of Series B Preferred is convertible into 2.093 shares of Common stock. In addition, the Series B Preferred is automatically convertible upon a public stock offering, as defined. Dividends on the Series B Preferred are cumulative at $0.078 per share per annum and the Series B Preferred has a liquidation preference of $1.296 per share. At December 31, 1998, cumulative dividends accrued but not declared were $476,720. Beginning in October 2001, the holders may require the Company to redeem the Preferred at $1.296 per share plus accrued dividends over an eighteen-month period. The Series B Preferred stockholders participate in Common stock dividends and have Common stock voting rights on an as converted basis. F-13 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 9. STOCK OPTION AND EMPLOYEE BENEFIT PLANS: STOCK OPTION PLAN In 1996, the Company adopted the 1996 Incentive and Non-Qualified Stock Option Plan (the "1996 Plan") under which incentive and nonstatutory stock options to acquire shares of the Company's Common stock may be granted to officers, employees and consultants of the Company. Incentive stock options must be issued at an exercise price not less than the fair market value of the underlying shares on the date of grant. Options granted under the 1996 Plan are exercisable over a period of time, not to exceed ten years, and are subject to other terms and conditions specified in the individual option grants. In April 1997, in connection with the sale of Series A Convertible Preferred Stock (see Note 7), the 1996 Plan was amended and restated, increasing the total shares available under the plan to 2,500,000. On August 7, 1997, all outstanding options granted under the 1996 Plan were canceled and 483,900 were reissued at an exercise price of $0.70 per share. In April 1998, in connection with the sale of Series B Convertible Preferred Stock (see Note 8), the 1996 Plan was amended and restated, increasing the total shares available under the plan to 4,500,000. In March 1999, the 1996 Plan was amended to increase the total shares available under the plan to 9,429,049. Information relative to the 1996 Plan is as follows:
WEIGHTED RANGE OF AGGREGATE AVERAGE EXERCISES EXERCISE EXERCISE SHARES PRICES PRICE PRICE ----------- ----------- ----------- ----------- Outstanding January 1, 1996................................... -- $ -- $ -- $ -- Granted................................................... 762,100 2.00 1,524,200 2.00 ----------- ----------- ----------- ----- Outstanding December 31, 1996................................. 762,100 2.00 1,524,200 2.00 Granted................................................... 1,640,143 0.70-3.00 1,279,200 0.78 Canceled.................................................. (1,071,000) 0.70-3.00 (1,871,530) 1.75 ----------- ----------- ----------- ----- Outstanding December 31, 1997................................. 1,331,243 0.70 931,870 0.70 Granted................................................... 2,518,776 0.70-0.96 2,249,416 0.89 Exercised................................................. (8,125) 0.70 (5,688) 0.70 Canceled.................................................. (59,275) 0.70 (41,493) 0.70 ----------- ----------- ----------- ----- Outstanding December 31, 1998................................. 3,782,619 0.70-0.96 3,134,105 0.83 Granted................................................... 2,348,727 0.96 2,254,778 0.96 Exercised................................................. (750) 0.70-0.96 (646) 0.86 Canceled.................................................. (69,043) 0.70-0.96 (61,405) 0.89 ----------- ----------- ----------- ----- Outstanding March 31, 1999.................................... 6,061,553 $ 0.70-0.96 $ 5,326,832 $ 0.88 ----------- ----------- ----------- ----- ----------- ----------- ----------- -----
There were options to purchase 2,929,275 shares of common stock exercisable as of March 31, 1999. In addition, as of March 31, 1999, there were options to purchase 3,358,621 shares of common stock available for grant under the 1996 Plan. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and the related interpretations, in accounting for its stock option plan. Had compensation cost for the 1996 Plan been determined based upon the fair value of the options at the F-14 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) date of grant, as prescribed under SFAS 123, the Company's net loss for the years ended December 31, 1997 and 1998 would have increased to the following pro forma amount:
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1998 ------------- -------------- Net loss, as reported.............................................................. $ (3,797,571) $ (11,604,682) ------------- -------------- ------------- -------------- Pro forma net loss................................................................. $ (3,871,550) $ (11,764,529) ------------- -------------- ------------- --------------
The weighted average fair value of the options granted are estimated as $0.25 to $0.28 per share on the date of grant using the Black-Scholes option-pricing model with the following assumptions: no expected dividend yield, a volatility of 0.0%, risk-free interest rates ranging from 4.514% to 6.738% based on the rates in effect on the date of grant, and an expected life of seven years. RETIREMENT SAVINGS PLAN The Company has a retirement savings plan (the "Plan") that qualifies under Section 401(k) of the Internal Revenue Code. Eligible employees may contribute up to 15% of their annual compensation, as defined by the Plan. The Company contributes to the Plan at a rate of 10% of the employee's contributions up to a maximum of 6% of the employee's salary. The Company's contributions to the Plan were $10,452, $22,009, $31,807, $7,317 and $11,075 for the years ended December 31, 1996, 1997 and 1998, and the three months ended March 31, 1998 and 1999, respectively. 10. INCOME TAXES: The income tax provision consists of the following:
YEAR ENDED DECEMBER 31, ------------------------ 1997 1998 ----------- ----------- Current provision...................................................................... $ -- $ -- Deferred benefit....................................................................... (64,000) (81,000) Net operating loss not benefited....................................................... (1,134,000) (4,410,000) Termination of S corporation status.................................................... (121,000) -- Increase in valuation allowance........................................................ 1,319,000 4,491,000 ----------- ----------- $ -- $ -- ----------- ----------- ----------- -----------
The tax effect of the differences that give rise to deferred income taxes is as follows:
DECEMBER 31 ------------------------- 1997 1998 ----------- ----------- Net operating loss carryforwards............... $ 1,134,000 $ 5,544,000 Accounts receivable........... 15,000 18,000 Accrued expenses.............. 71,000 174,000 Property and equipment........ 24,000 24,000 Deferred revenue adjustment... 315,000 252,000 Cash-to-accrual adjustment.... (240,000) (202,000) ----------- ----------- 1,319,000 5,810,000 Less-Valuation allowance...... (1,319,000) (5,810,000) ----------- ----------- $ -- $ -- ----------- ----------- ----------- -----------
F-15 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) The Company has established a valuation allowance for the full amount of the net deferred tax asset due to the limited operating history of the Company and uncertainty surrounding realizability. At December 31, 1998, the Company had a net operating loss carryforward of approximately $14 million beginning to expire in 2012 for federal tax purposes and in 2004 for state tax purposes. 11. TRANSACTIONS WITH BCI: On April 17, 1997, in connection with the sale of the Series A Convertible Preferred Stock (see Note 7), the Company spun off its consulting division, BCI, to its then sole stockholder, who is currently a director of the Company. In connection with the spin-off, the Company entered into the Intercompany Services Agreement with BCI, whereby the Company allows BCI access to certain technology at no charge and BCI provided the Company certain administrative services and access to certain computer systems at an allocated cost based on actual cost and usage. For the year ended December 31, 1997, general and administrative expense includes $871,784 for such services provided by BCI. The Company also sells certain software products and services to BCI and purchases certain consulting services from BCI. For the years ended December 31, 1997 and 1998 and for the three months ended March 31, 1998 and 1999, the Company's sales to BCI totaled $40,448, $58,607, $22,606 and $9,320, respectively, and total purchases from BCI were $47,088, $351,739, $185,555 and $44,960, respectively. At December 31, 1997 and 1998 and March 31, 1999, accounts receivable includes $5,217, $23,299 and $19,660, respectively, due from BCI and accounts payable includes $43,889, $77,097 and $29,760, respectively, payable to BCI. On March 31, 1998, the Company decided to no longer sell non-proprietary software products. In addition, the Company agreed to allow BCI to commence the sale and support of this product line, and sub-contracted support services to BCI related to previously sold maintenance contracts. The Company paid BCI $450,000 in 1998 and paid BCI $150,000 in 1999, for the sub-contracted support services. The Company also sub-leases a portion of its operating facility to BCI (see Note 12). Amounts charged to BCI, which reduced the Company's rent expense for the years ended December 31, 1997 and 1998 and the three months ended March 31, 1998 and 1999, totaled $130,588, $74,165, $19,702 and $23,434, respectively. During the year ended December 31, 1998 and the three months ended March 31, 1998 and 1999, the Company rented certain equipment from BCI, totaling $89,489, $15,938 and $23,907, respectively. In connection with the Series A Convertible Preferred Stock sale and spin-off of BCI, the Company issued a $500,000, 10% note payable to BCI (see Note 6). F-16 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED) 12. COMMITMENTS AND CONTINGENCIES: The Company has operating leases on its office facilities (see Note 11) and certain equipment. Future minimum lease payments under such noncancelable operating leases are summarized as follows, as of December 31, 1998: 1999.......................................................................................................... $ 739,851 2000.......................................................................................................... 598,608 2001.......................................................................................................... 502,980 2002.......................................................................................................... 502,980 2003.......................................................................................................... 454,662 ---------- $2,799,081 ---------- ----------
Rent expense for continuing operations was $263,079, $551,832, $691,615, $131,849 and $205,671 for the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999, respectively. The Company is involved in certain legal actions arising in the ordinary course of business. Management believes that the outcome of such actions will not have a material adverse effect on the Company's financial position or results of operations. F-17 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Bluestone Software, Inc. We have audited, in accordance with generally accepted auditing standards, the financial statements of Bluestone Software, Inc. included in this registration statement and have issued our report thereon dated March 31, 1999. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying financial statement schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Philadelphia, PA March 31, 1999 S-1 BLUESTONE SOFTWARE, INC., SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS Allowance for Doubtful Accounts:
BALANCE AT CHARGED TO SPIN-OFF OF BALANCE AT BEGINNING OF COSTS AND CONSULTING END OF PERIOD EXPENSES DIVISION WRITE-OFFS PERIOD ------------ ----------- ----------- ---------- ----------- 1998.............................................. $ 37,012 $ 32,800 $ -- $ (25,339) $ 44,473 1997.............................................. 77,090 95,883 (104,372) (31,589) 37,012 1996.............................................. 69,073 94,217 -- (86,200) 77,090
S-2 [INSIDE BACK COVER OF PROSPECTUS] GRAPHIC: Single page graphic containing five stones arranged one on top of the other and descending in size from top to bottom. The bottom three stones are flat and grey in color. The top two stones are circular, with the penultimate stone colored grey and the top stone colored blue. The middle right side of the graphic, positioned to the right of the middle stone, contains the statement "Bluestone rocks." - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- You may rely only on the information contained in this prospectus. We have not authorized anyone to provide information different from that contained in this prospectus. Neither the delivery of this prospectus nor the sale of common stock means that information contained in this prospectus is correct after the date of the prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy these shares of common stock in any circumstances under which the offer or solicitation is unlawful. ------------------------ TABLE OF CONTENTS
PAGE --------- Prospectus Summary.............................. 1 Risk Factors.................................... 5 Forward-looking Statements...................... 13 Use of Proceeds................................. 13 Dividend Policy................................. 13 Capitalization.................................. 14 Dilution........................................ 15 Selected Financial Data......................... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 17 Business........................................ 27 Management...................................... 37 Certain Transactions............................ 45 Principal and Selling Stockholders.............. 50 Description of Securities....................... 53 Shares Eligible For Future Sale................. 56 Plan of Distribution............................ 58 Legal Matters................................... 59 Experts......................................... 59 Where You Can Find More Information............. 60 Glossary........................................ 61 Index to Financial Statements................... F-1
------------------------ UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE THESE SHARES OF COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. SHARES [LOGO] COMMON STOCK --------------------- PROSPECTUS --------------------- DEUTSCHE BANC ALEX / / BROWN SOUNDVIEW TECHNOLOGY GROUP C.E. UNTERBERG, TOWBIN LEGG MASON WOOD WALKER INCORPORATED , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Securities and Exchange Commission registration fee................................ $ 12,788 NASD and Blue Sky fees and expenses................................................ Nasdaq National Market listing fee................................................. Accountants' fees and expenses..................................................... Legal fees and expenses............................................................ Transfer Agent's fees and expenses................................................. Printing and engraving expenses.................................................... Miscellaneous...................................................................... --------- Total Expenses..................................................................... --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law permits each Delaware business corporation to indemnify its directors, officers, employees and agents against liability for each such person's acts taken in his or her capacity as a director, officer, employee or agent of the corporation if such actions were taken in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action, if he or she had no reasonable cause to believe his or her conduct was unlawful. Section 23.1 of Bluestone's bylaws provides that Bluestone, to the full extent permitted by Section 145 of the Delaware General Corporation Law, shall indemnify all past and present directors, officers, employees and agents of Bluestone who were or are parties or are threatened to be made parties to or are involved in any action, suit or proceeding against all expenses, liability and losses in connection with such proceeding. Such expenses may be paid by Bluestone in advance of the final disposition of the action upon receipt of an undertaking to repay the advance if it is ultimately determined that such person is not entitled to indemnification. As permitted by Section 102(b)(7) of the Delaware General Corporation Law, Article VIII of Bluestone's certificate of incorporation provides that no director of Bluestone shall be liable to Bluestone for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to Bluestone or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for the unlawful payment of dividends on or redemption of Bluestone's capital stock, or (iv) for any transaction from which the director derived an improper personal benefit. Bluestone has obtained a policy insuring it and its directors and officers against certain liabilities, including liabilities under the Securities Act. It is anticipated that the Underwriting Agreement to be filed as Exhibit 1.1 to this Registration Statement will provide for indemnification by the Underwriters of the Registrant and its officers and directors for certain liabilities arising under the Securities Act or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES During the past three years, the Registrant has sold the securities set forth below which were not registered under the Securities Act: Pursuant to a stock purchase agreement dated April 18, 1997, the Registrant issued 5,526,316 shares of Series A preferred stock to institutional and accredited investors for a total purchase price of $5.25 million or $0.95 per share, including 263,158 shares of Series A preferred stock to Mel Baiada. No underwriters were used for such offering. II-1 In connection with the Registrant's credit facility with Silicon Valley Bank, the Registrant issued to Silicon Valley Bank a warrant dated November 24, 1997 to purchase up to 31,250 shares of common stock at an exercise price equal to $0.80 per share. The warrant may be exercised at any time prior to November 24, 2004. The exercise price of the warrant and the number of shares of common stock into which the warrant is exercisable are subject to proportionate adjustment in the event of stock dividends payable in shares of common stock and combinations and splits of common stock. In addition, pursuant to an antidilution agreement between the Registrant and Silicon Valley Bank dated November 24, 1997, the exercise price of the warrant and the number of shares of common stock into which the warrant is exercisable are subject to adjustment on a broad-based weighted average basis for issuance of securities after November 24, 1997 for less than the then applicable exercise price for the warrant. Pursuant to a stock purchase agreement dated April 22, 1998, the Registrant issued 8,782,695 shares of Series B preferred stock to institutional and accredited investors for a total purchase price of $11.4 million or $1.296 per share. On January 21, 1999, the Registrant entered into the Note and Warrant Purchase Agreement with substantially all of the holders of the Series B preferred stock (the "Investors"). Under the Note and Warrant Purchase Agreement, the Investors agreed to provide subordinated secured debt financing of up to $5.0 million (the "Committed Principal Amount"). The Registrant drew down $1.35 million of such debt and issued 10% Convertible Subordinated Secured Notes and warrants to purchase up to 435,483 shares of common stock at an exercise price equal to $0.62 per share to the Investors. The outstanding $1.35 million of the Committed Principal Amount was converted into Series C preferred stock as part of our issuance of 9,191,176 shares of Series C preferred stock at $2.72 per share on May 25, 1999. Pursuant to a stock purchase agreement dated May 25, 1999, the Registrant issued 9,191,176 shares of Series C preferred stock to institutional and accredited investors for a total purchase price of $25.0 million, or $2.72 per share. Deutsche Bank Securities Inc. acted as the placement agent for such offering for which it received $1.4 million and a warrant to purchase up to 481,434 shares of common stock at $2.72 per share. Bluestone believes that the transactions described above were exempt from registration under Section 3(b) or 4(2) of the Securities Act because the subject securities were sold to a limited group of persons, each of whom was believed to have been a sophisticated, accredited investor or to have had a pre-existing business or personal relationship with Bluestone or its management and to have been purchasing for investment without a view to further distribution. In addition, the recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates issued in such transactions. All recipients had adequate access to information about Bluestone. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following exhibits are filed herewith or incorporated herein by reference:
EXHIBIT NO. DESCRIPTION - --------- --------------------------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 2.1 Contribution and Distribution Agreement, dated April 17, 1997, between Bluestone and Bluestone Consulting, Inc. 3.1 Third Amended and Restated Certificate of Incorporation of Bluestone, as amended. 3.2 Bylaws of Bluestone.
II-2
EXHIBIT NO. DESCRIPTION - --------- --------------------------------------------------------------------------------------------------------- 3.3* Form of Fourth Amended and Restated Certificate of Incorporation of Bluestone. 3.4* Form of Amended and Restated Bylaws of Bluestone. 4.1* Specimen Stock Certificate of Bluestone. 5.1* Opinion of Pepper Hamilton LLP. 10.1+ 1996 Incentive and Non-Qualified Stock Option Plan of Bluestone, as amended, including forms of Incentive Stock Option Agreement, Non-Qualified Stock Option Agreement and Stock Purchase and Restriction Agreement. 10.2*+ Directors Compensation Plan of Bluestone. 10.3+ Forms of Employee Confidentiality Agreements of Bluestone. 10.4+ Executive Employment Agreement, dated April 18, 1997, between Mel Baiada and Bluestone. 10.5+ First Amendment to Executive Employment Agreement, dated January 13, 1999, between Mel Baiada and Bluestone. 10.6+ Executive Employment Agreement, dated April 24, 1997, between Robert Bickel and Bluestone. 10.7+ Severance Agreement, dated September 17, 1998, between P. Kevin Kilroy and Bluestone. 10.8+ Severance Agreement, dated September 17, 1998, between Robert Bickel and Bluestone. 10.9+ Severance Agreement, dated September 17, 1998, between John H. Capobianco and Bluestone. 10.10+ Severance Agreement, dated September 17, 1998, between Enrico J. Ballezzi and Bluestone. 10.11 Consulting Agreement between Bluestone and Andrew J. Filipowski dated as of May 3, 1999. 10.12* Reseller Agreement, dated January 1, 1998, between Bluestone and Bluestone Consulting, Inc. 10.13 Subcontract Agreement, dated April 23, 1998, between Bluestone and Bluestone Consulting, Inc. 10.14 Intercompany Services Agreement, dated April 17, 1997, between Bluestone and Bluestone Consulting, Inc. 10.15 Service Mark License Agreement, dated April 17, 1997, between Bluestone and Bluestone Consulting, Inc. 10.16 $500,000 Amended and Restated Convertible and Subordinated Note, dated April 17, 1997, by Bluestone in favor of Mark Baiada. 10.17 $500,000 Promissory Note, dated April 17, 1997, by Bluestone in favor of Bluestone Consulting, Inc. 10.18* Sublease Agreement dated as of April 18, 1997 between Bluestone (as sublandlord) and Bluestone Consulting, Inc. (as subtenant). 10.19* Equipment Lease, dated September 5, 1997, between Bluestone and Colonial Pacific Leasing. 10.20 Loan and Security Agreement, dated as of December 8, 1997, between Silicon Valley Bank and Bluestone.
II-3
EXHIBIT NO. DESCRIPTION - --------- --------------------------------------------------------------------------------------------------------- 10.21 First Loan Modification Agreement, dated as of August 16, 1998, between Silicon Valley Bank and Bluestone. 10.22 Second Loan Modification Agreement, dated as of January 21, 1999, between Silicon Valley Bank and Bluestone. 10.23 Third Loan Modification Agreement, dated as of March 30, 1999, between Silicon Valley Bank and Bluestone. 10.24 Negative Pledge Agreement, dated as of August 16, 1998, between Silicon Valley Bank and Bluestone. 10.25 Warrant to purchase 31,250 shares of Common Stock of Bluestone, dated as of November 24, 1997, issued by Bluestone to Silicon Valley Bank, as amended. 10.26 Antidilution Agreement, dated as of November 24, 1997, between Silicon Valley Bank and Bluestone. 10.27 Registration Rights Agreement, dated as of November 24, 1997, between Silicon Valley Bank and Bluestone. 10.28 Form of Warrant to purchase 481,434 shares of Common Stock of Bluestone, dated as of May 25, 1999, issued by Bluestone to Deutsche Banc Alex. Brown 10.29 Series A Preferred Stock Purchase Agreement, dated as of April 18, 1997, between Bluestone and the investors listed therein. 10.30 Series B Preferred Stock Purchase Agreement, dated as of April 22, 1998, between Bluestone and the investors listed therein. 10.31 Convertible Subordinated Secured Note and Warrant Purchase Agreement, dated as of January 21, 1999, between Bluestone and the investors listed therein. 10.32 Form of Warrant issued to the investors under the Convertible Subordinated Secured Note and Warrant Purchase Agreement dated January 21, 1999. 10.33 Preferred Stock Purchase Agreement relating to the sale of Series C Preferred Stock, dated as of May 25, 1999, between Bluestone and the purchasers listed therein. 10.34 Second Restated First Refusal and Co-Sale Agreement, dated as of May 25, 1999, between Bluestone and the investors and stockholders listed therein. 10.35 Second Restated Investors' Rights Agreement, dated as of May 25, 1999, between Bluestone and the investors and stockholders listed therein, as amended by the First Amendment dated as of June 16, 1999. 10.36 Restated Voting Agreement, dated as of April 23, 1998, between Bluestone and the investors and founders listed therein, as amended by the First Amendment dated as of June 16, 1999. 10.37 Lease for headquarters space at 1000 Briggs Road, Mount Laurel, New Jersey, dated September 27, 1993, with Liberty Property Limited Partnership (successor to Briggs Properties Partnership) as landlord. 10.38* Sublease Agreement between Bluestone and Bluestone Consulting, Inc. dated as of April 18, 1997. 23.1 Consent of Arthur Andersen LLP. 23.2* Consent of Pepper Hamilton LLP (included in Exhibit 5.1).
II-4
EXHIBIT NO. DESCRIPTION - --------- --------------------------------------------------------------------------------------------------------- 24.1 Powers of Attorney (included in the signature page to the Registration Statement). 27.1 Financial Data Schedule (in electronic format only).
- ------------------------ * To be filed by amendment. + Management contract or compensatory plan. (b) The following financial statement schedule and the report related thereto are included with this Registration Statement: 1. Schedule II--Valuation and Qualifying Accounts of Bluestone. 2. Report of Arthur Andersen LLP on financial statement schedule. Schedules, other than those referred to above, are omitted as non-applicable or not required, or the required information is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreements certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The Registrant hereby undertakes that: (i) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. (ii) For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Mount Laurel, New Jersey on the 2nd day of July, 1999. BLUESTONE SOFTWARE, INC. By: /s/ P. KEVIN KILROY ----------------------------------------- P. Kevin Kilroy President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints P. Kevin Kilroy and Craig Huke, and each or any of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and other registration statements and amendments thereto relating to the Offering contemplated by this Registration Statement (including registration statements under Rule 462 promulgated under the Securities Act of 1933, as amended), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their, his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- /s/ P. MELAN BAIADA Chairman of the Board of - ------------------------------ Directors July 2, 1999 P. Melan Baiada President and Chief /s/ P. KEVIN KILROY Executive Officer and - ------------------------------ Director (Principal July 2, 1999 P. Kevin Kilroy Executive Officer) Senior Vice President Chief /s/ S. CRAIG HUKE Financial Officer - ------------------------------ (Principal Financial and July 2, 1999 S. Craig Huke Accounting Officer) /s/ GREGORY M. CASE Director - ------------------------------ July 2, 1999 Gregory M. Case
II-6
SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- /s/ WILLIAM C. HULLEY Director - ------------------------------ July 2, 1999 William C. Hulley /s/ ANTON SIMUNOVIC Director - ------------------------------ July 2, 1999 Anton Simunovic /s/ ANDREW J. FILIPOWSKI Director - ------------------------------ July 2, 1999 Andrew J. Filipowski /s/ PAUL E. BLONDIN Director - ------------------------------ July 2, 1999 Paul E. Blondin
II-7 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 2.1 Contribution and Distribution Agreement, dated April 17, 1997, between Bluestone and Bluestone Consulting, Inc. 3.1 Third Amended and Restated Certificate of Incorporation of Bluestone, as amended. 3.2 Bylaws of Bluestone. 3.3* Form of Fourth Amended and Restated Certificate of Incorporation of Bluestone. 3.4* Form of Amended and Restated Bylaws of Bluestone. 4.1* Specimen Stock Certificate of Bluestone. 5.1* Opinion of Pepper Hamilton LLP. 10.1+ 1996 Incentive and Non-Qualified Stock Option Plan of Bluestone, as amended, including forms of Incentive Stock Option Agreement, Non-Qualified Stock Option Agreement and Stock Purchase and Restriction Agreement. 10.2*+ Directors Compensation Plan of Bluestone. 10.3+ Forms of Employee Confidentiality Agreements of Bluestone. 10.4+ Executive Employment Agreement, dated April 18, 1997, between Mel Baiada and Bluestone. 10.5+ First Amendment to Executive Employment Agreement, dated January 13, 1999, between Mel Baiada and Bluestone. 10.6+ Executive Employment Agreement, dated April 24, 1997, between Robert Bickel and Bluestone. 10.7+ Severance Agreement, dated September 17, 1998, between P. Kevin Kilroy and Bluestone. 10.8+ Severance Agreement, dated September 17, 1998, between Robert Bickel and Bluestone. 10.9+ Severance Agreement, dated September 17, 1998, between John H. Capobianco and Bluestone. 10.10+ Severance Agreement, dated September 17, 1998, between Enrico J. Ballezzi and Bluestone. 10.11 Consulting Agreement between Bluestone and Andrew J. Filipowski dated as of May 3, 1999. 10.12* Reseller Agreement, dated January 1, 1998, between Bluestone and Bluestone Consulting, Inc. 10.13 Subcontract Agreement, dated April 23, 1998, between Bluestone and Bluestone Consulting, Inc. 10.14 Intercompany Services Agreement, dated April 17, 1997, between Bluestone and Bluestone Consulting, Inc. 10.15 Service Mark License Agreement, dated April 17, 1997, between Bluestone and Bluestone Consulting, Inc. 10.16 $500,000 Amended and Restated Convertible and Subordinated Note, dated April 17, 1997, by Bluestone in favor of Mark Baiada. 10.17 $500,000 Promissory Note, dated April 17, 1997, by Bluestone in favor of Bluestone Consulting, Inc.
EXHIBIT NO. DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 10.18* Sublease Agreement dated as of April 18, 1997 between Bluestone (as sublandlord) and Bluestone Consulting, Inc. (as subtenant). 10.19* Equipment Lease, dated September 5, 1997, between Bluestone and Colonial Pacific Leasing. 10.20 Loan and Security Agreement, dated as of December 8, 1997, between Silicon Valley Bank and Bluestone. 10.21 First Loan Modification Agreement, dated as of August 16, 1998, between Silicon Valley Bank and Bluestone. 10.22 Second Loan Modification Agreement, dated as of January 21, 1999, between Silicon Valley Bank and Bluestone. 10.23 Third Loan Modification Agreement, dated as of March 30, 1999, between Silicon Valley Bank and Bluestone. 10.24 Negative Pledge Agreement, dated as of August 16, 1998, between Silicon Valley Bank and Bluestone. 10.25 Warrant to purchase 31,250 shares of Common Stock of Bluestone, dated as of November 24, 1997, issued by Bluestone to Silicon Valley Bank, as amended. 10.26 Antidilution Agreement, dated as of November 24, 1997, between Silicon Valley Bank and Bluestone. 10.27 Registration Rights Agreement, dated as of November 24, 1997, between Silicon Valley Bank and Bluestone. 10.28 Form of Warrant to purchase 481,434 shares of Common Stock of Bluestone, dated as of May 25, 1999, issued by Bluestone to Deutsche Banc Alex. Brown 10.29 Series A Preferred Stock Purchase Agreement, dated as of April 18, 1997, between Bluestone and the investors listed therein. 10.30 Series B Preferred Stock Purchase Agreement, dated as of April 22, 1998, between Bluestone and the investors listed therein. 10.31 Convertible Subordinated Secured Note and Warrant Purchase Agreement, dated as of January 21, 1999, between Bluestone and the investors listed therein. 10.32 Form of Warrant issued to the investors under the Convertible Subordinated Secured Note and Warrant Purchase Agreement dated January 21, 1999. 10.33 Preferred Stock Purchase Agreement relating to the sale of Series C Preferred Stock, dated as of May 25, 1999, between Bluestone and the purchasers listed therein. 10.34 Second Restated First Refusal and Co-Sale Agreement, dated as of May 25, 1999, between Bluestone and the investors and stockholders listed therein. 10.35 Second Restated Investors' Rights Agreement, dated as of May 25, 1999, between Bluestone and the investors and stockholders listed therein, as amended by the First Amendment dated as of June 16, 1999. 10.36 Restated Voting Agreement, dated as of April 23, 1998, between Bluestone and the investors and founders listed therein, as amended by the First Amendment dated as of June 16, 1999. 10.37 Lease for headquarters space at 1000 Briggs Road, Mount Laurel, New Jersey, dated September 27, 1993, with Liberty Property Limited Partnership (successor to Briggs Properties Partnership) as landlord.
EXHIBIT NO. DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 10.38* Sublease Agreement between Bluestone and Bluestone Consulting, Inc. dated as of April 18, 1997. 23.1 Consent of Arthur Andersen LLP. 23.2* Consent of Pepper Hamilton LLP (included in Exhibit 5.1). 24.1 Powers of Attorney (included in the signature page to the Registration Statement). 27.1 Financial Data Schedule (in electronic format only).
- ------------------------ * To be filed by amendment. + Management contract or compensatory plan. EX-2.1 2 EXHIBIT 2.1 Exhibit 2.1 CONTRIBUTION AND DISTRIBUTION AGREEMENT between BLUESTONE SOFTWARE, INC. and BLUESTONE CONSULTING, INC. Dated April 17, 1997 TABLE OF CONTENTS ARTICLE I DEFINITIONS.......................................................................................................2 1.1 Definitions.........................................................................................2 ARTICLE II THE REORGANIZATION................................................................................................6 2.1 Transfer of Contributed Assets......................................................................6 2.2 Assumption of Liabilities...........................................................................6 2.3 Retained Liabilities................................................................................6 2.4 Dispute Resolution..................................................................................6 2.5 Issuance of Services Common Stock...................................................................7 2.6 Nonassignable Contracts.............................................................................7 2.7 Closing Balance Sheet; Opening Balance Sheet........................................................7 ARTICLE III THE DISTRIBUTION..................................................................................................8 3.1 Distribution of Contribution Shares.................................................................8 ARTICLE IV OTHER AGREEMENTS..................................................................................................8 4.1 Mark Baiada Convertible Note........................................................................8 4.2 Replication of Stock Option Plan....................................................................8 4.3 Transfer of Employees...............................................................................9 4.4 Intercompany Services...............................................................................9 4.5 Intellectual Property...............................................................................9 4.6 Customer and Prospect Database......................................................................9 4.7 Shareholder Notes...................................................................................9 4.8 Intercompany Notes..................................................................................9 4.9 PNC Debt...........................................................................................10 ARTICLE V CLOSING..........................................................................................................10 5.1 Closing............................................................................................10 5.2 Deliveries and Proceedings at Closing..............................................................10
-i- ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE SERVICES COMPANY...........................................................11 6.1 February Balance Sheet.............................................................................11 ARTICLE VII INDEMNIFICATION..................................................................................................12 7.1 Indemnification....................................................................................12 7.2 Third Party Claim Indemnification Procedures.......................................................12 7.3 Remedies Cumulative................................................................................14 ARTICLE VIII TAX AND EXPENSE MATTERS..........................................................................................14 8.1 Certain Taxes and Expenses.........................................................................14 8.2 Tax Returns and Other Filings......................................................................14 8.3 Tax Allocations....................................................................................14 8.4 Representations, Warranties and Covenants..........................................................14 8.5 Failure to Qualify.................................................................................15 ARTICLE IX ADDITIONAL MATTERS...............................................................................................15 9.1 Access to Information..............................................................................15 ARTICLE X MISCELLANEOUS....................................................................................................16 10.1 Construction......................................................................................16 10.2 Notices...........................................................................................16 10.3 Successors and Assigns............................................................................16 10.4 Governing Law; Jurisdiction.......................................................................17 10.5 Entire Agreement..................................................................................17 10.6 Further Assurances................................................................................17 10.7 Amendment and Waiver..............................................................................17 10.8 Counterparts......................................................................................17 10.9 Headings..........................................................................................17
-ii- TABLE OF EXHIBITS AND SCHEDULES Exhibit 4.4 - Intercompany Services Agreement Exhibit 4.5(i) - Intellectual Property Assignment Exhibit 4.5(ii) - Service Mark Licence Agreement Exhibit 5.2(a)(i) - Bill of Sale Exhibit 5.2(b)(iii) - Assumption Agreement Exhibit 8.2 - Tax Allocation Agreement Schedule 1.1(a) - Contributed Assets Schedule 1.1(b) - Retained Assets Schedule 2.1 - Permitted Encumbrances Schedule 2.2 - Assumed Liabilities Schedule 2.3 - Retained Liabilities Schedule 2.6 - Nonassignable Contracts -iii- CONTRIBUTION AND DISTRIBUTION AGREEMENT THIS CONTRIBUTION AND DISTRIBUTION AGREEMENT (this "Agreement") dated April 17, 1997, is made by and between BLUESTONE SOFTWARE, INC., a Delaware corporation (the "Products Company"), and BLUESTONE CONSULTING, INC., a Delaware corporation (the "Services Company"). Capitalized terms shall have the meanings set forth in Article I hereof unless otherwise defined in a particular Section in which they are used. BACKGROUND A. The Prior Corporation was formed as a New Jersey corporation, all of the issued and outstanding stock of which was owned by the Shareholder. For the sole purpose of enabling the Prior Corporation to change its state of incorporation, the Products Company was formed as a Delaware corporation and, on March 25, 1997, the Prior Corporation merged with and into the Products Company, with the Products Company as the surviving corporation. All of the issued and outstanding common stock of the Products Company is owned by the Shareholder. B. In order to enable the Products Company to obtain venture capital financing and as a condition thereof, the Board of Directors of the Products Company has determined to transfer or cause to be transferred to the Services Company substantially all of the assets of the Products Company used primarily in or primarily related to, the Services Business, to cause the assumption by the Services Company of the Assumed Liabilities and to cause the issuance to the Products Company of all of the shares of Common Stock of the Services Company (the "Contribution"), which Contribution in conjunction with the Distribution defined below is intended to qualify for federal income tax purposes as a reorganization pursuant to Section 368(a)(1)(D) of the Code. C. Immediately after the Contribution and as part of the same plan, the Products Company shall distribute or cause to be distributed to the Shareholder all of the shares of Common Stock of the Services Company owned by the Products Company (the "Distribution") in a distribution that is intended to be tax-free to the Shareholder and the Products Company pursuant to Sections 355(a) and 361(c) of the Code, respectively. D. The Products Company and the Services Company have determined that it is desirable to set forth the principal corporate transactions required to effect the Contribution and the Distribution and to set forth other agreements that will govern certain other matters prior to or following the Distribution. NOW, THEREFORE, in consideration of the mutual covenants contained herein and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the respective meanings ascribed to them in this Section: "Affiliate" means a person that directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with, the person specified; provided that the Products Company and the Services Company (after giving effect to the Reorganization) shall not be deemed to be Affiliates of each other for purposes of this Agreement. "Assumed Liabilities" has the meaning set forth in Section 2.2 hereof. "Assumption Agreement" has the meaning set forth in Section 5.2(b)(iii) hereof. "Bill of Sale" has the meaning set forth in Section 5.2(a)(i) hereof. "Business Day" means any day other than a Saturday, Sunday, or a day on which banking institutions in the State of Delaware are authorized or obligated by law or executive order to close. "Closing" means the consummation of the Reorganization. "Closing Balance Sheet" has the meaning set forth in Section 2.7 hereof. "Closing Date" has the meaning set forth in Section 5.1 hereof. "Code" means the Internal Revenue Code of 1986, as amended. "Contributed Assets" means all right, title, and interest of the Products Company on the date hereof in all assets, properties and rights used primarily in or primarily related to the Services Business (other than the Retained Assets), wherever such assets are located and whether real, personal or mixed, tangible or intangible, and whether or not any of such assets have any value for accounting purposes or are carried or reflected on or specifically referred to in its books or financial statements, and set forth on SCHEDULE 1.1 hereto (except for consumable assets and other similar assets which are not listed on such Schedule). "Contribution" has the meaning set forth in the "Background" section. "Contribution Date" means the time immediately prior to the Distribution Date. "Contribution Shares" has the meaning set forth in Section 2.5 hereof. -2- "Damages" means any and all losses, liabilities, damages (including, without limitation, any governmental fines or penalties or punitive damages and costs of investigation), settlement payments, deficiencies, judgments, interest, costs and expenses (including, without limitation, attorneys' fees and expenses) including without limitation any of the foregoing relating to, resulting from or arising out of any commenced or threatened action, suit, administrative proceeding, investigation, audit or other proceeding by any person or entity and any settlement or compromise thereof. "Distribution" has the meaning set forth in the "Background" section. "Distribution Date" means the date as of which the Distribution shall be effected as determined by the Board of Directors of the Products Company. "February Balance Sheet" has the meaning set forth in Section 6.1 hereof. "Former Convertible Note" means the $1 million convertible promissory note issued by the Prior Corporation to Mark Baiada and convertible into 700,000 shares of common stock of the Prior Corporation. "Former Options" has the meaning set forth in Section 4.2 hereof. "Former Shareholder Note" has the meaning set forth in Section 4.7 hereof. "GAAP" has the meaning set forth in Section 2.7 hereof. "Indemnified Party" has the meaning set forth in Section 7.2(a) hereof. "Indemnifying Party" has the meaning set forth in Section 7.2(a) hereof. "Intellectual Property Assignment" has the meaning set forth in Section 4.5 hereof. "Intercompany Services Agreement" has the meaning set forth in Section 4.4 hereof. "ISOs" has the meaning set forth in Section 4.2 hereof. "Lien" has the meaning set forth in Section 2.1 hereof. "Litigation Conditions" has the meaning set forth in Section 7.2(b) hereof. "Opening Balance Sheet" has the meaning set forth in Section 2.7 hereof. "Permitted Encumbrances" has the meaning set forth in Section 2.1 hereof. -3- "PNC Debt" means the indebtedness of the Products Company under the $3 million line of credit, the $235,000 term note and the $300,000 Convertible Software Note, each as reflected on the February Balance Sheet. "Prior Corporation" means Bluestone Consulting, Inc., a New Jersey corporation, which merged with and into the Products Company on March 25, 1997. "Products Business" means the business engaged in by the Products Company prior to the Closing Date in connection with its software products operations, and includes the products, training, marketing, consulting and support groups. "Products Company" means Bluestone Software, Inc., a Delaware corporation, successor to the Prior Corporation. "Products Common Stock" means common stock, par value $.001 per share, of the Products Company. "Products Intercompany Note" has the meaning set forth in Section 4.8 hereof. "Products Options" has the meaning set forth in Section 4.2 hereof. "Products Shareholder Note" has the meaning set forth in Section 4.7 hereof. "Products Stock Option Plan" has the meaning set forth in Section 4.2 hereof. "Products Company Tax Liabilities" means the liabilities of the Products Company set forth in the Tax Allocation Agreement. "Products Transaction Documents" means this Agreement, the Bill of Sale, the Intellectual Property Assignment, the Service Mark Licence Agreement, the Intercompany Services Agreement and the Tax Allocation Agreement. "Reorganization" means collectively, the transactions contemplated pursuant to the provisions of Article II and Article III hereof. "Retained Assets" means those assets, properties and rights of the Products Company that are used in, to be used in, useful to or related to the Services Business which are not intended to be contributed to the Services Company as set forth on SCHEDULE 1.1(B) hereto. "Retained Liabilities" shall have the meaning set forth in Section 2.3 hereof. "Service Mark Licence Agreement" has the meaning set forth in Section 4.5 hereof. -4- "Services Business" means the business engaged in by the Prior Corporation prior to the Closing Date in connection with its professional consulting services group and which also includes the central group (accounting, finance, information systems and human resources). "Services Common Stock" means common stock, par value $.001 per share, of the Services Company. "Services Company" means Bluestone Software, Inc., a Delaware corporation. "Services Options" has the meaning set forth in Section 4.2 hereof. "Services Intercompany Note" has the meaning set forth in Section 4.8 hereof. "Services Records" has the meaning set forth in Section 9.1 hereof. "Services Shareholder Note" has the meaning set forth in Section 4.7 hereof. "Services Stock Option Plan" has the meaning set forth in Section 4.2 hereof. "Services Company Tax Liabilities" means the liabilities of the Services Company set forth in the Tax Allocation Agreement. "Services Transaction Documents" means this Agreement, the Service Mark Licence Agreement, the Intercompany Services Agreement and the Assumption Agreement. "Shareholder" means Mr. Mel Baiada. "Stock Purchase Agreement" means the Series A Preferred Stock Purchase Agreement among the Products Company and the investors listed therein. "Tax Allocation Agreement" has the meaning set forth in Section 8.2 hereof. "Taxes" means any federal, state, local and foreign income, payroll, withholding, excise, sales, use, personal property, use and occupancy, business and occupation, mercantile, real estate, gross receipts, license, employment, excise, severance, stamp, premium, windfall profits, social security, unemployment, disability, transfer, registration, value added, alternative, or add-on minimum, estimated, or capital stock and franchise and other tax or governmental charge of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not. "Tax Returns" means returns, reports, or information returns or statements relating to Taxes (including amendments thereto) required to be filed with the appropriate United States, state, local or foreign tax authority or agency thereof. "Third Party Claim" has the meaning set forth in Section 7.2(a) hereof. -5- ARTICLE II THE REORGANIZATION 2.1 TRANSFER OF CONTRIBUTED ASSETS. Subject to the terms and conditions of this Agreement and effective as of the Contribution Date, the Products Company hereby assigns, transfers, delivers and conveys to the Services Company, as a capital contribution, all of its right, title and interest in and to the Contributed Assets, free and clear of all mortgages, pledges, liens, restrictions, encumbrances, tenancies, licenses, encroachments, covenants, rights of way, easements, claims, security interests, charges or any other matter affecting title (collectively "Liens"), except (a) minor imperfections of title, none of which, individually or in the aggregate, materially detracts from the value of or impairs the use of the affected properties or impairs the operations of the Products Company, (b) liens for current taxes not yet due and payable, or (c) as disclosed on SCHEDULE 2.1 hereto (collectively, "Permitted Encumbrances"). 2.2 ASSUMPTION OF LIABILITIES. Except for the Retained Liabilities referred to in Section 2.3 hereof, the Services Company hereby assumes and agrees to pay, fully satisfy when due and fully perform when required, all of the Assumed Liabilities. For purposes of this Agreement, "Assumed Liabilities" shall mean all of the liabilities and obligations, whether primary or secondary, direct or indirect, absolute or contingent, arising out of or relating to the Contributed Assets or the Services Business, whether now existing or hereafter arising and whether arising out of occurrences, events or incidents occurring prior to the Closing Date or thereafter, including any liabilities set forth on SCHEDULE 2.2 hereto. 2.3 RETAINED LIABILITIES. Except for the Assumed Liabilities referred to in Section 2.2 hereof, the Products Company hereby retains and agrees to pay, fully satisfy when due and fully perform when required, all of the Retained Liabilities. For purposes of this Agreement, "Retained Liabilities" shall mean all of the liabilities and obligations, whether primary or secondary, direct or indirect, absolute or contingent, arising out of or relating to the Products Business, whether now existing or hereafter arising and whether arising out of occurrences, events or incidents occurring prior to the Closing Date or thereafter, including any liabilities set forth on SCHEDULE 2.3 hereto. 2.4 DISPUTE RESOLUTION. In the event that (i) the parties are unable to agree on whether an asset is a Contributed Asset or (ii) the parties are unable to agree on whether a liability is, in whole or part, an Assumed Liability or a Retained Liability, then (x) the Boards of Directors of the Services Company and the Products Company shall meet and attempt in good faith to resolve the differences between the parties, and if no resolution is reached after fifteen (15) days, (y) the parties shall settle the matter by arbitration before a single arbitrator in the County of Philadelphia (or such other place agreed to by the parties) in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. All costs -6- associated with such arbitration shall be borne equally by the parties to the dispute, except that each party shall bear the costs of its own attorneys and experts. 2.5 ISSUANCE OF SERVICES COMMON STOCK. Contemporaneously with the transfer of the Contributed Assets and the assumption of the Assumed Liabilities contemplated herein, the Services Company shall issue, transfer and deliver to the Products Company, as its initial issuance, nine million (9,000,000) shares of Services Common Stock free and clear of all Liens, such transfer to be accomplished by a certificate or certificates registered in the Products Company's name, which will, immediately after such issuance, constitute all of the Services Company's issued and outstanding common stock (the "Contribution Shares"). 2.6 NONASSIGNABLE CONTRACTS. Nothing in this Agreement shall be construed as an attempt to assign any contract, agreement, permit, franchise or claim included in the Contributed Assets which is by its terms or by law nonassignable and are set forth on SCHEDULE 2.6 hereto, without the consent of the other party or parties thereto, unless such consent shall have been given, or as to which all the remedies for the enforcement thereof enjoyed by the Products Company would, as a matter of law, pass to the Services Company as an incident of the assignments provided for by this Agreement. In order, however, to provide the Services Company the full realization and value of every contract, agreement, permit, franchise and claim of the character described in the immediately preceding sentence, the Products Company agrees that on and after the Closing, it will, at the request and under the direction of the Services Company, in the name of the Products Company or otherwise as the Services Company shall specify, take all reasonable actions and do or cause to be done all such things as shall in the reasonable opinion of the Services Company or its counsel be necessary or proper (a) to assure that the rights of the Products Company under such contracts, agreements, permits, franchises and claims shall be preserved for the benefit of the Services Company and (b) to facilitate receipt of the consideration to be received by the Products Company in and under every such contract, agreement, permit, franchise or claim, which consideration shall be held for the benefit of, and shall be delivered to, the Services Company. 2.7 CLOSING BALANCE SHEET; OPENING BALANCE SHEET. (a) Within sixty (60) days after the Closing, the parties hereto will use their best efforts to have prepared and delivered to the Products Company an audited balance sheet (the "Closing Balance Sheet") of the Products Company as of the close of business on the Closing Date, which balance sheet shall be prepared in accordance with generally accepted accounting principles applied in the United States of America ("GAAP"). The Closing Balance Sheet shall be accompanied by an opinion from Arthur Andersen LLP that the Closing Balance Sheet fairly presents in all material respects the assets and liabilities of the Products Company as of the close of business on the Closing Date in accordance with GAAP. (b) Within sixty (60) days after the Closing, the parties hereto will use their best efforts to have prepared and delivered to the Services Company an audited balance sheet (the "Opening Balance Sheet") of the Services Company as of the close of business on the Closing Date, which balance sheet shall be prepared in accordance with GAAP. The Opening -7- Balance Sheet shall be accompanied by an opinion from Arthur Andersen LLP that the Opening Balance Sheet fairly presents in all material respects the assets and liabilities of the Services Company as of the close of business on the Closing Date in accordance with GAAP. ARTICLE III THE DISTRIBUTION 3.1 DISTRIBUTION OF CONTRIBUTION SHARES. On the Distribution Date, the Products Company shall distribute to Shareholder, a duly executed certificate or certificates representing the Contribution Shares, so that immediately following the distribution, the Shareholder shall be the sole shareholder of the Services Company. ARTICLE IV OTHER AGREEMENTS 4.1 MARK BAIADA CONVERTIBLE NOTE. The Services Company has agreed that one-half of the principal amount of the Former Convertible Note shall be an Assumed Liability under Section 2.2 hereof. Accordingly, at Closing (i) the Former Convertible Note shall be amended and restated to reflect that the principal amount due thereunder shall be in the amount of $500,000 as evidenced by an amended and restated convertible and subordinated note issued by the Products Company, such note to be convertible into 700,000 shares of Products Common Stock; and (ii) the Services Company shall issue a convertible and subordinated note in the principal amount of $500,000, which note shall be convertible into 700,000 shares of Services Common Stock. 4.2 REPLICATION OF STOCK OPTION PLAN. Prior to the Closing Date, the 1996 Incentive and Non-Qualified Stock Option Plan of the Prior Corporation (the "1996 Plan") will be assumed by the Products Company (the "Products Stock Option Plan"). On or prior to the Closing Date, the Services Company will adopt a stock option plan (the "Services Stock Option Plan") substantially similar to the Products Stock Option Plan. In exchange for agreeing to the cancellation of outstanding options granted by the Prior Corporation pursuant to the terms of the 1996 Plan (the "Former Options") and agreeing to execute new confidentiality agreements, holders of Former Options shall be granted (i) options to purchase the same number of shares of Products Common Stock as under the Former Options ("Products Options") and (ii) options to purchase the same number of shares of Services Common Stock as under the Former Options (the "Services Options"). Option holders who are employed by the Products Company after the Closing Date shall receive Products Options that are intended to be incentive stock options within the meaning of Section 422 of the Code ("ISOs") and Services Options that are non-qualified stock options. Option holders who are employed by the Services Company after the Closing Date shall receive Services Options that are intended to be ISOs and Products Options that are non-qualified stock options. -8- 4.3 TRANSFER OF EMPLOYEES. Effective as of the Closing Date, each employee of the Services Business shall cease to be an employee of the Products Company, and shall become an employee of the Services Company unless he or she choose not to accept such employment in which case his or her employment shall terminate altogether. The Services Company shall establish and maintain such compensation and benefit arrangements as it may determine from time to time. The Services Company and Products Company shall cooperate in the transfer of employee records, coordination of compensation systems, and continuity of benefit arrangements, including vacation, 401(k) and profit sharing, sick pay and disability, health plans, and all other material benefit arrangements. 4.4 INTERCOMPANY SERVICES. As a condition to the execution of this Agreement and simultaneous herewith, the Products Company and the Services Company shall enter into and execute an Intercompany Services Agreement, substantially in the form of EXHIBIT 4.4 hereto (the "Intercompany Services Agreement"). 4.5 INTELLECTUAL PROPERTY. As condition to the execution of this Agreement and simultaneous herewith, the Products Company and the Services Company shall enter into and execute an Intellectual Property Assignment, substantially in the form of EXHIBIT 4.5(I) hereto (the "Assignment"), and an Service Mark Licence Agreement, substantially in the form of EXHIBIT 4.5(II) hereto (the "License Agreement"). 4.6 CUSTOMER AND PROSPECT DATABASE. During the one (1) year period following the Closing, each of the Products Company and the Services Company shall use its best efforts to equitably separate and divide ownership of the customer and prospect database (known internally as "BEDROCK") jointly owned by the parties hereto. After such division, each company shall have sole right, title and interest to its database. 4.7 SHAREHOLDER NOTES. On the Closing Date, the $403,066.37 Promissory Note, dated as of December 31, 1994, issued by the Prior Corporation to the Shareholder (the "Former Shareholder Note") will be canceled, and in consideration therefore (a) the Services Company will issue to the Shareholder a $107,495 promissory note (the "Services Shareholder Note"), and (b) the Products Company will issue to the Shareholder a $250,000 promissory note (the "Products Shareholder Note"). The Products Shareholder Note will subsequently be contributed to capital of the Products Company in exchange for the issuance of 263,158 shares Series A Preferred Stock in accordance with the Stock Purchase Agreement. 4.8 INTERCOMPANY NOTES. On the Closing Date, the Products Company will issue to the Services Company a $500,000 promissory note (the "Products Intercompany Note") in connection with the allocation of indebtedness for borrowed money between the companies. On the closing of the Stock Purchase Agreement, the Services Company will issue to the Products Company a promissory note in the amount of the fees and expenses incurred and payable by the Services Company in accordance with Section 8.1 hereof (the "Services Intercompany Note"), which fees and expenses will be paid by the Products Company on the Services Company's behalf. -9- 4.9 PNC DEBT. On the Closing Date, the Services Company and the Products Company shall enter into an assignment and assumption agreement assigning to the Services Company its allocable portion of the PNC Debt, in the amounts set forth on SCHEDULE 2.2 hereto. The Products Company shall retain the PNC Debt in the amounts set forth on SCHEDULE 2.3 hereto. Subsequent to the assignment and assumption of the PNC Debt, each of the parties will enter into amended and restated financing documents with PNC reflecting the allocation of the PNC Debt. ARTICLE V CLOSING 5.1 CLOSING. Subject to the terms and conditions of this Agreement, the closing under this Agreement (the "Closing") will take place concurrently with the execution and delivery of this Agreement, at 10:00 a.m. on the date of this Agreement, at the offices of Pepper, Hamilton & Scheetz, 1235 Westlakes Drive, Suite 400, Berwyn, Pennsylvania 19312, or at such other time, date or location as shall be agreed upon by the parties hereto. The date at which the Closing occurs is sometimes referred to herein as the "Closing Date". 5.2 DELIVERIES AND PROCEEDINGS AT CLOSING. (a) DELIVERIES TO THE SERVICES COMPANY. The Products Company hereby delivers to the Services Company the following: (i) a Bill of Sale and instrument of Assignment with respect to the Contributed Assets, duly executed by the Products Company, substantially in the form of EXHIBIT 5.2(A)(I) hereto (the "Bill of Sale"); (ii) the Intercompany Services Agreement, duly executed by the Products Company; (iii) the Assignment, duly executed by the Products Company; (iv) the License Agreement, duly executed by the Products Company; (v) the Tax Allocation Agreement, duly executed by the Products Company; and (vi) all such other instruments of conveyance as shall, in the reasonable opinion of the Services Company and its counsel, be necessary to vest in the Services Company good, valid and, marketable title to the Contributed Assets in accordance with Section 2.1 hereof. -10- (b) DELIVERIES BY THE SERVICES COMPANY TO THE PRODUCTS COMPANY. The Services Company hereby delivers to the Products Company the following: (i) a stock certificate or certificates representing the Services Common Stock, free and clear of all Liens, registered in the name of the Products Company and appropriately legended; (ii) the Intercompany Services Agreement, duly executed by the Services Company; (iii) an assumption agreement, duly executed by the Services Company, substantially in the form of EXHIBIT 5.2(B)(III) hereto (the "Assumption Agreement"); (iv) the License Agreement, duly executed by the Services Company; and (v) the Tax Allocation Agreement, duly executed by the Services Company. (c) DELIVERIES BY THE PRODUCTS COMPANY TO THE SHAREHOLDER. The Products Company shall deliver to the Shareholder a duly executed certificate or certificates representing the Contribution Shares, duly registered in the Shareholder's name and appropriately legended. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE SERVICES COMPANY The Services Company hereby represents and warrants to the Products Company as follows: 6.1 FEBRUARY BALANCE SHEET. The unaudited balance sheet of the Prior Corporation as of February 28, 1997 (the "February Balance Sheet") fairly presents the financial condition of the Prior Corporation as of such date, subject to normal year-end adjustments. The February Balance Sheet has been prepared in accordance with GAAP applied on a consistent basis, except that the February Balance Sheet may not contain all footnotes required by GAAP. Since the date of the February Balance Sheet, the Products Company has not incurred any material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business consistent with past practices (other than extensions of trade payables), (ii) liabilities incurred under the PNC financing documents, or (iii) as disclosed in the Disclosure Letter to the Series A Preferred Stock Purchase Agreement among the Products Company and the investors listed therein. -11- ARTICLE VII INDEMNIFICATION 7.1 INDEMNIFICATION. (a) INDEMNIFICATION BY THE PRODUCTS COMPANY. The Products Company shall indemnify the Services Company and its directors, officers and other Affiliates and hold the Services Company and its directors, officers and other Affiliates harmless from and against any and all Damages relating to, arising out of or resulting from: (i) any material misrepresentation or any material breach of any representation or warranty made by the Products Company in this Agreement or any material failure to comply with any covenant made by the Products Company in this Agreement; (ii) any Retained Liabilities; or (iii) any Products Company Tax Liabilities. (b) INDEMNIFICATION BY THE SERVICES COMPANY. The Services Company shall indemnify the Products Company and its directors, officers and other Affiliates, and hold the Products Company and its directors, officers and other Affiliates harmless from and against any and all Damages relating to, arising out of or resulting from: (i) any material breach of any representation or warranty made by the Services Company in this Agreement or any material failure to comply with any covenant made by the Services Company in this Agreement; (ii) any Assumed Liabilities; or (iii) any Services Company Tax Liabilities. (c) LIMITATION OF INDEMNIFICATION. Notwithstanding anything to the contrary contained herein, no claim for indemnification under this Article VII may be brought after the second anniversary of the Closing Date. 7.2 THIRD PARTY CLAIM INDEMNIFICATION PROCEDURES. (a) A party seeking indemnification pursuant to this Article VII (an "Indemnified Party") shall give prompt notice to the party from whom such indemnification is sought (the "Indemnifying Party") of the assertion of any claim, or the commencement of any action, suit or proceeding by a third party in respect of which indemnity may be sought hereunder (a "Third Party Claim"), and will give the Indemnifying Party such information with respect thereto as the Indemnifying Party may reasonably request, but failure to give such notice shall not -12- relieve the Indemnifying Party of any liability hereunder except to the extent that the Indemnifying Party is actually prejudiced thereby. (b) The Indemnifying Party shall have the right, exercisable by written notice to the Indemnified Party within thirty (30) days of receipt of notice from the Indemnified Party of the commencement of or assertion of any Third Party Claim in respect of which indemnity may be sought hereunder, to assume and conduct the defense of such Third Party Claim with counsel selected by the Indemnifying Party and reasonably acceptable to the Indemnified Party; provided that: (i) such Third Party Claim involves (and continues to involve) solely monetary damages; (ii) the defense of such Third Party Claim by the Indemnifying Party will not, in the reasonable judgment of the Indemnified Party, have a material adverse effect on the Indemnified Party; (iii) the Indemnifying Party makes adequate provision to satisfy reasonably the Indemnified Party of the Indemnifying Party's ability to satisfy the amount of any adverse monetary judgment that is reasonably likely to result, (the conditions set forth in clauses (i), (ii) and (iii) are collectively referred to as the "Litigation Conditions"); and (iv) the Indemnifying Party expressly agrees in writing that as between the Indemnifying Party and the Indemnified Party, the Indemnifying Party shall be solely obligated to satisfy and discharge the Third Party Claim. If the Indemnifying Party does not assume the defense of such Third Party Claim in accordance with this Section, then the Indemnified Party may continue to defend the Third Party Claim. If the Indemnifying Party has assumed the defense of a Third Party Claim as provided in this Section 7.2(b), then the Indemnifying Party will not be liable for any legal expenses subsequently incurred by the Indemnified Party in connection with the defense thereof; provided however that if (A) the Litigation Conditions cease to be met, or (B) the Indemnifying Party fails to take reasonable steps necessary to defend diligently such Third Party Claim within ten (10) calendar days (or such shorter period as may be required to defend diligently such Third Party Claim) after receiving written notice from the Indemnified Party that the Indemnified Party believes the Indemnifying Party has failed to take such steps, then the Indemnified Party may assume its own defense, and the Indemnifying Party will be liable for all reasonable costs or expenses paid or incurred in connection therewith. (c) The Indemnifying Party or the Indemnified Party, as the case may be, shall have the right to participate in (but not control), at its own expense, the defense of any Third Party Claim which the other is defending as provided in this Agreement. (d) The Indemnifying Party, if it shall have assumed the defense of any Third Party Claim as provided in this Agreement, shall not, without the prior written consent of the Indemnified Party, consent to a settlement of, or the entry of any judgment arising from, any such Third Party Claim which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party a complete release from all liability in respect of such Third Party Claim, or which grants any injunctive or equitable relief. The Indemnified Party shall have the right to settle any Third Party Claim, the defense of which has not been assumed by the Indemnifying Party, with the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. -13- (e) Whether or not the Indemnifying Party chooses to defend or prosecute any Third Party Claim, all the parties hereto shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connection therewith. 7.3 REMEDIES CUMULATIVE. Except as herein expressly provided, the remedies provided herein shall be cumulative and are not exclusive and shall not preclude assertion by any party hereto of any other rights or the seeking of any other remedies against any other party hereto. ARTICLE VIII TAX AND EXPENSE MATTERS 8.1 CERTAIN TAXES AND EXPENSES. The Services Company shall pay all sales, use, transfer, real property transfer, documentary stamp, recording and other similar taxes with respect to transfer of the Contributed Assets. The Products Company shall pay the audit fees of Arthur Andersen LLP in connection with the audit of the financial statements for the fiscal years ended December 31, 1995 and 1996. The Products Company shall pay the fees and expenses of Ernst & Young LLP and Blank Rome Comisky & McCauley for the applicable accounting and legal services rendered in connection with the transactions contemplated by this Agreement and the Stock Purchase Agreement. The Services Company shall pay the fees and expenses of Arthur Andersen LLP (other than the audit fees) and the fees and expenses of Pepper, Hamilton & Scheetz LLP for the applicable accounting and legal services rendered in connection with the transactions contemplated by this Agreement and the Stock Purchase Agreement. At the Closing the Products Company shall pay all transaction fees incurred by each of the Products Company and the Services Company and referred to in this Section 8.1. The Services Company shall concurrently therewith issue to the Products Company the Services Intercompany Note. 8.2 TAX RETURNS AND OTHER FILINGS. Each of the Services Company and the Products Company shall agree: (i) to report the Contribution and Distribution as a transaction described in Section 368(a)(1)(D) of the Code and the Distribution as a transaction described in Section 355 of the Code on all Tax Returns and other filings, (ii) to take no position inconsistent therewith or with the consummation of such transactions, and (iii) to file or cause to be filed all Tax Returns for which it is responsible hereunder on a timely basis (including any extensions thereof). 8.3 TAX ALLOCATIONS. As a condition of the execution of this Agreement, the Parties shall execute a tax allocation agreement, substantially in the same form of EXHIBIT 8.2 hereto (the "Tax Allocation Agreement"), which agreement shall set forth the manner in which taxes shall be allocated between the parties. 8.4 REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of the Services Company and the Products Company represents, warrants and covenants to the other that it has no present plan or -14- intention to take any action (including without limitation, in the case of the Services Company, the cessation of the Services Business or the sale or disposition of the Contributed Assets other than in the ordinary course of business, and in the case of the Products Company, the cessation of the Products Business or the sale or disposition of the Retained Assets or the assets of the Products Company other than in the ordinary course of business) or cause any condition to exist, that would disqualify (i) the Contribution and Distribution as a transaction described in Section 368(a)(1)(D) of the Code; or (ii) the Distribution as a tax-free distribution under Section 355 of the Code. 8.5 FAILURE TO QUALIFY. If any of the transactions fails to qualify as tax-free under the applicable Code Section as a result of a breach or violation of a representation, warranty or covenant set forth in this Agreement by a party hereto, then the party breaching or violating the representation, warranty or covenant shall be solely responsible for any taxes resulting from such breach or violation. ARTICLE IX ADDITIONAL MATTERS 9.1 ACCESS TO INFORMATION. (a) On the Closing Date, or as soon thereafter as practicable, the Products Company will deliver to the Services Company all original agreements, documents, books, records and files relating solely to the Services Business (collectively, "Services Records") in its possession, except that the Products Company may retain any federal Tax Returns. After the Closing, the Services Company will retain all Services Records required to be retained pursuant to obligations imposed by any applicable law. On the Closing Date, or as soon thereafter as practicable, the Products Company will deliver to the Services Company copies of all agreements, documents, books, records and files relating that are common to both the Services Business and the Products Business. (b) After the Closing, upon reasonable notice, each party hereto will give, or cause to be given, to the representatives, employees, counsel and accountants of the other parties hereto access, during normal business hours, to Services Records, relating to periods prior to or including the Closing, and will permit such persons to examine and copy such Services Records, in each case only to the extent reasonably requested by such other parties in connection with Tax and financial reporting matters (including without limitation any Tax Return relating to state or local real property transfer or gains taxes), legal proceedings or governmental investigations; provided, however, that nothing herein will obligate any party to take actions that would unreasonably disrupt the normal course of its business, violate the terms of any contract to which it is a party or to which it or any of its assets is subject or grant access to any of its proprietary, confidential or classified information. The parties hereto will cooperate with each other in the conduct of any tax audit, claim for refund of income taxes, or similar proceedings involving or otherwise relating to any of the Contributed Assets (or the income therefrom or -15- assets thereof) with respect to any Tax and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 9.1. ARTICLE X MISCELLANEOUS 10.1 CONSTRUCTION. The parties hereto have jointly participated in the negotiation and drafting of this Agreement and the instruments of transfer contemplated hereby. In the event any ambiguity or question of intent or interpretation arises, this Agreement and the instruments of transfer contemplated hereby shall be construed as if drafted jointly by and between the Services Company and the Products Company and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean including without limitation. Nothing in the Schedules hereto shall be deemed adequate to disclose an exception to a representation or warranty made herein unless the exception is described on the Schedule with reasonable particularity. 10.2 NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered by facsimile transmission (with confirmation postmarked on the same day), by overnight courier service or, if mailed, when mailed by United States first-class, certified or registered mail, postage prepaid, to the other party at the following addresses (or at such other address as shall be given in writing by any party to the other): If to the Products Company: Bluestone Software, Inc. 1000 Briggs Road Mount Laurel, NJ 08054 Fax: (609) 727-3833 Attention: Mr. Mel Baiada If to the Services Company, to: Bluestone Consulting, Inc. 1000 Briggs Road Mount Laurel, NJ 08054 Fax: (609) 727-3833 Attention: Mr. Thomas Ballezzi, Chief Operating Officer 10.3 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that no party may assign, delegate or otherwise transfer any of its rights or -16- obligations under this Agreement without the consent of the other party hereto, except that either party may assign its rights hereunder. 10.4 GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. In connection with any dispute arising between the parties under this Agreement, and without limiting Section 2.4 hereof, each party hereto consents to the exclusive jurisdiction and venue of any federal or state court located in the State of New Jersey, and each party hereby waives any claim it may have at any time to FORUM NON CONVENIENS with respect to such venue. 10.5 ENTIRE AGREEMENT. This Agreement, together with the Schedules and Exhibits hereto, constitutes the entire understanding of the parties with respect to the subject matter hereof, supersedes any prior agreements or understandings, written or oral, between the parties with respect to the subject matter hereof, and is not intended to confer upon any person other than the parties hereto any benefit, right or remedy. 10.6 FURTHER ASSURANCES. Each party shall cooperate and take such action as may be reasonably requested by any other party hereto in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. To the extent payments are received by any party hereto that properly belong to any other party hereto on or after the date hereof, the parties hereto agree to promptly remit such amounts to the appropriate party. 10.7 AMENDMENT AND WAIVER. The parties may, by mutual agreement, amend this Agreement in any respect, and any party, as to such party, may extend the time for the performance of any of the obligations of the other party; waive any inaccuracies in representations and warranties by the other party; waive compliance by the other party with any of the agreements contained herein and performance of any obligations by the other party; and waive the fulfillment of any condition that is precedent to the performance by such party of any of its obligations under this Agreement. To be effective, any such amendment or waiver must be in writing and be signed by the party against whom enforcement of the same is sought. 10.8 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. 10.9 HEADINGS. The headings preceding the text of the sections and subsections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect. [SIGNATURE PAGE FOLLOWS] -17- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first written above. BLUESTONE CONSULTING, INC. By /s/ Mel Baiada -------------------------- Name: Mel Baiada Title: President BLUESTONE SOFTWARE, INC. By /s/ Mel Baiada -------------------------- Name: Mel Baiada Title: President -18- EX-3.1 3 EXHIBIT 3.1 Exhibit 3.1 CERTIFICATE OF AMENDMENT OF THE THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF BLUESTONE SOFTWARE, INC. Bluestone Software, Inc. (the "Corporation"), a corporation organized and existing under, and by virtue of, the General Corporation Law of the State of Delaware (the "DGCL"), does hereby certify: FIRST: That the Board of Directors of the Corporation, by written consent filed with the minutes of proceedings of the board, duly adopted a resolution declaring advisable the amendment of the Certificate of Incorporation of the Corporation and submitting the same to the stockholders of the Corporation for approval. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Board hereby deems it advisable and in the best interest of the Company to amend the Company's Certificate of Incorporation as follows: (a) The first clause of "Authorized Capital Stock"of Article FOURTH shall be amended to read as follows: The Corporation shall have the authority to issue an aggregate 77,300,187 shares of capital stock which shall be divided into 53,800,000 shares of Common Stock, par value $.001 per share ("Common Stock") (b) Section B.4(d)(i)(C)(2) shall be amended such that the reference to "stock option plan" shall be replaced with "stock option plans (including the Director's Compensation Plan)" (c) The first sentence of Section E.1(a) of Article FOURTH shall be replaced with the following: Subject to Section E.2(a) of this Article IV, the Board shall consist of seven (7) members. (d) The fifth sentence of Section E.1(a) of Article FOURTH shall be replaced with the following: The holders of the Series A Preferred Stock and the Series B Preferred Stock and the Common Stock, voting together as a class, shall be entitled to elect, three (3) members of the Board at each meeting or pursuant to each consent of the Corporation's stockholders for the election of directors. (e) Section E.4(d)(iii) of Article FOURTH shall be amended such that the reference to "1996 Incentive and Non-Qualified Stock Option Plan" shall be replaced with "1996 Incentive and Non-Qualified Stock Option Plan or the Corporation's Directors' Compensation Plan" SECOND: That the stockholders of the Corporation duly consented in writing to the aforesaid amendment in accordance with the provisions of Section 228 of the DGCL. THIRD: That the amendment was duly adopted in accordance with the provisions of Section 242 of the DGCL. IN WITNESS WHEREOF, Bluestone Software, Inc. has caused this Certificate to be signed by Kevin Kilroy, its President and Chief Executive Officer, this 15th day of June, 1999. BLUESTONE SOFTWARE, INC. /s/ Kevin Kilroy ----------------------------- Kevin Kilroy President and Chief Executive Officer -2- Exhibit 3.1 BLUESTONE SOFTWARE, INC. THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION MAY 24, 1999 BLUESTONE SOFTWARE, INC. THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION Bluestone Software, Inc., a Delaware corporation (the "Corporation"), does hereby certify that: FIRST: The present name of the Corporation is "Bluestone Software, Inc.," which is the name under which the Corporation was originally incorporated. The date of filing of the original Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware was March 13, 1997. SECOND: This Third Amended and Restated Certificate of Incorporation (this "Certificate") amends and restates in its entirety the present Second Amended and Restated Certificate of Incorporation of the Corporation, as amended. This Certificate has been duly adopted and approved by the board of directors of the Corporation and the stockholders of the Corporation in accordance with the provisions of Section 141(f), 228 and 242 of the General Corporation Law of the State of Delaware. THIRD: This Certificate shall become effective immediately upon its filing with the Secretary of State of the State of Delaware. FOURTH: Upon the filing with the Secretary of State of the State of Delaware of this Certificate, the Second Amended and Restated Certificate of Incorporation of the Corporation, as amended, shall be amended and restated in its entirety to read as set forth in Exhibit "A" hereto. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be executed by a duly authorized officer this 24th day of May, 1999. BLUESTONE SOFTWARE, INC. By: /s/ S. Craig Huke ------------------------------------- S. Craig Huke, Sr. Vice President Exhibit A BLUESTONE SOFTWARE, INC. THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION ARTICLE I NAME. The name of the corporation is Bluestone Software, Inc. (the "Corporation"). ARTICLE II REGISTERED OFFICE AND AGENT. The address of the registered office of the Corporation in the State of Delaware is 1201 Market Street, Suite 1600, Wilmington, DE 19801. The name of its registered agent at such address is PHS Corporate Services, Inc. ARTICLE III PURPOSE. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV AUTHORIZED CAPITAL STOCK. The Corporation shall have the authority to issue an aggregate 76,800,187 shares of capital stock which shall be divided into 53,300,000 shares of Common Stock, par value $.001 per share ("Common Stock"), as more fully described in Section A of this Article IV below, 5,526,316 shares of Series A Convertible Preferred Stock, par value $.001 per share, as more fully described in Section B of this Article IV below (the "Series A Preferred Stock"), 8,782,695 shares of Series B Convertible Preferred Stock, par value $.001 per share, as more fully described in Section C of this Article IV below (the "Series B Preferred Stock"), and 9,191,176 shares of Series C Convertible Preferred Stock, par value $.001 per share, as more fully described in Section D of this Article IV below (the "Series C Preferred Stock"), (collectively, with the Series A Preferred Stock and the Series B Preferred Stock, the "Preferred Stock"). A. COMMON STOCK. 1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior right as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors of the Corporation (the "Board"), out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board. 2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding up of the Corporation, subject to the preferential rights of the outstanding shares of Preferred Stock, the holders of shares of Common Stock and Series B Preferred Stock shall be entitled to receive the remaining assets and funds of the Corporation available for distribution to its stockholders ratably in proportion to the number of shares of Common Stock held by such stockholders and into which their shares of Series B Preferred Stock are convertible as of the date fixed for the determination of the amounts available for distribution. 3. REDEMPTION. The Common Stock is not redeemable. 4. VOTING RIGHTS. Subject to Section E of this Article IV and except otherwise provided by law or in this Third Amended and Restated Certificate of Incorporation, the holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any stockholders' meeting in accordance with the bylaws of the Corporation (the "Bylaws"), and shall be entitled to vote upon such matters and in such manner as may be provided by law. B. SERIES A PREFERRED STOCK. The Series A Preferred Stock shall have the preferences, powers, qualifications, limitations and restrictions applicable thereto as follows: 1. DIVIDENDS. (a) Subject to the prior rights of holders of the Series C Preferred Stock, the holders of the Series A Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation at the rate of $.057 per share per annum for the Series A Preferred Stock, commencing on the date of issuance of such share of Series A Preferred Stock (the "Series A Original Issue Date"), payable when and as declared by the Board. Such dividends shall accrue on each share from the Series A Original Issue Date of such share, and shall accrue thereafter from day to day, whether or not earned or declared. Such dividends shall be cumulative so that, if all or any portion of such dividends in respect of any previous or current annual dividend period, at the annual rate specified above, shall not have been paid, then the deficiency shall first be fully paid before any dividend or other distribution shall be paid on or declared and set apart for the Common Stock. No dividend or distribution in cash, shares of stock or other property on the Series B Preferred Stock shall be declared or paid or set apart for payment unless, at the same time, a dividend or distribution is declared or paid or set apart, as the case may be, on the Series A Preferred Stock payable on the same date, in an amount which bears the same proportion to the amount of such dividend or distribution on the Series B Preferred Stock as the amount of the annual cash dividend on the Series A Preferred Stock specified in the first sentence of this Section B.1(a) bears to the annual cash dividend on the Series B Preferred Stock specified in the first sentence of Section C.1(a), and any cash dividend or distribution so paid to the holders of Series A Preferred Stock shall be credited against the cash dividend otherwise payable under the first sentence of this Section B.1(a). The payment of any dividend on the Series A Preferred Stock may be waived or delayed, in whole or in part, upon the affirmative vote or written consent of the holders of at least 75% of the then outstanding shares of Series A Preferred Stock. Any accumulation of dividends on the Series A Preferred Stock shall not bear interest. Upon conversion of the Series A Preferred Stock into shares of Common Stock in accordance with Section B.4: (i) the Corporation shall pay to the holders of shares of 2 Series A Preferred Stock so converted all accumulated and unpaid dividends (whether or not declared) with respect to such shares of Series A Preferred Stock to the extent assets are legally available therefor; or (ii) at the election of the holder of Series A Preferred Stock so converted, and subject to the approval of the holders of at least a majority of the then outstanding shares of Common Stock, such holder shall have the right to exchange any and all accumulated and unpaid dividends (whether or not declared) with respect to such shares of Series A Preferred Stock for shares of Common Stock at the then fair market value as determined in good faith by the unanimous vote of the Board or, if the Board is unable to unanimously agree on the fair market value, by an independent appraiser selected by the unanimous vote of the Board. Any accumulated dividends (whether or not declared) on the Series A Preferred Stock that become payable but were not paid because assets were not legally available therefor shall be paid promptly as assets become legally available therefor, and any partial payment shall be made pro rata among the holders of such shares. (b) In addition to the dividends set forth in Section B.1(a), in the event that the Corporation shall declare a non-cash dividend or distribution upon its Common Stock, including, without limitation, any distribution of capital stock (other than Common Stock) of the Corporation, stock or other securities of other persons, evidences of indebtedness issued by the Corporation or other persons, other assets or options or rights (excluding options to purchase and rights to subscribe for Common Stock or other securities of the Corporation convertible into or exchangeable for Common Stock), the holders of Series A Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock into which their shares of Series A Preferred Stock are convertible as of the date fixed for the determination of the holders of Common Stock entitled to receive such distribution. (c) Subject to the prior rights of the Series C Preferred Stock, in the event that it is determined that the holders of shares of the Series A Preferred Stock are subject to the payment of federal or state income tax with respect to any accrued but unpaid dividends (whether or not declared) or otherwise prior to the payment of any dividends, then the Corporation shall pay to such holders, out of funds legally available therefor, dividends in an amount equal to such tax determined at the highest marginal rate then in effect. The amount of any dividends actually paid from time to time pursuant to this Section B.1(c) shall reduce the amount of accumulated but unpaid dividends under Section B.1(a). 2. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) In the event of any liquidation, dissolution, or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment or provision for the payment of the debts and other liabilities of the Corporation, and subject to the preferential rights of the outstanding shares of Series C Preferred Stock and Series B Preferred Stock, the holders of Series A Preferred Stock shall be entitled to receive the amount of $.95 per share (the "Series A Original Issue Price") (as adjusted for any stock dividends, combinations or splits with respect to such shares), plus an amount equal to all accrued but unpaid dividends, without interest, before any payment or distribution of the assets and funds of the Corporation shall be made to or set apart pursuant to paragraph (b) below; provided, however, that if after the payment or provision for the payment of the debts and other liabilities of the Corporation, and after the payment to the holders of Series C Preferred Stock and Series B Preferred Stock of the amounts set forth in Section D.2(a) and Section C.2(a), respectively, the assets and funds of the Corporation shall be insufficient to pay in full the preferential amounts to which the holders of Series A Preferred Stock are entitled under this Section B.2(a), then: (i) the entire remaining assets and funds of the Corporation shall 3 be distributed ratably to the holders of Series A Preferred Stock in proportion to the full amounts to which they are entitled under this Section B.2(a); and (ii) the holders of Common Stock and Series B Preferred Stock shall in no event be entitled to participate in the distribution of such assets and funds pursuant to paragraph (b) below. (b) After the payment to the holders of Series C Preferred Stock of the amounts set forth in Section D.2(a) and the holders of Series B Preferred Stock of the amounts set forth in Section C.2(a) and the holders of Series A Preferred Stock of the amounts set forth in Sections B.2(a), the holders of Series B Preferred Stock and Common Stock shall be entitled to receive the remaining property, securities or other consideration available for distribution to its stockholders ratably in proportion to the number of shares of Common Stock held by such stockholders or into which their shares of Series B Preferred Stock are convertible as of the date fixed for the determination of the amounts available for distribution. (c) For purposes of this Section B.2, any transaction which is described in Section C.2(d) or Section D.2(d) (but only if so determined by the holders of not less than 75% of the outstanding shares of either the Series B Preferred Stock or the Series C Preferred Stock pursuant to such respective sections) shall be treated as a liquidation, dissolution or winding up of the Corporation and shall entitle the holders of Series A Preferred Stock and Common Stock to receive at the closing in cash, securities or other property the amounts specified in Section B.2(a). (d) Whenever the distribution provided for in this Section B.2 shall be payable in securities or property other than cash, the value of such distribution shall be the fair market value of such securities or other property as determined in good faith by the unanimous vote of the Board or, if the Board is unable to unanimously agree on the fair market value, by an independent appraiser selected by the unanimous vote of the Board. 3. REDEMPTION. (a) The Corporation shall redeem, from any source of funds legally available therefor, the Series A Preferred Stock in three annual installments, beginning on April 18, 2003 and thereafter on April 18, 2004 and on April 18, 2005 (each a "Series A Redemption Date"), whereupon the remaining shares of Series A Preferred Stock outstanding shall be redeemed; provided that no shares of Series A Preferred Stock shall be redeemed pursuant to this Section B.3(a) unless and until all outstanding shares of Series B Preferred Stock and Series C Preferred Stock have been redeemed and all payments of the Series B Redemption Price and the Series C Redemption Price (as defined herein) in respect of the Series B Preferred Stock and the Series C Preferred Stock, respectively, have been made. The Corporation shall redeem the Series A Preferred Stock on the applicable Series A Redemption Dates by paying in cash in exchange for shares of the Series A Preferred Stock to be redeemed on such Series A Redemption Date an amount equal to $.95 per share of Series A Preferred Stock (as adjusted for any stock dividends, combinations or splits with respect to such shares) plus all accumulated but unpaid dividends (whether or not declared) on such share (as to a Series A Redemption Date, the "Series A Redemption Price"). The number of shares of Series A Preferred Stock that the Corporation shall be required under this Section B.3(a) to redeem on any one Series A Redemption Date shall be equal to the amount determined by dividing (i) the aggregate number of shares of Series A Preferred Stock outstanding immediately prior to the Series A Redemption Date, by (ii) the number of remaining Series A Redemption Dates (including the Series A Redemption Date to which such calculation applies). The 4 redemption of the Series A Preferred Stock required by this Section B.3(a) may be waived or delayed, in whole or in part, upon the affirmative vote or written consent of the holders of at least 75% of the outstanding shares of Series A Preferred Stock. (b) As used herein and in Section B.3(c) below, the term "Series A Redemption Date" shall refer to each "Series A Redemption Date." At least thirty (30) but no more than sixty (60) days prior to each Series A Redemption Date, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series A Preferred Stock to be redeemed, at the address last shown on the records of the Corporation for such holder, notifying such holder of the redemption to be effected, specifying: the number of shares to be redeemed from such holder; the Series A Redemption Date; the Series A Redemption Price; the place at which payment may be obtained; and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, such holder's certificate or certificates representing the shares to be redeemed (the "Series A Redemption Notice"). Except as provided in Section B.3(c), on or after the Series A Redemption Date, each holder of Series A Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated by the Corporation, and thereupon the Series A Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (c) From and after the Series A Redemption Date, unless there shall have been a default in payment of the Series A Redemption Price, all rights of the holders of shares of Series A Preferred Stock designated for redemption in the Series A Redemption Notice (except the right to receive the Series A Redemption Price of such shares without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Series A Preferred Stock on any Series A Redemption Date are insufficient to redeem the total number of shares to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed based upon the number of shares of Series A Preferred held by each such holder. The shares of the Series A Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided in this Certificate of Incorporation. At any time thereafter when additional funds of the Corporation are legally available for the redemption of shares of the Series A Preferred Stock, such funds will immediately be used to redeem the balance of the shares that the Corporation has become obliged to redeem on any Series A Redemption Date but which the Corporation has not redeemed. 4. CONVERSION. The holders of the Series A Preferred Stock shall have conversion rights as follows (the "Series A Conversion Rights"): (a) RIGHT TO CONVERT. Subject to Section B.4(b) hereof, each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the Series A Original Issue Date of such share and prior to the close of business on the day prior to the Series A Redemption Date, if any, as may have been fixed in any Series A Redemption Notice with respect to such share of Series A Preferred Stock, at the office of the Corporation or any transfer agent for such stock, 5 into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Series A Original Issue Price by the Series A Conversion Price, determined as hereafter provided, in effect on the date the certificate with respect to such share of Series A Preferred Stock is surrendered for conversion. The initial Series A Conversion Price per share for shares of Series A Preferred Stock shall be the Series A Original Issue Price; provided, however, that the Series A Conversion Price for the Series A Preferred Stock shall be subject to adjustment as set forth in this Section B.4. The Series A Conversion Price as of May 25, 1999 is $.95 per share. (b) AUTOMATIC CONVERSION. Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock at the Series A Conversion Price at the time in effect for such Series A Preferred Stock, upon the earlier of (i) the date specified by the affirmative vote or written consent of holders of at least 75% of the then outstanding shares of Series A Preferred Stock, or (ii) immediately upon the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), the gross public offering price of which is at least 150% of the Series C Conversion Price, at the time in effect, per share and $20,000,000 in the aggregate (a "Qualified Public Offering") (except as provided below in Section B.4(c)). (c) MECHANICS OF CONVERSION. Before any holder of Series A Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for such stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such share of Common Stock as of such date. If the conversion is in connection with an underwritten public offering of securities pursuant to the Securities Act, the conversion may, at the option of any holder tendering shares of Series A Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Series A Preferred Stock shall not be deemed to have converted such Series A Preferred Stock until immediately prior to the closing of such sale of securities. (d) ADJUSTMENTS TO THE SERIES A CONVERSION PRICE FOR CERTAIN DILUTIVE ISSUES. (i) SPECIAL DEFINITIONS. For purposes of this Section B.4(d), Section C.4(d) and Section D.4(d), the following definitions apply: (A) "Options" shall mean rights, options, or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities (defined below). 6 (B) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than Common Stock and Preferred Stock) or other securities convertible into or exchangeable for Common Stock. (C) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section B.4(d)(iii), C.4(d)(ii), or D.4(d)(ii) deemed to be issued) by the Corporation after the Series A Original Issue Date for the initial shares of Series A Preferred Stock or the Series B Original Issue Date for the initial shares of Series B Preferred Stock or the Series C Original Issue Date for the initial shares of Series C Preferred Stock, as the case may be, other than shares of Common Stock issued or issuable: (1) upon conversion of shares of Preferred Stock; (2) to officers, directors, employees or consultants of the Corporation pursuant to stock options granted pursuant to the Corporation's stock option plan on terms approved by the Board, but not exceeding 6,297,354 shares of Common Stock (or such greater number approved by the Board) (net of any repurchases of such shares or cancellations or expirations of options), subject to adjustment for all subdivisions and combinations; (3) as a dividend or distribution on Preferred Stock; (4) for which adjustment of the Series A Conversion Price, the Series B Conversion Price or the Series C Conversion Price is made pursuant to Section B.4(e), C.4(e) or D.4(e); (5) upon the conversion of the convertible term note held by Mark Baiada in the principal amount of $500,000, subject to adjustment for all subdivisions and combinations; (6) to Silicon Valley Bank pursuant to a warrant granted to it but not exceeding 31,250 shares of Common Stock, subject to adjustment for all subdivisions and combinations; or (7) upon exercise or conversion of warrants and convertible subordinated secured notes to be issued to investors under the Convertible Subordinated Secured Note and Warrant Purchase Agreement by and among the Corporation and the investors listed therein, or Common Stock issued or issuable upon the conversion of the Series B Preferred Stock or the Series C Preferred Stock or other convertible securities received by the investors upon conversion of the convertible subordinated secured notes. (ii) NO ADJUSTMENT OF THE SERIES A CONVERSION PRICE. Any provision herein to the contrary notwithstanding, no adjustment in the Series A Conversion Price shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share (determined pursuant to Section B.4(d)(v) hereof) for the Additional Shares of Common Stock issued or deemed to be issued by the Corporation is less than the Series A Conversion Price in effect on the date of, and immediately prior to, such issue. 7 (iii) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation at any time or from time to time after the Series A Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities then entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein designed to protect against dilution) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, upon the conversion or exercise of such Convertible Securities and Options therefor, and the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, or in case such a record date shall have been fixed, as of the close of business on such record date, provided that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustments in the Series A Conversion Price for the Series A Preferred Stock shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or decrease or increase in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Series A Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities (provided, however, that no such adjustment of the Series A Conversion Price shall affect Common Stock previously issued upon conversion of any shares of the Series A Preferred Stock); (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Series A Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (1) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were the shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange; and (2) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued 8 at the time of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation (determined pursuant to Section B.4(d)(iii)) upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Series A Conversion Price to an amount which exceeds the lower of (a) the Series A Conversion Price on the original adjustment date, or (b) the Series A Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (E) in the case of any Options which expire by their terms not more than 30 days after the date of issue thereof, no adjustment of the Series A Conversion Price shall be made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the same manner provided in clause (C) above. (iv) ADJUSTMENT OF THE SERIES A CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation, at any time after the Series A Original Issue Date, shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section B.4(d)(iii)) without consideration or for a consideration per share less than the Series A Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, the Series A Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series A Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series A Conversion Price in effect immediately prior to such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued. For the purpose of the above calculation, the number of shares of Common Stock outstanding immediately prior to such issue shall be calculated on a fully as-converted basis, as if all shares of Series A Preferred Stock and all Convertible Securities had been fully converted into shares of Common Stock immediately prior to such issuance and any outstanding warrants, options or other rights for the purchase of shares of stock or convertible securities had been fully exercised immediately prior to such issuance (and the resulting securities fully converted into shares of Common Stock if so convertible) as of such date, but not including in such calculation any additional shares of Common Stock issuable with respect to shares of Series A Preferred Stock, Convertible Securities, or outstanding options, warrants or other rights for the purchase of shares of stock or convertible securities, solely as a result of the adjustment of the Series A Conversion Price for the Series A Preferred Stock (or other conversion ratios) resulting from the issuance of the Additional Shares of Common Stock causing the adjustment in question. (v) DETERMINATION OF CONSIDERATION. For purposes of this Section B.4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) CASH AND PROPERTY. Such consideration shall: 9 (1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends; (2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board; and (3) in the event Additional Shares of Common Stock are issued together with the other shares or securities or other assets of the Corporation for consideration which covers both types of securities, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, with respect to the Additional Shares of Common Stock as determined in good faith by the Board. (B) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section B.4(d)(iii), relating to Options and Convertible Securities shall be determined by dividing: (1) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein designed to protect against dilution) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein designed to protect against the dilution) issuable upon the exercise of such Options or conversion or exchange of such Convertible Securities. (e) ADJUSTMENTS TO CONVERSION PRICES FOR STOCK DIVIDENDS AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that the Corporation at any time or from time to time after the Series A Original Issue Date shall declare or pay, without consideration, any dividend on the Common Stock payable in Common Stock or in any right to acquire Common Stock for no consideration, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock), or in the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then the Series A Conversion Price for the Series A Preferred Stock in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate. In the event that this Corporation shall declare or pay, without consideration, any dividend on the Common Stock payable in any right to acquire Common Stock for no consideration, then the Corporation shall be deemed to have made a dividend payable in 10 Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire Common Stock. (f) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If the Common Stock issuable upon conversion of the Series A Preferred Stock shall be changed into the same or a different number of shares of any other class of classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for in Section B.4(e) or a merger or other reorganization referred to in Section B.2(c)), the Conversion Price for the Series A Preferred Stock then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted so that the Series A Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Series A Preferred Stock immediately before that change. (g) NO IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section B.4 and in the taking of all such action as may be necessary or appropriate in order to protect the Series A Conversion Rights against impairment. (h) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of any Series A Conversion Price pursuant to this Section B.4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock a certificate executed by the Corporation's President or Chief Financial Officer setting forth such adjustment or readjustment. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Series A Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Series A Preferred Stock. (i) NOTICES OF RECORD DATE. In the event that the Corporation shall propose at any time: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or (iv) to merge or consolidate with or into any other corporation, or sell, lease or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; then, in connection with each such event, the Corporation shall send to the holders of Series A Preferred Stock, unless waived in writing by each such holder: (1) at least twenty (20) days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and 11 specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (iii) and (iv) above; and (2) in the case of the matters referred to in (iii) and (iv) above, at least twenty (20) days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event). (j) ISSUE TAXES. The Corporation shall pay any and all issue and other transfer taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of the Series A Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion. (k) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Third Amended and Restated Certificate of Incorporation. (l) FRACTIONAL SHARES. No fractional share shall be issued upon the conversion of any share or shares of Series A Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series A Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board). (m) NOTICES. Any notice required by the provisions of this Section B.4 to be given to the holders of shares of Series A Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, or if sent by facsimile or delivered personally by hand or nationally recognized courier and addressed to each holder of record at such holder's address or facsimile number appearing in the records of the Corporation. 5. VOTING RIGHTS. (a) Subject to Sections B.5(b) and E of this Article IV, the holders of each share of Series A Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series A Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common 12 Stock (except as otherwise expressly provided herein or as required by law), and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote, together with the holders of Common Stock and Series B Preferred Stock and Series C Preferred Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares of Common Stock into which shares of Series A Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). (b) Notwithstanding the foregoing, so long as any shares of Series A Preferred Stock shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of at least 75% of the then outstanding shares of Series A Preferred Stock: (i) alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock; (ii) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series A Preferred Stock or issue, or obligate itself to issue, shares of Series A Preferred Stock; or (iii) authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity security, senior to or on parity with the Series A Preferred Stock with respect to voting rights, dividend rights, redemption rights or liquidation preferences. 6. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any shares of Series A Preferred Stock shall be redeemed or converted pursuant to Section B.3 or Section B.4 hereof or otherwise purchased or acquired by the Corporation, the shares so converted, redeemed, purchased or otherwise acquired shall be canceled and shall not be issuable by the Corporation. The Third Amended and Restated Certificate of Incorporation of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. C. SERIES B PREFERRED STOCK. The Series B Preferred Stock shall have the preferences, powers, qualifications, limitations and restrictions applicable thereto as follows: 1. DIVIDENDS. (a) Subject to the prior rights of holders of the Series C Preferred Stock, the holders of Series B Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation at the rate of $.078 per share per annum for the Series B Preferred Stock, commencing on the date of issuance of such share of Series B Preferred Stock (the "Series B Original Issue Date"), payable when and as declared by the Board. Such dividends shall accrue on each share from the Series B Original Issue Date of such share, and shall accrue thereafter from day to day, whether 13 or not earned or declared. Such dividends shall be cumulative so that, if all or any portion of such dividends in respect of any previous or current annual dividend period, at the annual rate specified above, shall not have been paid, then the deficiency shall first be fully paid before any dividend or other distribution shall be paid on or declared and set apart for the Common Stock. No dividend or distribution in cash, shares of stock or other property on the Series A Preferred Stock (other than in respect of dividends for periods prior to the Series B Original Issue Date) shall be declared or paid or set apart for payment unless, at the same time, a dividend or distribution is declared or paid or set apart, as the case may be, on the Series B Preferred Stock payable on the same date, in an amount which bears the same proportion to the amount of such dividend or distribution on the Series A Preferred Stock as the amount of the annual cash dividend on the Series A Preferred Stock specified in the first sentence of Section B.1(a) bears to the annual cash dividend on the Series B Preferred Stock specified in the first sentence of this Section C.1(a), and any cash dividend or distribution so paid to the holders of Series B Preferred Stock shall be credited against the cash dividend otherwise payable under the first sentence of this Section C.1(a). The payment of any dividend on the Series B Preferred Stock may be waived or delayed, in whole or in part, upon the affirmative vote or written consent of the holders of at least 75% of the then outstanding shares of Series B Preferred Stock. Any accumulation of dividends on the Series B Preferred Stock shall not bear interest. Upon conversion of the Series B Preferred Stock into shares of Common Stock in accordance with Section C.4: (i) the Corporation shall pay to the holders of shares of Series B Preferred Stock so converted all accumulated and unpaid dividends (whether or not declared) with respect to such shares of Series B Preferred Stock to the extent assets are legally available therefor; or (ii) at the election of the holder of the Series B Preferred Stock so converted, and subject to the approval of the holders of at least a majority of the then outstanding shares of Common Stock, such holder shall have the right to exchange any and all accumulated and unpaid dividends (whether or not declared) with respect to such shares of Series B Preferred Stock for shares of Common Stock at the then fair market value as determined in good faith by the unanimous vote of the Board or, if the Board is unable to unanimously agree on the fair market value, by an independent appraiser selected by the unanimous vote of the Board. Any accumulated dividends (whether or not declared) on the Series B Preferred Stock that become payable but were not paid because assets were not legally available therefor shall be paid promptly as assets become legally available therefor, and any partial payment shall be made pro rata among the holders of such shares. (b) In addition to the dividends set forth in Section C.1(a), in the event that the Corporation shall declare a non-cash dividend or distribution upon its Common Stock including, without limitation, any distribution of capital stock (other than Common Stock) of the Corporation, stock or other securities of other persons, evidences of indebtedness issued by the Corporation or other persons, other assets or options or rights (excluding options to purchase and rights to subscribe for Common Stock or other securities of the Corporation convertible into or exchangeable for Common Stock), the holders of Series B Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock into which their shares of Series B Preferred Stock are convertible as of the date fixed for the determination of the holders of Common Stock entitled to receive such distribution. (c) Subject to the prior rights of the Series C Preferred Stock, in the event that it is determined that the holders of shares of Series B Preferred Stock are subject to the payment of federal or state income tax with respect to any accrued but unpaid dividends (whether or not declared) or otherwise prior to the payment of any dividends, then the Corporation shall pay to such holders, out of funds legally available therefor, dividends in an amount equal to such tax determined at the highest 14 marginal rate then in effect. The amount of any dividends actually paid from time to time pursuant to this Section C.1(c) shall reduce the amount of accumulated but unpaid dividends under Section C.1(a). 2. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) In the event of any liquidation, dissolution, or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment or provision for the payment of the debts and other liabilities of the Corporation, and subject to the preferential rights of the outstanding shares of Series C Preferred Stock, the holders of Series B Preferred Stock shall be entitled to receive the amount of $1.296 per share (the "Series B Original Issue Price") (as adjusted for any stock dividends, combinations or splits with respect to such shares), plus interest thereon accruing daily and compounding annually at 8.5% per annum [prime rate as of the closing date], plus an amount equal to all accrued but unpaid dividends, without interest, before any payment or distribution of the assets and funds of the Corporation shall be made to or set apart for the holders of any other capital stock in respect of their shares of such class or series of stock (except payments to satisfy the preferential amounts due to the Series C Preferred Stock); provided, however, that if after the payment or provision for the payment of the debts and other liabilities of the Corporation and the payments to satisfy the preferential amounts due to the Series C Preferred Stock, the assets and funds of the Corporation shall be insufficient to pay in full the preferential amounts to which the holders of Series B Preferred Stock are entitled under this Section C.2(a), then: (i) the entire remaining assets and funds of the Corporation shall be distributed ratably to the holders of Series B Preferred Stock in proportion to the full amounts to which they are entitled under this Section C.2(a); and (ii) the holders of the Series A Preferred Stock and the Common Stock shall in no event be entitled to participate in the distribution of such assets and funds in respect of their Series A Preferred Stock or Common Stock, as the case may be. (b) After the payment to the holders of Series C Preferred Stock of the amounts set forth in Section D.2(a) and the holders of Series B Preferred Stock of the amounts set forth in Section C.2(a), the holders of Series A Preferred Stock shall be paid the amounts set forth in Section B.2(a) and then the holders of Series B Preferred Stock and the Common Stock shall be entitled to receive the remaining assets and funds of the Corporation available for distribution to its stockholders ratably in proportion to the number of shares of Common Stock held by such stockholders or into which their shares of Series B Preferred Stock are convertible as of the date fixed for the determination of the amounts available for distribution. (c) Notwithstanding the provisions of Sections C.2(a) and C.2(b) above, if the total value of property, securities or other consideration to be distributed and/or received per share of Common Stock (assuming the conversion of all shares of Series A Preferred Stock and Series B Preferred Stock into Common Stock) pursuant to Sections C.2(a) and C.2(b) is equal to or greater than $2.60 per share (as adjusted for any stock dividends, combinations or splits with respect to such shares), then the holders of Series A Preferred Stock and Series B Preferred Stock and Common Stock will receive such property, securities or other consideration ratably in proportion to the number of shares of Common Stock held by such stockholders or into which their shares of Series A Preferred Stock and Series B Preferred Stock are convertible as of the date fixed for the determination of the amounts available for distribution. (d) For purposes of this Section C.2, at the sole discretion of the holders of not less than 75% of the outstanding shares of Series B Preferred Stock: (i) any acquisition of the 15 Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation, but excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation) in which all or substantially all of the outstanding shares of the Corporation are exchanged for securities or other consideration issued by the acquiring entity or its subsidiary; (ii) the acquisition by any person or group of persons of "beneficial ownership" within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended, of 75% or more of the ordinary voting power of the outstanding shares of capital stock of the Corporation; or (iii) any sale of all or substantially all of the assets of the Corporation, shall be treated as a liquidation, dissolution or winding up and shall entitle the holders of the Series C Preferred Stock, the Series B Preferred Stock, the Series A Preferred Stock and the Common Stock to receive at the closing, in cash, securities or other property the amounts specified in Sections A.2, B.2(a), B.2(b), C.2(a), C.2(b), C.2(c) and D.2(a). (e) Whenever the distribution provided for in this Section C.2 shall be payable in securities or property other than cash, the value of such distribution shall be the fair market value of such securities or other property as determined in good faith by the unanimous vote of the Board or, if the Board is unable to unanimously agree on the fair market value, by an independent appraiser selected by the unanimous vote of the Board. 3. REDEMPTION. (a) Subject to the preferential rights of the outstanding shares of Series C Preferred Stock, the Corporation shall redeem, from any source of funds legally available therefor, the Series B Preferred Stock, in priority and preference over the Series A Preferred Stock, in four semi-annual installments, beginning on October 18, 2001 and thereafter on April 18, 2002, October 18, 2002 and on April 18, 2003 (each a "Series B Redemption Date"), whereupon the remaining shares of Series B Preferred Stock outstanding shall be redeemed. The Corporation shall redeem the Series B Preferred Stock on the applicable Series B Redemption Dates by paying in cash in exchange for shares of the Series B Preferred Stock to be redeemed on such Series B Redemption Date an amount equal to $1.296 per share of Series B Preferred Stock (as adjusted for any stock dividends, combinations or splits with respect to such shares), plus interest thereon accruing daily and compounding annually at 8.5% per annum, plus all accumulated but unpaid dividends (whether or not declared) on such share (as to a Series B Redemption Date, the "Series B Redemption Price"). The number of shares of Series B Preferred Stock that the Corporation shall be required under this Section C.3(a) to redeem on any one Series B Redemption Date shall be equal to the amount determined by dividing (i) the aggregate number of shares of Series B Preferred Stock outstanding immediately prior to the Series B Redemption Date, by (ii) the number of remaining Series B Redemption Dates (including the Series B Redemption Date to which such calculation applies). The redemption of the Series B Preferred Stock required by this Section C.3(a) may be waived or delayed, in whole or in part, upon the affirmative vote or written consent of the holders of at least 75% of the outstanding shares of Series B Preferred Stock. (b) As used herein and in Section C.3(c) below, the term "Series B Redemption Date" shall refer to each "Series B Redemption Date." At least thirty (30) but no more than sixty (60) days prior to each Series B Redemption Date, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series B Preferred Stock to be redeemed, at the address last shown on the records of the Corporation for such holder, notifying such holder of the redemption to be effected, 16 specifying: the number of shares to be redeemed from such holder; the Series B Redemption Date; the Series B Redemption Price; the place at which payment may be obtained; and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, such holder's certificate or certificates representing the shares to be redeemed (the "Series B Redemption Notice"). Except as provided in Section C.3(c), on or after the Series B Redemption Date, each holder of Series B Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated by the Corporation, and thereupon the Series B Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (c) From and after the Series B Redemption Date, unless there shall have been a default in payment of the Series B Redemption Price, all rights of the holders of shares of Series B Preferred Stock designated for redemption in the Series B Redemption Notice (except the right to receive the Series B Redemption Price of such shares without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Series B Preferred Stock on any Series B Redemption Date are insufficient to redeem the total number of shares to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed based upon the number of shares of Series B Preferred Stock held by each such holder. The shares of the Series B Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided in this Third Amended and Restated Certificate of Incorporation. Subject to the preferential rights of the Series C Preferred Stock, at any time thereafter when additional funds of the Corporation are legally available for the redemption of shares of the Series B Preferred Stock, such funds will immediately be used to redeem the balance of the shares that the Corporation has become obliged to redeem on any Series B Redemption Date but which the Corporation has not redeemed. 4. CONVERSION. The holders of the Series B Preferred Stock shall have conversion rights as follows (the "Series B Conversion Rights"): (a) RIGHT TO CONVERT. Subject to Section C.4(b) hereof, each share of Series B Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the Series B Original Issue Date of such share and prior to the close of business on the day prior to the Series B Redemption Date, if any, as may have been fixed in any Series B Redemption Notice with respect to such share of Series B Preferred Stock, at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Series B Original Issue Price by the Series B Conversion Price, determined as hereafter provided, in effect on the date the certificate with respect to such share of the Series B Preferred Stock is surrendered for conversion. The initial Series B Conversion Price per share shall be the Series B Original Issue Price; provided, however, that the Series B Conversion Price shall be subject to adjustment as set forth in this Section C.4. The Series B Conversion Price as of May 25, 1999 is $.62 per share. (b) AUTOMATIC CONVERSION. Each share of Series B Preferred Stock shall automatically be converted into shares of Common Stock at the Series B Conversion Price at the time in 17 effect, upon the earlier of (i) the date specified by the affirmative vote or written consent of holders of at least 75% of the then outstanding shares of Series B Preferred Stock, or (ii) immediately upon a Qualified Public Offering of the Corporation's Common Stock (except as provided below in Section C.4(c)). (c) MECHANICS OF CONVERSION. Before any holder of Series B Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for such stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable, thereafter, issue and deliver at such office to such holder of Series B Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series B Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such share of Common Stock as of such date. If the conversion is in connection with a Qualified Public Offering of securities pursuant to the Securities Act, the conversion may, at the option of any holder tendering shares of Series B Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Series B Preferred Stock shall not be deemed to have converted such Series B Preferred Stock until immediately prior to the closing of such sale of securities. (d) ADJUSTMENTS TO CONVERSION PRICE FOR CERTAIN DILUTIVE ISSUES. (i) NO ADJUSTMENT OF THE SERIES B CONVERSION PRICE. Any provision herein to the contrary notwithstanding, no adjustment in the Series B Conversion Price shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share (determined pursuant to Section C.4(d)(iv) hereof) for the Additional Shares of Common Stock issued or deemed to be issued by the Corporation is less than the Series B Conversion Price in effect on the date of, and immediately prior to, such issue. (ii) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation at any time or from time to time after the Series B Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities then entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein designed to protect against dilution) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, upon the conversion or exercise of such Convertible Securities and Options therefor, and the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, or in case such a record date shall have been fixed, as of the close of business on such record date, provided that in any such case in which Additional Shares of Common Stock are deemed to be issued: 18 (A) no further adjustments in the Series B Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or decrease or increase in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Series B Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities (provided, however, that no such adjustment of the Series B Conversion Price shall affect Common Stock previously issued upon conversion of any shares of the Series B Preferred Stock); (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Series B Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (1) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were the shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange; and (2) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation (determined pursuant to Section C.4(d)(iii)) upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Series B Conversion Price to an amount which exceeds the lower of (a) the Series B Conversion Price on the original adjustment date, or (b) the Series B Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (E) in the case of any Options which expire by their terms not more than 30 days after the date of issue thereof, no adjustment of the Series B Conversion Price 19 shall be made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the same manner provided in clause (C) above. (iii) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation, at any time after the Series B Original Issue Date, shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section C.4(d)(ii)) without consideration or for a consideration per share less than the Series B Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, the Series B Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series B Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series B Conversion Price in effect immediately prior to such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued. For the purpose of the above calculation, the number of shares of Common Stock outstanding immediately prior to such issue shall be calculated on a fully as-converted basis, as if all shares of Series B Preferred Stock and all Convertible Securities had been fully converted into shares of Common Stock immediately prior to such issuance and any outstanding warrants, options or other rights for the purchase of shares of stock or convertible securities had been fully exercised immediately prior to such issuance (and the resulting securities fully converted into shares of Common Stock if so convertible) as of such date, but not including in such calculation any additional shares of Common Stock issuable with respect to shares of Series B Preferred Stock, Convertible Securities, or outstanding options, warrants or other rights for the purchase of shares of stock or convertible securities, solely as a result of the adjustment of the Series B Conversion Price (or other conversion ratios) resulting from the issuance of the Additional Shares of Common Stock causing the adjustment in question. (iv) DETERMINATION OF CONSIDERATION. For purposes of this Section C.4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) CASH AND PROPERTY. Such consideration shall: (1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends; (2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board; and (3) in the event Additional Shares of Common Stock are issued together with the other shares or securities or other assets of the Corporation for consideration which covers both types of securities, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, with respect to the Additional Shares of Common Stock as determined in good faith by the Board. 20 (B) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section C.4(d)(ii), relating to Options and Convertible Securities shall be determined by dividing: (1) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein designed to protect against dilution) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein designed to protect against the dilution) issuable upon the exercise of such Options or conversion or exchange of such Convertible Securities. (e) ADJUSTMENTS TO CONVERSION PRICES FOR STOCK DIVIDENDS AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that the Corporation at any time or from time to time after the Series B Original Issue Date shall declare or pay, without consideration, any dividend on the Common Stock payable in Common Stock or in any right to acquire Common Stock for no consideration, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock), or in the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then the Series B Conversion Price in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate. In the event that this Corporation shall declare or pay, without consideration, any dividend on the Common Stock payable in any right to acquire Common Stock for no consideration, then the Corporation shall be deemed to have made a dividend payable in Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire Common Stock. (f) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If the Common Stock issuable upon conversion of the Series B Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for in Section C.4(e) or a merger or other reorganization referred to in Section C.2(d)), the Series B Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted so that the Series B Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Series B Preferred Stock immediately before that change. 21 (g) NO IMPAIRMENT. The Corporation will not, by amendment of its Third Amended and Restated Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section C.4 and in the taking of all such action as may be necessary or appropriate in order to protect the Series B Conversion Rights of the holders of the Series B Preferred Stock against impairment. (h) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of any Series B Conversion Price pursuant to this Section C.4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series B Preferred Stock a certificate executed by the Corporation's President or Chief Financial Officer setting forth such adjustment or readjustment. The Corporation shall, upon the written request at any time of any holder of Series B Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Series B Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Series B Preferred Stock. (i) NOTICES OF RECORD DATE. In the event that the Corporation shall propose at any time: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or (iv) to merge or consolidate with or into any other corporation, or sell, lease or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; then, in connection with each such event, the Corporation shall send to the holders of Series B Preferred Stock, unless waived in writing by each such holder: (1) at least twenty (20) days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (iii) and (iv) above; and (2) in the case of the matters referred to in (iii) and (iv) above, at least twenty (20) days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event). (j) ISSUE TAXES. The Corporation shall pay any and all issue and other transfer taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of the Series B Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion. 22 (k) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series B Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series B Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Third Amended and Restated Certificate of Incorporation. (l) FRACTIONAL SHARES. No fractional share shall be issued upon the conversion of any share or shares of Series B Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series B Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board). (m) NOTICES. Any notice required by the provisions of this Section C.4 to be given to the holders of shares of Series B Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, or if sent by facsimile or delivered personally by hand or nationally recognized courier and addressed to each holder of record at such holder's address or facsimile number appearing in the records of the Corporation. 5. VOTING RIGHTS. (a) Subject to Sections C.5(b) and E of this Article IV, the holders of each share of Series B Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series B Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock (except as otherwise expressly provided herein or as required by law), and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares of Common Stock into which shares of Series B Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). (b) Notwithstanding the foregoing, so long as any shares of Series B Preferred Stock shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of at least 75% of the then outstanding shares of Series B Preferred Stock: 23 (i) alter or change the rights, preferences or privileges of the shares of Series B Preferred Stock; (ii) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series B Preferred Stock or issue, or obligate itself to issue, shares of Preferred Stock; or (iii) authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity security, senior to or on parity with the Series B Preferred Stock with respect to voting rights, dividend rights, redemption rights or liquidation preferences. 6. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any shares of Preferred Stock shall be redeemed or converted pursuant to Section C.3 or Section C.4 hereof or otherwise purchased or acquired by the Corporation, the shares so converted, redeemed, purchased or otherwise acquired shall be canceled and shall not be issuable by the Corporation. The Third Amended and Restated Certificate of Incorporation of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. D. SERIES C PREFERRED STOCK. The Series C Preferred Stock shall have the preferences, powers, qualifications, limitations and restrictions applicable thereto as follows: 1. DIVIDENDS. (a) The holders of Series C Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation at the rate of $.1632 per share per annum for the Series C Preferred Stock, commencing on the date of issuance of such share of Series C Preferred Stock (the "Series C Original Issue Date"), payable when and as declared by the Board. Such dividends shall accrue on each share from the Series C Original Issue Date of such share, and shall accrue thereafter from day to day, whether or not earned or declared. Such dividends shall be cumulative so that, if all or any portion of such dividends in respect of any previous or current annual dividend period, at the annual rate specified above, shall not have been paid, then the deficiency shall first be fully paid before any dividend or other distribution shall be paid on or declared and set apart for the Series B Preferred Stock, the Series A Preferred Stock or the Common Stock. The payment of any dividend on the Series C Preferred Stock may be waived or delayed, in whole or in part, upon the affirmative vote or written consent of the holders of at least 75% of the then outstanding shares of Series C Preferred Stock. Any accumulation of dividends on the Series C Preferred Stock shall not bear interest. Upon conversion of the Series C Preferred Stock into shares of Common Stock in accordance with Section D.4: (i) the Corporation shall pay to the holders of shares of Series C Preferred Stock so converted all accumulated and unpaid dividends (whether or not declared) with respect to such shares of Series C Preferred Stock to the extent assets are legally available therefor; or (ii) at the election of the holder of the Series C Preferred Stock so converted, and subject to the approval of the holders of at least a majority of the then outstanding shares of Common Stock, such holder shall have the right to exchange any and all accumulated and unpaid dividends (whether or not declared) with respect to such shares of Series C 24 Preferred Stock for shares of Common Stock at the then fair market value as determined in good faith by the unanimous vote of the Board or, if the Board is unable to unanimously agree on the fair market value, by an independent appraiser selected by the unanimous vote of the Board. Any accumulated dividends (whether or not declared) on the Series C Preferred Stock that become payable but were not paid because assets were not legally available therefor shall be paid promptly as assets become legally available therefor, and any partial payment shall be made pro rata among the holders of such shares. (b) In addition to the dividends set forth in Section D.1(a), in the event that the Corporation shall declare a non-cash dividend or distribution upon its Common Stock including, without limitation, any distribution of capital stock (other than Common Stock) of the Corporation, stock or other securities of other persons, evidences of indebtedness issued by the Corporation or other persons, other assets or options or rights (excluding options to purchase and rights to subscribe for Common Stock or other securities of the Corporation convertible into or exchangeable for Common Stock), the holders of Series C Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock into which their shares of Series C Preferred Stock are convertible as of the date fixed for the determination of the holders of Common Stock entitled to receive such distribution. (c) In the event that it is determined that the holders of shares of Series C Preferred Stock are subject to the payment of federal or state income tax with respect to any accrued but unpaid dividends (whether or not declared) or otherwise prior to the payment of any dividends, then the Corporation shall pay to such holders, out of funds legally available therefor, dividends in an amount equal to such tax determined at the highest marginal rate then in effect. The amount of any dividends actually paid from time to time pursuant to this Section D.1(c) shall reduce the amount of accumulated but unpaid dividends under Section D.1(a). 2. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) In the event of any liquidation, dissolution, or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment or provision for the payment of the debts and other liabilities of the Corporation, the holders of Series C Preferred Stock shall be entitled to receive the amount of $2.72 per share (the "Series C Original Issue Price") (as adjusted for any stock dividends, combinations or splits with respect to such shares), plus interest thereon accruing daily and compounding annually at 8.5% per annum, plus an amount equal to all accrued but unpaid dividends, without interest, before any payment or distribution of the assets and funds of the Corporation shall be made to or set apart for the holders of any other capital stock in respect of their shares of such class or series of stock; provided, however, that if after the payment or provision for the payment of the debts and other liabilities of the Corporation, the assets and funds of the Corporation shall be insufficient to pay in full the preferential amounts to which the holders of Series C Preferred Stock are entitled under this Section D.2(a), then: (i) the entire remaining assets and funds of the Corporation shall be distributed ratably to the holders of Series C Preferred Stock in proportion to the full amounts to which they are entitled under this Section D.2(a); and (ii) the holders of the Series A Preferred Stock, the Series B Preferred Stock and the Common Stock shall in no event be entitled to participate in the distribution of such assets and funds in respect of their Series A Preferred Stock, Series B Preferred Stock or Common Stock, as the case may be. 25 (b) For purposes of this Section C.2, at the sole discretion of the holders of not less than 75% of the outstanding shares of Series C Preferred Stock: (i) any acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation, but excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation) in which all or substantially all of the outstanding shares of the Corporation are exchanged for securities or other consideration issued by the acquiring entity or its subsidiary; (ii) the acquisition by any person or group of persons of "beneficial ownership" within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended, of 75% or more of the ordinary voting power of the outstanding shares of capital stock of the Corporation; or (iii) any sale of all or substantially all of the assets of the Corporation, shall be treated as a liquidation, dissolution or winding up and shall entitle the holders of Series C Preferred Stock, Series A Preferred Stock, Series B Preferred Stock and Common Stock to receive at the closing, in cash, securities or other property the amounts specified in Sections A.2, B.2(a) and B.2(b), C.2(a), and C.2(b), and D.2(a). (c) Whenever the distribution provided for in this Section D.2 shall be payable in securities or property other than cash, the value of such distribution shall be the fair market value of such securities or other property as determined in good faith by the unanimous vote of the Board or, if the Board is unable to unanimously agree on the fair market value, by an independent appraiser selected by the unanimous vote of the Board. 3. REDEMPTION. (a) The Corporation shall redeem, from any source of funds legally available therefor, the Series C Preferred Stock, in priority and preference over the Series B Preferred Stock and the Series A Preferred Stock, in four semi-annual installments, beginning on October 18, 2001 and thereafter on April 18, 2002, October 18, 2002 and on April 18, 2003 (each a "Series C Redemption Date"), whereupon the remaining shares of Series C Preferred Stock outstanding shall be redeemed. The Corporation shall redeem the Series C Preferred Stock on the applicable Series C Redemption Dates by paying in cash in exchange for shares of the Series C Preferred Stock to be redeemed on such Series C Redemption Date an amount equal to $2.72 per share of Series C Preferred Stock (as adjusted for any stock dividends, combinations or splits with respect to such shares), plus interest thereon accruing daily and compounding annually at 8.5% per annum, plus all accumulated but unpaid dividends (whether or not declared) on such share (as to a Series C Redemption Date, the "Series C Redemption Price"). The number of shares of Series C Preferred Stock that the Corporation shall be required under this Section D.3(a) to redeem on any one Series C Redemption Date shall be equal to the amount determined by dividing (i) the aggregate number of shares of Series C Preferred Stock outstanding immediately prior to the Series C Redemption Date, by (ii) the number of remaining Series C Redemption Dates (including the Series C Redemption Date to which such calculation applies). The redemption of the Series C Preferred Stock required by this Section D.3(a) may be waived or delayed, in whole or in part, upon the affirmative vote or written consent of the holders of at least 75% of the then outstanding shares of Series C Preferred Stock. (b) As used herein and in Section D.3(c) below, the term "Series C Redemption Date" shall refer to each "Series C Redemption Date." At least thirty (30) but no more than sixty (60) days prior to each Series C Redemption Date, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series C Preferred Stock to be redeemed, at the address last shown on the 26 records of the Corporation for such holder, notifying such holder of the redemption to be effected, specifying: the number of shares to be redeemed from such holder; the Series C Redemption Date; the Series C Redemption Price, the place at which payment may be obtained; and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, such holder's certificate or certificates representing the shares to be redeemed (the "Series C Redemption Notice"). Except as provided in Section D.3(c), on or after the Series C Redemption Date, each holder of Series C Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated by the Corporation, and thereupon the Series C Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (c) From and after the Series C Redemption Date, unless there shall have been a default in payment of the Series C Redemption Price, all rights of the holders of shares of Series C Preferred Stock designated for redemption in the Series C Redemption Notice (except the right to receive the Series C Redemption Price of such shares without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Series C Preferred Stock on any Series C Redemption Date are insufficient to redeem the total number of shares to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed based upon the number of shares of Series C Preferred Stock held by each such holder. The shares of the Series C Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided in this Third Amended and Restated Certificate of Incorporation. At any time thereafter when additional funds of the Corporation are legally available for the redemption of shares of the Series C Preferred Stock, such funds will immediately be used to redeem the balance of the shares that the Corporation has become obliged to redeem on any Series C Redemption Date but which the Corporation has not redeemed. 4. CONVERSION. The holders of the Series C Preferred Stock shall have conversion rights as follows (the "Series C Conversion Rights"): (a) RIGHT TO CONVERT. Subject to Section D.4(b) hereof, each share of Series C Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the Series C Original Issue Date of such share and prior to the close of business on the day prior to the Series C Redemption Date, if any, as may have been fixed in any Series C Redemption Notice with respect to such share of Series C Preferred Stock, at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Series C Original Issue Price by the Series C Conversion Price, determined as hereafter provided, in effect on the date the certificate with respect to such share of Series C Preferred Stock is surrendered for conversion. The initial Series C Conversion Price per share shall be the Series C Original Issue Price; provided, however, that the Series C Conversion Price shall be subject to adjustment as set forth in this Section D.4. (b) AUTOMATIC CONVERSION. Each share of Series C Preferred Stock shall automatically be converted into shares of Common Stock at the Series C Conversion Price at the time in 27 effect, upon the earlier of (i) the date specified by the affirmative vote or written consent of holders of a majority of the then outstanding shares of Series C Preferred Stock, or (ii) immediately upon a Qualified Public Offering of the Corporation's Common Stock (except as provided below in Section D.4(c)). (c) MECHANICS OF CONVERSION. Before any holder of Series C Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for such stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable, thereafter, issue and deliver at such office to such holder of Series C Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series C Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such share of Common Stock as of such date. If the conversion is in connection with a Qualified Public Offering, the conversion may, at the option of any holder tendering shares of Series C Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Series C Preferred Stock shall not be deemed to have converted such Series C Preferred Stock until immediately prior to the closing of such sale of securities. (d) ADJUSTMENTS TO CONVERSION PRICE FOR CERTAIN DILUTIVE ISSUES. (i) NO ADJUSTMENT OF SERIES C CONVERSION PRICE. Any provision herein to the contrary notwithstanding, no adjustment in the Series C Conversion Price shall be made in respect of: (i) any future issuance of Options (or upon the issuance of Common Stock upon the exercise of such Options) to employees of the Corporation so long as the exercise price of such Options equals or exceeds the fair market value per share of Common Stock on the date of grant as determined in good faith by the Board; or (ii) the issuance of Additional Shares of Common Stock unless the consideration per share (determined pursuant to Section D.4(d)(iv) hereof) for the Additional Shares of Common Stock issued or deemed to be issued by the Corporation is less than the Series C Conversion Price in effect on the date of, and immediately prior to, such issue. (ii) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation at any time or from time to time after the Series C Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities then entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein designed to protect against dilution) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, upon the conversion or exercise of such Convertible Securities and Options therefor, and the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, or in case such a record date shall have been fixed, as of the close of business on such record date, provided that in any such case in which Additional Shares of Common Stock are deemed to be issued: 28 (A) no further adjustments in the Series C Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or decrease or increase in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Series C Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities (provided, however, that no such adjustment of the Series C Conversion Price shall affect Common Stock previously issued upon conversion of any shares of the Series C Preferred Stock); (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Series C Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (1) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were the shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange; and (2) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation (determined pursuant to Section D.4(d)(iii)) upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Series C Conversion Price to an amount which exceeds the lower of (a) the Series C Conversion Price on the original adjustment date, or (b) the Series C Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (E) in the case of any Options which expire by their terms not more than 30 days after the date of issue thereof, no adjustment of the Series C Conversion Price 29 shall be made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the same manner provided in clause (C) above. (iii) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. Except for Series C Preferred Stock held by persons that exercise fully their rights of first offer pursuant to Section E.4 (each, a "Fully-Exercising Holder") in connection with the issuance of Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section D.4(2)(ii)), in the event the Corporation, at any time after the Series C Original Issue Date, shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section D.4(d)(ii)) without consideration or for a consideration per share less than the Series C Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, the Series C Conversion Price of all shares of Series C Preferred Stock (except those shares held by Fully-Exercising Holders) shall be reduced concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series C Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series C Conversion Price in effect immediately prior to such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued. For the purpose of the above calculation, the number of shares of Common Stock outstanding immediately prior to such issue shall be calculated on a fully as-converted basis, as if all shares of Series C Preferred Stock and all Convertible Securities had been fully converted into shares of Common Stock immediately prior to such issuance and any outstanding warrants, options or other rights for the purchase of shares of stock or convertible securities had been fully exercised immediately prior to such issuance (and the resulting securities fully converted into shares of Common Stock if so convertible) as of such date, but not including in such calculation any additional shares of Common Stock issuable with respect to shares of Series C Preferred Stock, Convertible Securities, or outstanding options, warrants or other rights for the purchase of shares of stock or convertible securities, solely as a result of the adjustment of the Series C Conversion Price (or other conversion ratios) resulting from the issuance of the Additional Shares of Common Stock causing the adjustment in question. The Series C Conversion Price for shares of Series C Preferred Stock held by Fully-Exercising Holders shall be adjusted concurrently with such issue to become the per share price of the Additional Shares of Common Stock issued. (iv) DETERMINATION OF CONSIDERATION. For purposes of this Section D.4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) CASH AND PROPERTY. Such consideration shall: (1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends; (2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board; and 30 (3) in the event Additional Shares of Common Stock are issued together with the other shares or securities or other assets of the Corporation for consideration which covers both types of securities, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, with respect to the Additional Shares of Common Stock as determined in good faith by the Board. (B) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section D.4(d)(ii), relating to Options and Convertible Securities shall be determined by dividing: (1) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein designed to protect against dilution) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein designed to protect against the dilution) issuable upon the exercise of such Options or conversion or exchange of such Convertible Securities. (e) ADJUSTMENTS TO CONVERSION PRICES FOR STOCK DIVIDENDS AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that the Corporation at any time or from time to time after the Series C Original Issue Date shall declare or pay, without consideration, any dividend on the Common Stock payable in Common Stock or in any right to acquire Common Stock for no consideration, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock), or in the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then the Series C Conversion Price in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate. In the event that this Corporation shall declare or pay, without consideration, any dividend on the Common Stock payable in any right to acquire Common Stock for no consideration, then the Corporation shall be deemed to have made a dividend payable in Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire Common Stock. (f) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If the Common Stock issuable upon conversion of the Series C Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for in Section D.4(e) or a merger or other reorganization referred to in Section D.2(b)), the Series C Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be 31 proportionately adjusted so that the Series C Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Series C Preferred Stock immediately before that change. (g) NO IMPAIRMENT. The Corporation will not, by amendment of its Second Amended and Restated Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section D.4 and in the taking of all such action as may be necessary or appropriate in order to protect the Series C Conversion Rights of the holders of the Series C Preferred Stock against impairment. (h) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of any Series C Conversion Price pursuant to this Section D.4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series C Preferred Stock a certificate executed by the Corporation's President or Chief Financial Officer setting forth such adjustment or readjustment. The Corporation shall, upon the written request at any time of any holder of Series C Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Series C Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Series C Preferred Stock. (i) NOTICES OF RECORD DATE. In the event that the Corporation shall propose at any time: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or (iv) to merge or consolidate with or into any other corporation, or sell, lease or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; then, in connection with each such event, the Corporation shall send to the holders of Series C Preferred Stock, unless waived in writing by each such holder: (1) at least twenty (20) days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (iii) and (iv) above; and (2) in the case of the matters referred to in (iii) and (iv) above, at least twenty (20) days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event). 32 (j) ISSUE TAXES. The Corporation shall pay any and all issue and other transfer taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of Series C Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion. (k) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series C Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series C Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series C Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Third Amended and Restated Certificate of Incorporation. (l) FRACTIONAL SHARES. No fractional share shall be issued upon the conversion of any share or shares of Series C Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series C Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board). (m) NOTICES. Any notice required by the provisions of this Section D.4 to be given to the holders of shares of Series C Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, or if sent by facsimile or delivered personally by hand or nationally recognized courier and addressed to each holder of record at such holder's address or facsimile number appearing in the records of the Corporation. 5. VOTING RIGHTS. (a) Subject to Section D.5(b), the holders of each share of Series C Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series C Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock (except as otherwise expressly provided herein or as required by law), and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote, together with the holders of Common Stock and the Series A Preferred Stock and Series B Preferred Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares of Common Stock into which shares of Series C Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). 33 (b) Notwithstanding the foregoing, so long as 20% or more of the shares of Series C Preferred Stock shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of at least a majority of the then outstanding shares of Series C Preferred Stock: (i) authorize or issue any class or series of equity security having equal or superior rights as to payment upon liquidation, dissolution or a winding up of the Corporation; (ii) redeem or repurchase any outstanding capital stock except for any stock held by any employee, officer, director, consultant or affiliate that is subject to repurchase rights (or rights of first refusal) in favor of the Corporation; (iii) enter into any agreement that would restrict the Corporation's ability to perform under the Preferred Stock Purchase Agreement entered into in connection with the offer and sale of the Series C Preferred Stock by the Corporation; (iv) amend this Third Amended and Restated Certificate of Incorporation or the Corporation's By-Laws in any way, or file a certificate of designation, that would adversely affect the rights and preferences of the holders of the Series C Preferred Stock as a class (except that the Corporation may complete a reverse split of its Common Stock without the consent of the holders of the Series C Preferred Stock); (v) authorize or effect the payment of dividends or other distributions on any capital stock of the Corporation; or (vi) if the total consideration per share received by the holders of the Series C Preferred Stock, directly or in liquidation or distributions, less the value of all previous dividends and distributions, is less than 150% of the Series C Conversion Price, at the time in effect: (A) sell, license or otherwise dispose of all, or substantially all, of the assets or business of the Corporation or authorize any winding up or liquidation of the Corporation, or (B) execute any transaction such as a sale, merger, or other change of control transaction. 6. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any shares of Preferred Stock shall be redeemed or converted pursuant to Section D.3 or Section D.4 hereof or otherwise purchased or acquired by the Corporation, the shares so converted, redeemed, purchased or otherwise acquired shall be canceled and shall not be issuable by the Corporation. The Third Amended and Restated Certificate of Incorporation of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. E. CERTAIN VOTING RIGHTS; DIRECTORS; RIGHT OF FIRST OFFER. 1. BOARD OF DIRECTORS. 34 (a) Subject to Section E.2(a) of this Article IV, the Board shall consist of six (6) members. For so long as General Electric Capital Corporation ("GE Capital") holds shares of the Corporation's capital stock, GE Capital shall be entitled to elect one (1) member of the Board at each meeting or pursuant to each consent of the Corporation's stockholders for the election of directors. The holders of Series A Preferred Stock, as a class, shall be entitled to elect two (2) members of the Board at each meeting or pursuant to each consent of the Corporation's stockholders for the election of directors. The holders of the Common Stock, as a class, shall be entitled to elect one (1) member of the Board at each meeting or pursuant to each consent of the Corporation's stockholders for the election of directors. The holders of the Series A Preferred Stock and the Series B Preferred Stock and the Common Stock, voting together as a class, shall be entitled to elect, two (2) members of the Board at each meeting or pursuant to each consent of the Corporation's stockholders for the election of directors. In addition, for so long as each of Patricof & Co. Ventures (which term refers to the group of funds that include APA Excelsior IV, L.P., Coutts & Co. (Cayman) Ltd., Cust. for APA Excelsior IV/Offshore, L.P., The P/A Fund, L.P. and Patricof Private Investment Club, L.P.) and GE Capital holds shares of the Corporation's capital stock, Patricof & Co. Ventures and GE Capital shall each be entitled to have one observer selected by Patricof & Co. Ventures or GE Capital, as the case may be, present at all meetings (whether in person, by telephone or video conference) of the Board and such observers shall have the same access to information concerning the business and operations of the Corporation and at the same time as directors of the Corporation and shall be entitled to participate in discussions and consult with the Board at each such meeting, without voting. (b) In the case of any vacancy in the office of a director occurring among the directors elected by GE Capital or the holders of the Series A Preferred Stock or Common Stock pursuant to the second, third and fourth sentences of Section D.1(a) hereof, the remaining director so elected by the holders of the Series A Preferred Stock, in the case of a vacancy in the office of a director elected by the holders of the Series A Preferred Stock, or if there is no such director remaining, the holders of the Series A Preferred Stock by the affirmative vote of the holders of a majority of such shares, or, in the case of a vacancy in the office of a director elected by GE Capital or by the holders of the Common Stock, GE Capital or the holders of the Common Stock by the affirmative vote of the holders of a majority of such shares, as the case may be, may elect a successor or successors to hold the office for the unexpired term of the director or directors whose place or places shall be vacant. Any director who shall have been elected by the holders of the Series A Preferred Stock or Common Stock or GE Capital or any director so elected as provided in the preceding sentence hereof, may be removed during the aforesaid term of office, whether with or without cause, only by the affirmative vote of the holders of a majority of the Series A Preferred Stock, or Common Stock or by GE Capital, as the case may be. 2. DEFAULT RIGHTS. (a) So long as any shares of Series A Preferred Stock or Series B Preferred Stock remain outstanding, in the event that the Corporation (i) materially breaches its representations or warranties in (1) the Stock Purchase Agreement, dated April 22, 1998, between the Corporation and certain purchasers of the Series B Preferred Stock, or (2) the Stock Purchase Agreement, dated April 18, 1997, between the Corporation and certain purchasers of the Series A Preferred Stock, or (ii) materially breaches or fails to perform its agreements in the Second Restated Investors' Rights Agreement, dated May 25, 1999, between the Corporation and certain purchasers of the Preferred Stock, or (iii) fails to pay any dividends required to be paid in respect of any shares of Series A Preferred Stock or Series B 35 Preferred Stock or to redeem any shares of Series A Preferred Stock or Series B Preferred Stock required to be redeemed under this Article IV ("Events of Default"), then the holders of the Series A Preferred Stock and the Series B Preferred Stock shall (immediately upon the giving of written notice to the Corporation by the holders of at least 75% of the then outstanding shares of Series A Preferred Stock and Series B Preferred Stock) be entitled to elect a majority of the members of the Board of the Corporation, and the holders of the Common Stock shall be entitled to elect the remaining members of the Board. Whenever such right shall become operative, (i) the Corporation shall increase the number of directors comprising the Board to such number or, alternatively, procure the removal or resignation of such number of incumbent directors, as may be necessary to allow the holders of the Series A Preferred Stock and the Series B Preferred Stock to exercise such right, and (ii) the Corporation shall take any and all such further actions as may be necessary to allow the holders of the Series A Preferred Stock and the Series B Preferred Stock to exercise such right. If, after the election of a new Board pursuant to this Section E.2(a), all Events of Default are cured, then the holders of the Series A Preferred Stock and the Series B Preferred Stock shall be divested of the special voting rights specified in this Section E.2(a). The special voting rights of this Section E.2(a) shall again accrue to the holders of the Series A Preferred Stock and the Series B Preferred Stock in case of any later occurrence of an Event of Default. Upon the termination of any such special voting rights as provided in this Section E.2(a), the Board shall promptly call a special meeting of the stockholders at which all directors will be elected, and the terms of office of all persons who are then directors of the Corporation shall terminate immediately upon the election of their successors. (b) Whenever under the provisions of Section E.2(a) hereof, the right shall have accrued to the holders of the Series A Preferred Stock and the Series B Preferred Stock to vote to elect a majority of the Corporation's directors, the Board shall, within ten (10) days after delivery to the Corporation at its principal office of a request to such effect by the holders of at least 75% of the then outstanding shares of Series A Preferred Stock and Series B Preferred Stock, call a special meeting of stockholders for the election of directors, to be held upon not less than ten (10) nor more than twenty (20) days' notice to such holders. If such notice of meeting is not given within the ten (10) days required above, the holders of the Series A Preferred Stock and the Series B Preferred Stock requesting such meeting may also call such meeting and for such purposes shall have access to the stock books and records of the Corporation. At any meeting so called or at any other meeting held while the holders of shares of Series A Preferred Stock and Series B Preferred Stock shall have the voting power provided in Section E.2(a), the holders of a majority of the shares of Series A Preferred Stock and Series B Preferred Stock present in person or by proxy or voting by written consent, shall be sufficient to constitute a quorum for the election of directors as herein provided. In the case of any vacancy in the office of a director occurring among the directors elected by the holders of the Series A Preferred Stock and the Series B Preferred Stock pursuant to Section E.2(a), the remaining directors so elected by such stockholders may, by the affirmative vote of a majority thereof (or the remaining director so elected if there be but one), elect a successor or successors to hold office for the unexpired term of the director or directors whose place or places shall be vacant, provided that if there are no remaining directors so elected by such stockholders, the vacancies may be filled by the affirmative vote of the holders of at least 75% of the shares of Series A Preferred Stock and Series B Preferred Stock then outstanding given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders. Any directors who shall have been elected by the holders of the Series A Preferred Stock and the Series B Preferred Stock or by any directors so elected as provided in the immediately preceding sentence may be removed during their term of office, either with or without cause, by, and only by, the affirmative vote of the holders of at least 75% of the shares of Series A Preferred Stock and Series B 36 Preferred Stock then outstanding, given either at a special meeting of such stockholders duly called for that purpose, or pursuant to a written consent of stockholders, and any vacancy thereby created may be filled by the holders of the Series A Preferred Stock and the Series B Preferred Stock represented at such meeting or pursuant to such written consent. 3. RESTRICTIONS AND LIMITATIONS. So long as any shares of Series A Preferred Stock or Series B Preferred Stock shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of at least 75% of the then outstanding shares of Series A Preferred Stock and Series B Preferred Stock (voting as one class on a fully-diluted basis): (i) sell, convey, lease, transfer or otherwise dispose of or encumber all or substantially all of its assets or business or merge with or into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation or to effectuate a reincorporation for the purpose of changing domicile) or effect any transaction or series of related transactions in which more than twenty percent (20%) of the voting power of the Corporation is disposed of; (ii) amend the Corporation's Certificate of Incorporation or the Bylaws; (iii) declare or pay any dividend or distribution of cash, shares or other assets or funds of the Corporation; (iv) repurchase, redeem or otherwise acquire for value (or pay into or set aside for a sinking fund for such purpose) any shares of Series A Preferred Stock or Series B Preferred Stock except pursuant to the redemption provisions in Section B.3 or C.3 hereof or pursuant to the conversion provisions in Section B.4 or C.4 hereof; (v) repurchase, redeem or otherwise acquire for value (or pay into or set aside for a sinking fund for such purpose) any shares of Common Stock except pursuant to the repurchase provisions contained in the Second Restated Right of First Refusal and Co-Sale Agreement or pursuant to the Corporation's stock option plan on terms approved by the Board; (vi) permit any subsidiary to issue or sell, or obligate itself to issue or sell, except to the Corporation or any wholly-owned subsidiary, any stock of such subsidiary; or (vii) increase the number of shares of Common Stock available for option grants under the Corporation's stock option plan. 4. RIGHT OF FIRST OFFER. Subject to the terms and conditions specified in this Section E.4, the Corporation hereby grants to each holder of Preferred Stock (a "Holder") a right of first offer with respect to future sales by the Corporation of its Shares (as hereinafter defined). Each time the Corporation proposes to offer any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock ("SHARES"), the Corporation shall first make an offering of such Shares to each Holder in accordance with the following provisions: 37 (a) The Corporation shall deliver a notice by certified mail ("NOTICE") to the Holders stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Shares. (b) Within twenty (20) calendar days after receipt of the Notice, the Holder may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that number of shares of Common Stock issuable or issued (i) upon conversion of the Series A Preferred Stock, the Series B Preferred Stock or the Series C Preferred Stock issued or issuable by the Corporation or (ii) upon exercise of the warrants to purchase shares of the Corporation's Common Stock issued pursuant to the Convertible Subordinated Secured Note and Warrant Purchase Agreement, dated as of January 21, 1999, by and between the Corporation and the investors signatory thereto or (iii) as a result of a dividend or distribution or stock split or reclassification of the Series A Preferred Stock, the Series B Preferred Stock or the Series C Preferred Stock or the Common Stock issued or issuable upon conversion thereof ("Registrable Securities") issued and held by such Holder bears to the total number of shares of Common Stock of the Corporation then outstanding (assuming full conversion and exercise of all convertible or exercisable securities). The Corporation shall promptly in writing, inform each Fully-Exercising Holder (i.e, a Holder that purchases all of the shares available to it) of any other Holder's failure to do likewise. During the ten-day period commencing after receipt of such information, each Fully-Exercising Holder shall be entitled to obtain that portion of the Shares for which the Holders were entitled to subscribe but that were not subscribed for by the Holders that is equal to the proportion that the number of shares of the Registrable Securities then held by such Fully-Exercising Holder bears to the total number of shares of the Registrable Securities issued and held by all Fully-Exercising Holders who wish to purchase some of the unsubscribed shares. (c) If all Shares that the Holders are entitled to obtain pursuant to Section E.4(b) are not elected to be obtained as provided in Section E.4(b) hereof, the Corporation may, during the 30-day period following the expiration of the period provided in Section E.4(b) hereof, offer the remaining unsubscribed portion of such Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice. If the Corporation does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within thirty (30) days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Holders in accordance herewith. (d) The right of first offer in this Section E.4 shall not be applicable (i) to the issuance or sale of 700,000 shares of Common Stock upon conversion of the convertible term note held by Mark Baiada in the principal amount of $500,000, or (ii) to the issuance or sale of shares of Common Stock upon exercise of the outstanding options of the Corporation to be issued to Bob Bickel on or after April 18, 1997 in the amount of 300,000, or (iii) to the issuance or grant of options (and the issuance and sale of Common Stock upon exercise of such options) to employees of the Corporation pursuant to the Corporation's Amended and Restated 1996 Incentive and Non-Qualified Stock Option Plan or any successor plan so long as such issuance has been approved by the Board of Directors of the Corporation, or (iv) the issuance of Series A Preferred Stock or Series B Preferred Stock and the issuance of Common Stock on conversion or exercise thereof, or (v) the issuance of Common Stock as a stock dividend to holders of Common Stock upon any subdivision or combination of shares of Common Stock, or (vi) shares of Common Stock issued in connection with a Qualified Public Offering, or (vii) the 38 issuance of securities pursuant to the conversion or exercise of convertible securities, or (viii) the issuance of securities in connection with a bona fide business acquisition of or by the Corporation, whether by merger, reincorporation, consolidation, sale of assets, sale or exchange of stock or otherwise so long as such issuance has been approved by at least a majority of the Registrable Securities then outstanding, or (ix) the issuance of stock, warrants or other securities or rights to persons or entities with which the Corporation has business relationships, provided such issuances have been approved by the Corporation's Board and are for other than primarily equity financing purposes and provided that at the time of any such issuance, the aggregate of such issuance and similar issuances in the preceding twelve month period do not exceed two percent (2%) of the then outstanding Common Stock of the Corporation (assuming full conversion and exercise of all convertible securities). (e) The right of first offer set forth in this Section E.4 may not be assigned or transferred, except that (i) such right is assignable, in whole or in part, by each Holder to any wholly owned subsidiary, parent or partner of, or to any corporation, person or entity that is, within the meaning of the Act, controlling, controlled by or under common control with, any such Holder, and (ii) such right is assignable, in whole or in part, between and among any of the Holders, and (iii) such right is assignable, in whole or in part, by the Holder to the ancestors, descendants, siblings or spouse of the Holder or to trusts for the benefit of such persons, provided any such assignee shall agree, in writing, to be bound by and comply with all the provisions of this Certificate, the Second Restated First Refusal and Co-Sale Agreement by and among the Corporation and certain stockholders dated May 25, 1999 and the Restated Voting Agreement by and among the Corporation and certain stockholders dated April 23, 1998 as if any such shares purchased by the Holder had been purchased by the assign. 39 ARTICLE V BYLAWS. In furtherance and not in limitation of the powers conferred by statute, the Board shall have the power, subject to the provisions of Sections B.5, C.5, D.5 and E of Article IV, to adopt, amend, repeal or otherwise alter the Bylaws of the Corporation without any action on the part of the stockholders; provided, however, that the grant of such power to the Board shall not divest the stockholders of nor limit their power, subject to the provisions of Sections B.5, C.5, D.5 and E of Article IV, to adopt, amend, repeal or otherwise alter the Bylaws. ARTICLE VI ELECTION OF DIRECTORS. Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. ARTICLE VII AMENDMENT AND REPEAL. The Corporation reserves the right to adopt, repeal, rescind or amend in any respect any provisions contained in this Certificate of Incorporation in the manner now or hereafter prescribed by applicable law, and all rights conferred on stockholders herein are granted subject to this reservation. ARTICLE VIII DIRECTOR LIABILITY. A director of the Corporation shall, to the full extent permitted by the Delaware General Corporation Law as it now exists or as it may hereafter be amended, not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Neither any amendment nor repeal of this Article VIII, nor the adoption of any provisions of this Certificate of Incorporation inconsistent with this Article VIII, shall eliminate or reduce the effect of this Article VIII in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article VIII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. * * * * * * 40 EX-3.2 4 EX-3.2 Exhibit 3.2 BY-LAWS OF BLUESTONE SOFTWARE INC. 1. OFFICES: 1.1. The Corporation may have an office or offices at such places as the Board of Directors may from time to time designate. 2. MEETING OF STOCKHOLDERS: 2.1. The annual meeting of stockholders for the election of directors shall be held at such time and date as may be fixed by the Board of Directors. 2.2. Special meetings of the stockholders may be called at any time by the president and shall be called by the president or secretary on the request in writing or by vote of a majority of the directors or at the request in writing of stockholders of record owning a majority in amount of the capital stock outstanding and entitled to vote. 2.3. All meetings of the stockholders shall be held at such place or places, within or without the State of Delaware, as may from time to time be fixed by the Board of Directors or as shall be specified and fixed in the respective notices or waiver of notice thereof. 3. DIRECTORS: 3.1. The property and business of the Corporation shall be managed by or under the direction of its Board of Directors, consisting of one or more directors, as determined from time to time by resolution of the Board of Directors. 3.2. The directors shall hold office until the next annual election and until their successor is elected and qualified. Directors shall be elected by the stockholders, except that vacancies in the Board by reason of death, resignation or otherwise and newly created directorships may be filled for the unexpired term by the remaining directors, though less than a quorum, by a majority vote. 4. POWER OF DIRECTORS: 4.1. The Board of Directors shall have such general and specific powers as are conferred upon corporations by the General Corporation Law of the State of Delaware, as amended from time to time, subject only to the provisions of the statutes, Certificate of Incorporation, and these By-Laws, which may restrict or deny such powers. 5. MEETING OF DIRECTORS: 5.1. After each annual election of directors, the newly elected directors may meet for the purpose of organization, the election of officers, and the transaction of other business, at such place and time as shall be fixed by the stockholders at the annual meeting, and if a majority of the directors be present at such place and time, no prior notice of such meeting shall be required to be given to the directors. The place and time of such meeting may also be fixed by written consent of the directors. Regular meetings of the directors may be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors. 5.2. Special meetings of the directors may be called by the president on five (5) days notice in writing or on two (2) days notice by telephone to each director and shall be called by the president in like manner on the written request of two directors. 5.3. Special meetings of the directors may be held within or without the State of Delaware at such place as is indicated in the notice or waiver of notice thereof. 5.4. A majority of the directors shall constitute a quorum, but a smaller number may adjourn from time to time, without further notice, until a quorum is secured. 6. EXECUTIVE AND OTHER COMMITTEES: 6.1. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board, designate an executive committee and one or more other committees each to consist of two or more of the directors of the Corporation. 6.2. The executive committee shall not have authority to make, alter or amend the By-Laws, but shall exercise all other powers of the Board of Directors between the meetings of said Board, except the power to fill vacancies in their own membership, which vacancies shall be filled by the Board of Directors. 6.3. The executive committee and such other committees shall meet at stated times or on notice to all by any of their own number. They shall fix their own rules of procedure. A majority shall constitute a quorum, but the affirmative vote of a majority of the whole committee shall be necessary in every case. 6.4. Such other committees shall have and may exercise the powers of the Board of Directors to the extent as provided in such resolution or resolutions. 2 7. OFFICERS OF THE CORPORATION: 7.1. The officers of the Corporation may be a president, one or more vice-presidents, secretary, treasurer, and such other officers as may from time to time be chosen by the Board of Directors. 7.2. The officers of the Corporation shall hold office until their successors are chosen and qualify in their stead. Any officer chosen or appointed by the Board of Directors may be removed either with or without cause at any time by the affirmative vote of a majority of the whole Board of Directors. If the office of any officer or officers becomes vacant for any reason, the vacancy shall be filled by the affirmative vote of a majority of the whole Board of Directors. 8. DUTIES OF THE PRESIDENT: 8.1. The President shall be the chief executive officer of the Corporation. It shall be his duty to preside at all meetings of the stockholders; to have general and active management of the business and the Corporation; to see that all orders and resolutions of the Board of Directors are carried into effect; to execute all contracts, agreements, deeds, bonds, mortgages and other obligations and instruments, in the name of the Corporation, and to affix the corporate seal thereto when authorized by the Board of Directors or the executive committee. 8.2. He shall have the general supervision and direction of the other officers of the Corporation and shall see that their duties are properly performed. 8.3. He shall be ex-officio a member of all standing committees and shall have the general duties and powers of supervision and management usually vested in the office of the President of a Corporation. 9. VICE PRESIDENT: 9.1. The Vice-Presidents, in the order designated by the Board of Directors, shall be vested with all powers and required to perform all the duties of the President in his absence or disability and shall perform such other duties as may be prescribed by the Board of Directors. 10. PRESIDENT PRO TEM: 10.1. In the absence or disability of the President and the Vice-President, the Board may appoint from their own number a president pro tem. 11. SECRETARY: 11.1. The Secretary shall attend all meetings of the Corporation, the Board of Directors, the executive committee and standing committees. He shall act as clerk thereof and shall 3 record all of the proceedings of such meetings in a book kept for that purpose. He shall give proper notice of meetings of stockholders and directors and shall perform such other duties as shall be assigned to him by the President or the Board of Directors. 12. TREASURER: 12.1. The Treasurer shall have custody of the funds and securities of the Corporation and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. 12.2. He shall disburse the funds of the Corporation as may be ordered by the Board, executive committee or President, taking proper vouchers for such disbursements, and shall render to the President and directors, whenever they may require it, an account of all his transactions as treasurer, and of the financial condition of the Corporation, and at the regular meeting of the Board next preceding the annual stockholders' meeting, a like report for the preceding year. 12.3. He shall keep an account of stock registered and transferred in such manner and subject to such regulations as the Board of Directors may prescribe. 12.4. He shall give the Corporation a bond, if required by the Board of Directors, in such sum and in form and with security satisfactory to the Board of Directors for the faithful performance of the duties of his office and the restoration to the Corporation, in case of his death, resignation or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession, belonging to the Corporation. He shall perform such other duties as the Board of Directors or executive committee may from time to time prescribe or require. 13. DUTIES OF OFFICERS MAY BE DELEGATED: 13.1. In case of the absence or disability of any officer of the Corporation or for any other reason deemed sufficient by a majority of the Board, the Board of Directors may delegate his powers or duties to any other officer or to any director for the time being. 14. CERTIFICATES OF STOCK: 14.1. Certificates of stock shall be signed by the President or a Vice-President and either the treasurer, assistant treasurer, secretary or assistant secretary. If a certificate of stock be lost or destroyed, another may be issued in its stead upon proof of loss or destruction and the giving of a satisfactory bond of indemnity in an amount sufficient to indemnify the Corporation against any claim. A new certificate may be issued without requiring bond when, in the judgment of the directors, it is proper to do so. 4 15. TRANSFER OF STOCK: 15.1. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction on its books. 16. STOCKHOLDERS OF RECORD: 16.1. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Delaware. 17. FISCAL YEAR: 17.1. The fiscal year of the Corporation shall be determined by the Board of Directors. 18. DIVIDENDS: 18.1. Dividends upon the capital stock may be declared by the Board of Directors at any regular or special meeting and may be paid in cash or property or in shares of the capital stock. The directors may set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purposes and may alter or abolish any such reserve or reserves. 19. CHECKS FOR MONEY: 19.1. All checks, drafts or orders for the payment of money shall be signed by the treasurer or by such other officer or officers as the Board of Directors may from time to time designate. No check shall be signed in blank. 20. BOOKS AND RECORDS: 20.1. The books, records and accounts of the Corporation except as otherwise required by the laws of the State of Delaware, may be kept within or without the State of Delaware, at such place or places as may from time to time be designated by the By-Laws or by resolution of the directors. 5 21. NOTICES: 21.1. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by facsimile transmission. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice is received, if hand delivered, or dispatched, if delivered through the mails or by facsimile transmission, shall be the time of the giving of the notice. 21.2. A written waiver of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. 22. AMENDMENT: 22.1. These By-Laws may be amended, altered, repealed or added to at any regular meeting of the stockholders or Board of Directors or at any special meeting called for that purpose, by affirmative vote of a majority of the stock issued and outstanding and entitled to vote or of a majority of the whole board of directors, as the case may be. 23. INDEMNIFICATION: 23.1. Right to Indemnification: Each person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("Proceeding"), including without limitation Proceedings by or in the right of the Corporation to procure a judgment in its favor, by reason of the fact that he or she or a person for whom he or she is the legal representative is or was a director or officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director or officer, employee or agent of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such Proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment) against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or 6 to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. Such right shall be a contract right and shall include the right to be paid by the corporation for expenses incurred in defending any such Proceeding in advance of its final disposition; provided, however, that the payment of such expenses incurred by a director or officer of the corporation in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of such Proceeding, shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this section or otherwise. 23.2. Right of Claimant to Bring Suit: If a claim under Section 1 is not paid in full by the corporation within ninety (90) days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the General Corporation Law of the State of Delaware for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant had not met the applicable standard of conduct. 23.3. Non-Exclusivity of Rights: The rights conferred by Sections 1 and 2 shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. 23.4. Insurance: The corporation may maintain insurance, at its expense, to protect itself and any such director, officer, employee or agent of the corporation or another corporation, partnership, joint 7 venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. DATED: March 13, 1997 8 EX-10.1 5 EXHIBIT 10.1 Exhibit 10.1 BLUESTONE SOFTWARE, INC. 1996 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN AS AMENDED AND RESTATED EFFECTIVE MARCH 11, 1999 TABLE OF CONTENTS
Page ---- Section 1. Name and Purposes................................................................................... 1 Section 2. Definitions......................................................................................... 1 Section 3. Administration...................................................................................... 5 Section 4. Eligibility......................................................................................... 7 Section 5. Stock Subject to the Plan........................................................................... 7 Section 6. Terms and Conditions of Options..................................................................... 8 Section 7. Fair Market Value of Common Stock................................................................... 11 Section 8. Adjustments......................................................................................... 12 Section 9. Rights as a Stockholder............................................................................. 12 Section 10. Forfeiture.......................................................................................... 12 Section 11. Time of Granting Options............................................................................ 13 Section 12. Modification, Extension, Renewal of Option.......................................................... 13 Section 13. Transferability..................................................................................... 13 Section 14. Power of Board if Change of Control................................................................. 13 Section 15. Amendment or Termination of the Plan................................................................ 14 Section 16. Application of Funds................................................................................ 14 Section 17. No Obligation to Exercise Option.................................................................... 14 Section 18. Approval of Stockholders............................................................................ 14 Section 19. Conditions Upon Issuance of Shares.................................................................. 15 Section 20. Reservation of Shares............................................................................... 15 Section 21. Other Agreements.................................................................................... 16
Section 22. Taxes, Fees, Expenses and Withholding.............................................................. 16 Section 23. Notices............................................................................................ 16 Section 24. No Enlargement of Employee Rights.................................................................. 17 Section 25. Information to Optionees........................................................................... 17 Section 26. Availability of Plan............................................................................... 17 Section 27. Invalid Provisions................................................................................. 17 Section 28. Applicable Law..................................................................................... 17 Section 29. Board Action....................................................................................... 18 Section 30. Miscellaneous...................................................................................... 18 INCENTIVE STOCK OPTION AGREEMENT............................................................................ TAB 1 NON-QUALIFIED STOCK OPTION AGREEMENT......................................................................... TAB 2 STOCK PURCHASE AND RESTRICTION AGREEMENT..................................................................... TAB 3
BLUESTONE SOFTWARE, INC. 1996 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN Section 1. NAME AND PURPOSES OF THE PLAN. (a) NAME. The Plan will be known as the Bluestone Software, Inc. 1996 Incentive and Non-Qualified Stock Option Plan. The Plan was formerly known as the Bluestone Consulting, Inc. 1996 Incentive and Non-Qualified Stock Option Plan, but pursuant to a corporate transaction in which Bluestone Consulting, Inc., a New Jersey corporation, merged into Bluestone Software, Inc., a Delaware corporation, Bluestone Software, Inc. became the successor sponsor of the Plan. (b) PURPOSES. The purpose of the Plan is to provide key Employees and Consultants with an opportunity to share in the capital appreciation of the Common Stock of the Company. The Options granted pursuant to the Plan are intended to constitute either Incentive Stock Options or Non-Qualified Stock Options, as determined by the Administrator of the Plan at the time of grant. Section 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "ADMINISTRATOR" shall be the Board or a Committee appointed by the Board pursuant to Section 3 of the Plan, which shall administer the Plan. (b) "AFFILIATE" shall mean, whether now or hereafter existing, a person or entity that directly, or indirectly controls or is controlled by, or is under common control with, the Company, except that when used in connection with an Incentive Stock Option, "Affiliate" shall mean a Subsidiary. (c) "BCI" shall mean Bluestone Consulting, Inc., a Delaware corporation, that was spun off from the Company on April 17, 1997. (d) "BOARD" shall mean the Board of Directors of the Company, as constituted from time to time. (e) "CHANGE OF CONTROL" shall mean the happening of an event (excluding a Public Offering) that shall be deemed to have occurred upon the earliest to occur of the following events: (i) the date the stockholders of the Company (or the Board, if stockholder action is not required) approve a plan or other arrangement pursuant to which the Company will be dissolved or liquidated; (ii) the date the stockholders of the Company (or the Board, if stockholder action is not required) approve a definitive agreement to sell or otherwise dispose of all or substantially all of the assets of the Company, or (iii) the date the stockholders of the Company (or the Board, if stockholder action is not required) and the stockholders of the other constituent corporations (or their respective boards of directors, if and to the extent that stockholder action is not required) have approved a definitive agreement to merge or consolidate the Company with or into another corporation, other than, in either case, a merger or consolidation of the Company in which holders of shares of the Company's voting capital stock immediately prior to the merger or consolidation will have at least fifty percent (50%) of the ownership of voting capital stock of the surviving corporation immediately after the merger or consolidation (on a fully diluted basis), which voting capital stock is to be held in the same proportion (on a fully diluted basis) as such holders' ownership of voting capital stock of the Company immediately before the merger or consolidation, or (iv) the date any entity, person or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), other than (A) the Company, (B) any of its Subsidiaries, (C) any of the holders of the capital stock of the Company, as determined on the date that this Plan is adopted by the Board, (D) any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its Subsidiaries or (E) any Affiliate of any of the foregoing, shall have acquired beneficial ownership of, or shall have acquired voting control over more than fifty percent (50%) of the outstanding shares of the Company's voting capital stock (on a fully diluted basis), unless the transaction pursuant to which such person, entity or group acquired such beneficial ownership or control resulted from the original issuance by the Company of shares of its voting capital stock and was approved by at least a majority of directors who shall have been members of the Board for at least twelve (12) months prior to the date of such approval, or (v) the first day after the date of this Plan when directors are elected such that there shall have been a change in the composition of the Board such that a majority of the Board shall have been members of the Board for less than twelve (12) months, unless the nomination for election of each new director who was not a director at the beginning of such twelve (12) month period was -2- approved by a vote of at least sixty percent (60%) of the directors then still in office who were directors at the beginning of such period, or (vi) the date upon which the Board determines (in its sole discretion) that based on then current available information, the events described in clause (iv) are reasonably likely to occur. (f) "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (g) "COMMITTEE" shall mean the Committee appointed by the Board in accordance with Section 3(a) of the Plan, if one is appointed, in which event the Committee shall possess the power and authority of the Board with respect to the Plan as set forth in section 3(b) of the Plan. (h) "COMMON STOCK" shall mean the common stock of the Company, $.001 par value per share. (i) "COMPANY" shall mean BLUESTONE SOFTWARE, INC., a Delaware corporation, formerly known as Bluestone Consulting, Inc., a New Jersey corporation, and any successor in interest that agrees to assume and maintain the Plan. (j) "CONSULTANT" shall mean (i) any person associated with the Company who is engaged by the Company to render services and is compensated by the Company for such services, including but not limited to, an advisor or independent contractor; (ii) any director of the Company whether or not compensated for such services in his capacity as a director; and (iii) solely for purposes of the Plan, any person employed by BCI or any other company so designated by the Board. (k) "DISABILITY" or "DISABLED" with respect to an Optionee shall mean (i) when the Optionee is determined to be disabled within the meaning of any long-term disability policy or program sponsored by the Company or BCI covering the Optionee, as in effect as of the date of such determination, or (ii) if no such policy or program shall be in effect, when the Optionee is unable to engage in any substantial gainful activity by reason of a physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve (12) months. The determination of whether an Optionee is Disabled pursuant to subparagraph (ii) shall be determined by the Board of Directors, whose determination shall be conclusive; provided that, (iii) if an Optionee is bound by the terms of an employment agreement between the Optionee and the Company or Optionee and BCI, whether the Optionee is "Disabled" for purposes of the Plan shall be determined in accordance with the procedures set forth in said employment agreement, if such procedures are therein provided; and (iv) an Optionee bound by such an employment agreement shall not be determined to be Disabled under the Plan any earlier than he or she would be determined to be disabled under his or her employment agreement. -3- (l) "EMPLOYEE" shall mean any person, including but not limited to, officers and directors, employed by the Company or any Subsidiary of the Company. The payment of directors' fees by the Company shall not be sufficient to constitute "employment" by the Company. (m) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (n) "FAIR MARKET VALUE" shall mean, as of any date, the fair market value of a share of Common Stock as determined pursuant to Section 7 hereof. (o) "INCENTIVE STOCK OPTION" shall mean any Option that is intended to be and is designated as an Incentive Stock Option within the meaning of Section 422 of the Code. (p) "NON-EMPLOYEE DIRECTOR" shall have the meaning set forth in Rule 16b- 3(b)(3)(i) promulgated by the Securities and Exchange Commission under the Exchange Act, or any successor definition adopted by the Securities and Exchange Commission; provided, however, that the Administrator may, in its sole discretion, determine from time to time whether the rules and regulations under Section 162(m) of the Code shall apply for purposes of determining which individuals are "Non-Employee Directors." (q) "NON-QUALIFIED STOCK OPTION" shall mean any Option that is not intended to qualify as an Incentive Stock Option. (r) "OPTION" shall mean an Incentive Stock Option or a Non-Qualified Stock Option as the case may be, granted pursuant to the Plan. (s) "OPTION AGREEMENT" shall mean the written agreement by and between the Company and an Optionee under which Optionee may purchase the Shares pursuant to the exercise of an Option. (t) "OPTIONEE" shall mean an Employee or Consultant to whom an Option is granted. (u) "PLAN" shall mean this Bluestone Software, Inc. 1996 Incentive and NonQualified Stock Option Plan, as amended from time to time. (v) "PUBLIC OFFERING" shall mean the consummation of a firm commitment underwritten public offering of equity securities of the Company registered under the Securities Act. (w) "SALE OF THE COMPANY" shall mean the earliest of: (i) the closing of a sale, transfer or other disposition of all or substantially all of the shares of the capital stock then outstanding of the Company (except if such transferee is then an Affiliate); (ii) the closing of a sale, transfer or other disposition of all or substantially all of the assets of the Company (except if -4- such transferee is then an Affiliate); or (iii) the merger or consolidation of the Company with or into another corporation (except an Affiliate), other than a merger or consolidation of the Company in which the holders of shares of the Company's voting capital stock outstanding immediately before such merger or consolidation hold greater than fifty percent (50%) of the surviving entity's voting capital stock after such consolidation or merger. (x) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. (y) "SECURITIES BROKER" means a registered securities broker acceptable to the Board who agrees to effect the cashless exercise of an Option. (z) "SHARE" or "SHARES" shall mean a share or shares of Common Stock, as adjusted in accordance with Section 8 of the Plan, that is allocated to the Plan. (aa) "STOCK PURCHASE AND RESTRICTION AGREEMENT" shall mean an agreement in such form or forms as the Board (subject to the terms and conditions of this Plan) may from time to time approve, which an Optionee shall be required to execute as a condition of purchasing Shares upon the exercise of an Option. (bb) "SUBSIDIARY" shall mean, whether now or hereafter existing, a subsidiary or parent corporation of the Company as such term is defined in Sections 424(e), (f) and (g) of the Code. (cc) "TRANSFER" or "TRANSFERRED" shall mean the transfer of employment or other engagement from the Company to BCI, or from BCI to the Company. Section 3. ADMINISTRATION. (a) PROCEDURE. The Plan shall be administered by the Board or a Committee consisting of not less than two persons appointed by the Board (in either case, the "Administrator"). Members of the Board or the Committee who are eligible for Options or who have been granted Options may vote on any matters affecting the administration of the Plan or the grant of any Options pursuant to the Plan, except that no such member shall act upon the granting of an Option to himself or herself, but any such member may be counted in determining the existence of a quorum at any meeting of the Board or the Committee during which action is taken with respect to the granting of Options to such member. In the event the Company has a class of equity securities registered under Section 12 of the Exchange Act, the Plan shall be administered either by the Board, or by a Committee, appointed in the same manner and subject to the same terms as provided in the preceding sentence of this subsection 3(a), provided that said Committee shall consist of not less than two (2) persons, each of whom is a Non-Employee Director. (b) COMMITTEE. If a Committee is appointed by the Board, then the Committee shall possess the power and authority of the Board in administering the Plan on -5- behalf of the Board, subject to the terms and conditions as the Board may prescribe. Members of the Committee may or may not be members of the Board and shall serve for such period of time as the Board may determine. From time to time, the Board may increase the size of the Committee and appoint additional members thereto, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. (c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan (and, in the case of the Committee, the specific duties delegated by the Board to such Committee), the Administrator shall have the authority, in its sole discretion: (i) to determine whether and to what extent Options are granted hereunder; (ii) to determine the Fair Market Value of the Common Stock based upon review of relevant information and in accordance with Section 7 of the Plan; (iii) to determine the exercise price of the Options in accordance with Section 6(b) of the Plan; (iv) to select the Optionees to whom Options may from time to time be granted; (v) to determine the number of Shares to be subject to each Option granted hereunder; (vi) to prescribe, amend and rescind rules and regulations relating to the Plan; (vii) to determine the terms and provisions of each Option granted under the Plan, each Option Agreement and each other agreement that in the sole discretion of the Administrator may be required (all of which agreements need not be identical with the terms of other Options, Option Agreements or other agreements); (viii) to determine the circumstances under which the vesting or exercise date of an Option will be accelerated; (ix) to interpret the Plan or any agreement entered into with respect to the grant or exercise of Options; (x) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Board or to take such other actions as may be necessary or appropriate with respect to the Company's rights pursuant to Options or agreements relating to the granting or exercise thereof; -6- (xi) to determine whether and under what circumstances an Option may be exercised without a payment of cash under Section 6(c) hereof; (xii) to terminate the Plan in the event of a Change of Control; (xiii) to determine whether or not a Transfer has occurred; and (xiv) to make such other determinations and establish such other procedures as it deems necessary or advisable for the administration of the Plan. (d) EFFECT OF THE ADMINISTRATOR'S DECISION. All decisions, determinations and interpretations of the Administrator pursuant to the provisions of the Plan shall be final and binding on all Optionees and any other holders of Options. (e) LIMITATION OF LIABILITY. Notwithstanding anything herein to the contrary, no member of the Board or the Committee shall be liable for any good faith determination, act or failure to act in connection with the Plan or any Option awarded hereunder. Section 4. ELIGIBILITY. (a) ELIGIBLE PERSONS. Options may be granted at any time and from time to time to any Employee or Consultant who shall be selected by the Administrator. Any grant of Options may include or exclude any Employee or Consultant as the Administrator shall determine in its sole discretion. Consultants who are not also Employees of the Company are eligible to be granted Non-Qualified Stock Options under the Plan but are not eligible to be granted Incentive Stock Options under the Plan. (b) VESTING OF OPTIONS. Subject to the provisions of Section 6 hereof and except to the extent the Board provides otherwise, each Option shall vest at a rate of twenty-five percent (25%) of the Shares subject to the Option per year (the total number of Shares so vested being the "Vested Amount") during the consecutive four (4) year period commencing on the date of grant. Options that are not vested may not be exercised. (c) EFFECT UPON ENGAGEMENT. The Plan will not confer upon any Optionee any right with respect to the continuation of any employment, consulting or any other relationship with the Company or BCI nor will it interfere in any way with such Optionee's right or the Company's or BCI's right to terminate that Optionee's employment, consulting or other relationship with the Company or BCI at any time, whether with or without cause. Section 5. STOCK SUBJECT TO THE PLAN. (a) MAXIMUM NUMBER OF SHARES. Subject to the provisions of Section 8 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is Nine Million Four Hundred Twenty Nine Thousand Forty Nine (9,429,049) Shares. The Shares may be authorized, but unissued or reacquired, Common Stock. Notwithstanding the -7- foregoing, no individual shall receive, over the term of the Plan, awards for more than an aggregate of Two Million Five Hundred Thousand (2,500,000) Shares authorized for grant under the Plan. (b) RETURN OF SHARES TO THE PLAN. If an Option expires, is terminated or become unexercisable for any reason without having been exercised in full, then the unpurchased Shares subject thereto shall, unless the Plan shall have been terminated, return to the Plan and become available for future grant under the Plan. Section 6. TERMS AND CONDITIONS OF OPTIONS. Each Option granted under the Plan shall be authorized by the Board and shall be evidenced by an Option Agreement which shall state or incorporate by reference all other terms and conditions of the Plan including, without limitation, the following terms and conditions: (a) NUMBER OF SHARES. The Option Agreement shall state the number of Shares subject to the Option. (b) OPTION EXERCISE PRICE. The per Share exercise price for the Shares to be issued pursuant to the exercise of an Incentive Stock Option shall be stated in the Option Agreement and shall be no less than the Fair Market Value per share of the Common Stock on the date such Option is granted, without regard to any restriction other than a restriction that by its terms will never lapse; provided, however, that any Incentive Stock Option granted under this Plan to an Employee who, at the time such Option is granted, owns more than ten percent (10%) of the current total combined voting power of all classes of the capital stock of the Company, shall have an exercise price per Share of not less than one hundred ten percent (110%) of the Fair Market Value of the Common Stock on the date such Option is granted. The per Share exercise price for the Shares to be issued pursuant to the exercise of a Non-Qualified Stock Option shall be stated in the Option Agreement and shall be determined by the Administrator but shall be at least $.01 per Share. (c) CONSIDERATION. The consideration to be paid for the Shares to be issued upon the exercise of an Option, including the method of payment, shall be determined by the Administrator and may consist entirely of: (i) cash; (ii) check; (iii) authorization from the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total Shares as to which the Option is exercised; (iv) to the extent permitted under the Exchange Act, the delivery of a properly executed exercise notice together with irrevocable instructions to a Securities Broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price; or (v) such other consideration and method of payment as the Administrator may from time to time determine. In making its determination as to the type of consideration to accept, the Administrator shall consider if the acceptance of such consideration may be reasonably expected to benefit the Company. -8- (d) FORM OF OPTION. The Option Agreement shall state whether the Option granted thereunder is intended to be an Incentive Stock Option or a Non-Qualified Stock Option and shall, subject to the terms of the Option Agreement, constitute a binding determination as to the form of Option granted thereunder. (e) EXERCISE OF AN OPTION. (i) Unless otherwise provided by the Board, any Option granted hereunder shall be exercisable, in whole or in part, in accordance with the vesting schedule set forth in Section 4(b) hereof and shall be exercisable at such times and under such further conditions as may be determined by the Board and as set forth in the Option Agreement. (ii) An Option may not be exercised for a fraction of a Share. In the event of a "cashless exercise" as permitted under Section 6(c) hereof, the Company shall issue shares for, the whole number of shares acquired through such cashless exercise and cash for the value of any fractional share. (iii) An Option may not be exercised after the date of expiration of its term as shall be set forth in the Option Agreement. (iv) An Option shall be deemed to be exercised when written notice of such exercise has been received by the Company at its principal executive office in accordance with the terms of the Option Agreement by the person entitled to exercise the Option, and full payment for the Shares with respect to which the Option is exercised has been received by the Company, accompanied by an executed Stock Purchase and Restriction Agreement and any other agreements required by the Administrator or the terms of the Plan and/or Option Agreement. An Optionee shall have no right to vote or receive dividends and shall have no other rights as a stockholder with respect to the Shares, notwithstanding the exercise of the Option, until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares. No adjustment shall be made for a dividend or other right for which the record date is prior to the date a stock certificate with respect to the Shares is issued. (v) As soon as practicable after the proper exercise of an Option in accordance with the provisions of the Plan, the Company shall, without transfer or issue tax to the Optionee, deliver to the Optionee at the principal executive office of the Company or such other place as shall be mutually agreed upon between the Company and the Optionee, a certificate or certificates representing the Shares for which the Option shall have been exercised. The time of issuance and delivery of the certificate(s) representing the Shares for which the Option shall have been exercised may be postponed by the Company for such period as may be required by the Company, with reasonable diligence, to comply with any applicable listing requirements of any national or regional securities exchange or any law or regulation applicable to the issuance or delivery of such Shares. -9- (vi) The exercise of an Option in any manner shall result in a decrease in the number of Shares that thereafter may be available both for purposes of the Plan and for sale under the Option by the number of Shares as to which the Option is exercised. (f) TERMINATION OF OPTIONS. (i) TERMINATION IN GENERAL. Unless sooner terminated as provided in this Plan, each Option shall be exercisable for the period of time as shall be determined by the Administrator and set forth in the Option Agreement and shall be void and unexercisable thereafter. (ii) TERMINATION OF RELATIONSHIP WITH THE COMPANY. Unless sooner terminated as provided in this Plan, in the event of the termination of an Optionee's employment or consulting relationship with the Company (as the case may be), including termination of employment or consulting relationship with BCI, for any reason other than the death or Disability of the Optionee, such Optionee may, within three (3) months (or such other period of time as is determined by the Board) from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option up to the Vested Amount as of the date of termination provided that the Optionee was entitled to exercise the Option on the date of such termination; provided, however, that an Optionee who has Transferred shall not be considered to have terminated his relationship with the Company. To the extent the Optionee was not entitled to exercise the Option on the date of such termination, or if the Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option will terminate. (iii) DEATH OR DISABILITY. Unless sooner terminated as provided in this Plan, in the event of the death or Disability of an Optionee while employed or engaged by the Company (as the case may be), including termination of employment or service with BCI, due to death or Disability, Options held by such Optionee that are exercisable on the date of Disability or death shall be exercisable up to the Vested Amount as of the date of Disability or death for a period of twelve (12) months commencing on the date of the Optionee's Disability or death. Such Options may be exercisable by the Optionee or his or her legal guardian or representative or, in the case of death, by his or her executor(s) or administrator(s); provided, however, if such disabled Optionee shall commence any employment or engagement during such twelve (12) month period with or by a competitor of the Company (INCLUDING, but not limited to, full or part-time employment or independent consulting work, but EXCLUDING any employment or engagement by BCI), as determined solely in the judgment of the Administrator, then all Options held by such Optionee that have not yet been exercised shall terminate immediately upon the commencement thereof. (iv) AGREEMENT TO TERMINATE. Options may be terminated at any time by agreement between the Company and the Optionee. -10- (g) OTHER PROVISIONS. (i) Notwithstanding any provision in this Plan or an Option Agreement to the contrary, no Option granted to any Optionee under this Plan shall be treated as an Incentive Stock Option to the extent that such Option would cause the aggregate Fair Market Value of all Shares with respect to which Incentive Stock Options are exercisable by such Optionee for the first time during any calendar year (determined as of the date of grant of each such Option) to exceed $100,000. For purposes of determining whether an Incentive Stock Option granted to an Optionee would cause the aggregate Fair Market Value to exceed the $100,000 limitation, such Incentive Stock Options shall be taken into account in the order granted. For purposes of this subsection, Incentive Stock Options granted to an Optionee shall include all incentive stock options under all plans of the Company that are incentive stock option plans within the meaning of Section 422 of the Code. Options may be exercised in any order elected by the Optionee, whether or not the Optionee holds any unexercised Options under this Plan or any other plan of the Company. (ii) Notwithstanding any other provision of this Plan or an Option Agreement to the contrary, no Option shall be (A) granted under this Plan after ten (10) years from the date on which this Plan is adopted by the Board, or (B) exercisable more than ten (10) years from the date of grant; provided that if an Incentive Stock Option shall be granted under this Plan to any Employee who, at the time of the grant of such Option, owns stock possessing more than ten percent (10%) of the total combined voting power for all classes of the Company's capital stock, the foregoing clause (B) shall be deemed modified by substituting the term "five (5) years" for the term "ten (10) years" that appears therein. Section 7. FAIR MARKET VALUE OF COMMON STOCK. The Fair Market Value of a Share of Common Stock, as of any date, shall be determined as follows: (a) If the Shares of Common Stock are listed on a national or regional securities exchange or traded through NASDAQ/NMS, then the Fair Market Value of a share of Common Stock shall be the closing price for a share of Common Stock on the exchange or on NASDAQ/NMS, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable on the relevant valuation date, or if there is no trading on that date, on the next trading date. (b) If the Shares of Common Stock are traded in the over-the-counter market, then the Fair Market Value of a share of Common Stock shall be the mean of the bid and asked prices for a share of Common Stock on the relevant valuation date as reported in THE WALL STREET JOURNAL or other source the Administrator deems reliable (or, if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotations ("NASDAQ") System or the NASD OTC Bulletin Board), or if there is no trading on such date, on the next trading date. -11- (c) In the absence of an established market for the Common Stock, the Fair Market Value of a share of Common Stock shall be determined by the Board in its sole discretion. Section 8. ADJUSTMENTS. (a) ADJUSTMENTS. Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Option, the number of Shares that have been authorized for issuance under the Plan but as to which no Options have yet been granted or that have been returned to the Plan upon cancellation or expiration of an Option, and the price per Share of the Common Stock covered by an Option will each be proportionately adjusted for any increase or decrease in the number of outstanding shares of Common Stock resulting from stock splits, reverse stock splits, stock dividends, reclassifications and recapitalizations. Such adjustment shall be made by the Board whose determination in that respect will be final, binding and conclusive. Except as provided herein, no issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, will affect, and no adjustment by reason thereof will be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) NO FRACTIONAL SHARES. No fractional Shares shall be issuable on account of any action aforesaid, and the aggregate number of Shares into which Shares then covered by the Option, when changed as the result of such action, shall be reduced to the number of whole Shares resulting from such action, unless the Board, in its sole discretion, shall determine to issue scrip certificates in respect to any fractional Shares, which scrip certificates shall be in a form and have such terms and conditions as the Board in its discretion shall prescribe. Section 9. RIGHTS AS A STOCKHOLDER. An Optionee shall have no rights as a stockholder of the Company and shall not have the right to vote nor receive dividends with respect to any Shares subject to an Option until such Option has been exercised and a stock certificate with respect to the Shares purchased upon such exercise of the Option has been issued to Optionee as set forth in Section 6(e)(iv) and (v) hereof. Section 10. FORFEITURE. Notwithstanding any other provision of this Plan, if an Optionee's employment or consulting relationship with the Company (as the case may be) is terminated by the Company or BCI and the Board makes a determination that the Optionee (i) has engaged in any type of disloyalty to the Company or BCI, including without limitation, fraud, embezzlement, theft, or dishonesty in the course of Optionee's employment or consulting relationship, (ii) has been convicted of a felony or other crime involving a breach of trust or fiduciary duty owed to the Company or BCI, (iii) has made an unauthorized disclosure of trade secrets or confidential information of the Company or BCI, or (iv) has breached any confidentiality agreement or non-competition agreement with the Company or BCI in any material respect, then, at the election of -12- the Board, all unexercised Options held by the Optionee (whether or not then exercisable) shall terminate. In the event of such an election by the Board, in addition to immediate termination of all unexercised Options, the Optionee shall forfeit all Shares for which the Company has not yet delivered stock certificates to the Optionee and the Company shall refund to the Optionee the exercise price paid to it upon exercise of the Option with respect to such Shares. Notwithstanding anything herein to the contrary, the Company may withhold delivery of stock certificates pending the resolution of any inquiry that could lead to a finding resulting in forfeiture. Section 11. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination to grant the Option or such other date as is determined by the Administrator. Notice of the determination shall be given to each Optionee to whom an Option is so granted within a reasonable time after the date of such grant. Section 12. MODIFICATION, EXTENSION, RENEWAL OF OPTION. Subject to the terms and conditions of the Plan, the Board may modify, extend or renew an Option, or accept the surrender of an Option (to the extent not theretofore exercised); provided that no Incentive Stock Option may be modified, extended or renewed if such action would cause such Option to cease to be an "incentive stock option" within the meaning of Section 422 of the Code. Section 13. TRANSFERABILITY. No Option may be sold, pledged, assigned, transferred or disposed of in any manner other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, his or her Options shall be exercisable only by the Optionee, or, in the event of his or her legal incapacity or Disability, by the legal guardian or representative of the Optionee. Section 14. POWER OF BOARD IF CHANGE OF CONTROL. Notwithstanding anything to the contrary set forth in this Plan, in the event of a Sale of the Company, fifty percent (50%) of all Options that have not vested as of the date of a Sale of the Company shall become immediately vested and exercisable. All remaining unvested Options shall vest in accordance with the vesting schedule set forth in the applicable Option Agreement. Notwithstanding the preceding, the Board shall have the right, in its sole discretion, to accelerate the vesting of all Options that have not vested as of the date of the Change of Control and/or to establish an earlier date for the expiration of the exercise of an Option (notwithstanding a later expiration of exercisability set forth in an Option Agreement). In addition, in the event of a Change of Control of the Company, the Board shall have the right, in its sole discretion, subject to and conditioned upon a Sale of the Company: (i) to arrange for the successor company (or other entity) to assume all of the rights and obligations of the Company under this Plan; or (ii) to terminate this Plan and (A) to pay to all Optionees cash with respect to -13- those Options that are vested as of the date of the Sale of the Company in an amount equal to the difference between the Option Price and the Fair Market Value of a Share of Common Stock (determined as of the date the Plan is terminated) multiplied by the number of Options that are vested as of the date of the Sale of the Company which are held by the Optionee as of the date of the Sale of the Company, or (B) to arrange for the exchange of all Options for options to purchase common stock in the successor corporation, or (C) to distribute to each Optionee other property in an amount equal to and in the same form as the Optionee would have received from the successor corporation if the Optionee had owned the Shares subject to Options that are vested as of the date of the Sale of the Company rather than the Option at the time of the Sale of the Company. The form of payment or distribution to the Optionee pursuant to this Section shall be determined by the Board in its sole discretion. Section 15. AMENDMENT OR TERMINATION OF THE PLAN. Insofar as permitted by law and the Plan, the Board may at any time suspend, terminate, discontinue, alter or amend the Plan in any respect whatsoever; provided, however, that without prior approval of at least a majority of the stockholders entitled to vote thereon, no such revision or amendment may change the aggregate number of Shares for which Options may be granted hereunder, change the designation of the class of Optionees eligible to receive Options or decrease the price at which Options may be granted. Any other provision of this Section notwithstanding, the Board specifically is authorized to adopt any amendment to this Plan deemed by the Board to be necessary or advisable to assure that the Incentive Stock Options or the Non-Qualified Stock Options available under the Plan continue to be treated as such, respectively, under all applicable laws. Section 16. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Shares pursuant to the exercise of Options shall be used for general corporate purposes. Section 17. NO OBLIGATION TO EXERCISE OPTION. The granting of an Option shall impose no obligation upon the Optionee to exercise such Option. Section 18. APPROVAL OF STOCKHOLDERS. This Plan shall become effective on the date that it is adopted by the Board; provided that it shall become limited to a non-qualified stock option plan if it is not approved by the stockholders of a majority of the Company's outstanding voting stock within one year (365 days) of its adoption by the Board. The Board may grant Options hereunder prior to approval of the Plan, or any material amendments thereto, by the holders of a majority of the Company's outstanding voting stock; provided that any and all Options so granted shall be converted into non-qualified stock options if the Plan, or a material amendment, is not approved by such stockholders within 365 days of its adoption or material amendment. -14- Section 19. CONDITIONS UPON ISSUANCE OF SHARES. (a) Options granted under the Plan are conditioned upon the Company obtaining any required permit or order from appropriate governmental agencies, authorizing the Company to issue such Options and Shares issuable upon the exercise thereof. (b) Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (c) As a condition to the exercise of an Option, the Board may require the person exercising such Option to execute an agreement with, and/or may require the person exercising such Option to make any representation and/or warranty to, the Company as may be, in the judgment of counsel to the Company, required under applicable law or regulation, including but not limited to, a representation and warranty that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation and warranty is appropriate under any of the aforementioned relevant provisions of law. Section 20. RESERVATION OF SHARES. (a) The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. (b) The Company, during the term of this Plan, shall use its best efforts to seek to obtain from appropriate regulatory agencies any requisite authorization in order to issue and sell such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain from any such regulatory agency having jurisdiction the requisite authorization(s) deemed by the Company's counsel to be necessary for the lawful issuance and sale of any Shares hereunder, or the inability of the Company to confirm to its satisfaction that any issuance and sale of any Shares hereunder will meet applicable legal requirements, shall relieve the Company of any liability in respect to the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. -15- Section 21. OTHER AGREEMENTS. Options shall be evidenced by an Option Agreement in such form or forms as the Board (subject to the terms and conditions of this Plan) may from time to time approve, which Option Agreement shall evidence and reflect the terms and conditions of an Option as set forth in Section 6 hereof. Upon exercise of an Option, the Optionee shall execute and deliver to the Company a Stock Purchase and Restriction Agreement in such form or forms as the Board shall approve from time to time. The Administrator may, from time to time, require such other agreements in connection with the Option as it, in its sole discretion, deems advisable. The Option Agreement and the Stock Purchase and Restriction Agreement and any other agreement required by the Plan or the Option Agreement, as determined by the Board, may contain such other provisions as the Board in its discretion deems advisable and that are not inconsistent with the provisions of this Plan, including, without limitation, restrictions upon or conditions precedent to the exercise of the Option. Section 22. TAXES, FEES, EXPENSES AND WITHHOLDING. (a) The Company shall pay all original issue and transfer taxes (but not income taxes, if any) with respect to the grant of an Option and/or the issue and transfer of Shares pursuant to the exercise thereof, and all other fees and expenses necessarily incurred by the Company in connection therewith, and will, from time to time, use its best efforts to comply with all laws and regulations that, in the opinion of counsel for the Company, shall be applicable thereto. (b) The granting of Options hereunder and the issuance of Shares pursuant to the exercise thereof is conditioned upon the Company's reservation of the right to withhold in accordance with any applicable law, from any compensation or other amounts payable to the Optionee, any taxes required to be withheld under federal, state or local law as a result of the grant or exercise of such Option or the sale of the Shares issued upon exercise thereof. To the extent that compensation or other amounts, if any, payable to the Optionee is insufficient to pay any taxes required to be so withheld, the Company may, in its sole discretion, require the Optionee (or such other person entitled herein to exercise the Option), as a condition to the exercise of an Option, to pay in cash to the Company an amount sufficient to cover such tax liability or otherwise to make adequate provision for the Company's satisfaction of its withholding obligations under federal, state and local law. Section 23. NOTICES. Any notice to be given to the Company pursuant to the provisions of this Plan shall be addressed to the Company in care of its Secretary (or such other person as the Company may designate from time to time) at its principal executive office, and any notice to be given to an Optionee shall be delivered personally or addressed to the Optionee at the address given beneath the signature of the Optionee on his or her Option Agreement, or at such other address as such Optionee or his or her permitted transferee (upon the transfer of the Shares) may hereafter designate in writing to the Company. Any such notice shall be deemed duly given when -16- enclosed in a properly sealed envelope or wrapper addressed as aforesaid, registered or certified, and deposited, postage and registry or certification fee prepaid, in a post office or branch post office regularly maintained by the United States Postal Service. It shall be the obligation of each Optionee and each permitted transferee holding Shares purchased upon exercise of an Option to provide the Secretary of the Company, by letter mailed as provided herein, with written notice of his or her direct mailing address. Section 24. NO ENLARGEMENT OF RIGHTS. This Plan is purely voluntary on the part of the Company, and the continuance of the Plan shall not be deemed to constitute a contract between the Company and any Employee or Consultant, or to be consideration for or a condition of the employment or service of any Employee or Consultant as the case may be. Nothing contained in this Plan shall be deemed to give any Employee or Consultant the right to be retained in the employ or service of the Company or BCI, or to interfere with the right of the Company or BCI to discharge or retire any Employee or Consultant thereof at any time. No Employee or Consultant shall have any right to or interest in Options authorized hereunder prior to the grant thereof to such Employee or Consultant, and upon such grant such Employee or Consultant shall have only such rights and interests as are expressly provided herein, subject, however, to all applicable provisions of the Company's Certificate of Incorporation, as the same may be amended from time to time. Section 25. INFORMATION TO OPTIONEES. The Company, upon request, shall provide without charge to each Optionee copies of such annual and periodic reports as are provided by the Company to its stockholders generally. Section 26. AVAILABILITY OF PLAN. A copy of this Plan shall be delivered to the Secretary of the Company and shall be shown to any eligible person making reasonable inquiry concerning it. Section 27. INVALID PROVISIONS. In the event that any provision of this Plan is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein as invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid or unenforceable provision was not contained herein. Section 28. APPLICABLE LAW. This Plan shall be governed by and construed in accordance with the laws of the State of New Jersey. -17- Section 29. BOARD ACTION. Notwithstanding anything to the contrary set forth in this Plan, any and all actions of the Board or Committee, as the case may be, taken under or in connection with this Plan and any agreements, instruments, documents, certificates or other writings entered into, executed, granted, issued and/or delivered pursuant to the terms hereof, shall be subject to and limited by any and all votes, consents, approvals, waivers or other actions of all or certain stockholders of the Company or other persons required pursuant to (a) the Company's Certificate of Incorporation (as the same may be amended and/or restated from time to time), (b) the Company's Bylaws (as the same may be amended and/or restated from time to time), and (c) any other agreement, instrument, document or writing now or hereafter existing, between or among the Company and its stockholders or other persons (as the same may be amended from time to time). Section 30. MISCELLANEOUS. This Plan is intended to comply with the conditions and requirements for employee benefit plans under Rule 16b-3, as promulgated under Section 16 of the Exchange Act, such that Options granted pursuant to the Plan will be exempted from the provisions of Section 16(b) thereof. To the extent that any provision of the Plan would cause a conflict with such requirements, such provision shall be deemed null and void to the extent permitted by applicable law. This section shall not be applicable if no class of the Company's equity securities is then registered pursuant to Section 12 of the Exchange Act. PLAN HISTORY ADOPTION AND APPROVAL OF PLAN AND ANY AMENDMENTS Date Plan adopted by Board: February 17, 1996 Date Plan approved by Stockholders: February 28, 1996 Original Effective Date of Plan: March 1, 1996 Amended and Restated: April 17, 1997 Amended and Restated: July 2, 1998 Amended: January 21, 1999 Amended and Restated: March 11, 1999
-18- BLUESTONE SOFTWARE, INC. 1996 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN INCENTIVE STOCK OPTION AGREEMENT BLUESTONE SOFTWARE, INC., a Delaware corporation (the "Company"), hereby grants to ____________________________ (the "Optionee") an option (the "Option") to purchase a total of ______________ (___) shares of Common Stock (the "Shares") of the Company, at the price and on the terms set forth herein, and in all respects subject to the terms and provisions of the BLUESTONE SOFTWARE, INC. 1996 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (the "Plan") applicable to incentive stock options, which terms and provisions are incorporated herein by reference. Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Plan. 1. NATURE OF THE OPTION. The Option is intended by the Company and the Optionee to be an incentive stock option within the meaning of Section 422 of the Code. 2. DATE OF GRANT; TERM OF OPTION. The Option is granted this ____ day of ____________, ____, and it may not be exercised later than 5:00 p.m. on the ____ day of ______________, ____. 3. OPTION EXERCISE PRICE. The Option exercise price is $_____ per Share which price is the Fair Market Value per Share on the date hereof; or $________ per Share if Optionee, at the time of grant, owns stock possessing more than 10% of the current total combined voting power of all classes of the Company's capital stock, which price represents a price per Share equal to no less than 110% of the Fair Market Value of the Common Stock on the date the Option is granted. 4. EXERCISE OF OPTION. Except as otherwise provided herein, the Option shall be exercisable during its term only in accordance with the terms and provisions of the Plan and this Option Agreement as follows: (A) VESTING. The Option shall vest at a rate of twenty-five percent (25%) of the total number of Shares subject to the Option per year (the total number of shares so vested being the "Vested Amount") on each consecutive anniversary of the date of this Option Agreement, commencing on the date of this Option Agreement. (B) RIGHT TO EXERCISE. (i) Options that have not yet vested may not be exercised. (ii) The Option may not be exercised for a fraction of a Share. (iii) In the event of Optionee's death, Disability or other termination of service, the exercisability shall be governed by this Section 4, Sections 6 and 7 hereof, and the provisions of the Plan. (iv) In no event may the Option be exercised after the date of expiration of the term of the Option, as set forth in Section 2 hereof. (C) METHOD OF EXERCISE. The Option shall be exercisable by written notice that shall state the election to exercise the Option, the number of Shares in respect to which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such Shares as may be required by the Company hereunder or pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company or such other person as may be designated by the Company. The written notice shall be accompanied by payment of the purchase price, an executed Stock Purchase and Restriction Agreement and any other agreements required by the Administrator, the terms of the Plan and/or this Option Agreement. The Option will be deemed to be exercised upon the receipt by the Company of such written notice, payment of the purchase price, the Stock Purchase and Restriction Agreement and any other agreements required by the Administrator, the terms of the Plan and/or this Option Agreement. The Optionee will have no right to vote or receive dividends and will have not other rights as a stockholder with respect to such Shares notwithstanding the exercise of the Option, until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing the Shares that are being issued upon exercise of the Option. The Company will issue (or cause to be issued) such stock certificates promptly following the exercise of the Option. The certificate or certificates for the Shares as to which the Option shall be exercised shall be registered in the name of the Optionee and shall contain any legend as may be required under the Plan, the Stock Purchase and Restriction Agreement, any other agreements required by the Administrator and/or applicable law. (D) METHOD OF PAYMENT. The method of payment of the purchase price shall be determined by the Administrator and may consist entirely of cash, check or any combination of such methods of payment, or such other consideration or method of payment as may be authorized by the Administrator and permitted under the Plan. -2- (E) RESTRICTIONS ON EXERCISE. The Option may not be exercised if the issuance of the Shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other laws or regulations. As a condition to the exercise of the Option, the Company may require the Optionee to make any representations and warranties to the Company as may be required by any applicable law or regulation. 5. INVESTMENT REPRESENTATIONS. Unless the Shares have been registered under the Securities Act, in connection with the grant of the Option, the Optionee represents and warrants as follows: (a) The Optionee is acquiring the Option, and upon exercise of the Option, the Optionee will be acquiring the Shares for investment for his or her own account, not as a nominee or agent, and not with a view to, or for resale in connection with, any distribution thereof. (b) The Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Shares. The Optionee has received all information as the Optionee deems necessary and appropriate to enable him or her to evaluate the financial risk inherent in making an investment in the Shares and has received satisfactory and complete information concerning the business and financial condition of the Company in response to all inquiries in respect thereof. 6. TERMINATION OF EMPLOYMENT WITH COMPANY. Subject to the provisions of Section 8 hereof, upon termination of the Optionee's employment with the Company for any reason other than death or Disability, the Optionee shall have the right to exercise the Option at any time within the three (3) month period after the date of such termination to the extent that the Optionee was entitled to exercise the Option at the date of such termination; provided, however, that if the Optionee Transfers, then to the extent the Option is not exercised within such three (3) month period, the unexercised portion of the Option shall automatically convert into a non-qualified stock option and shall continue to be exercisable up to the earlier of the expiration of the Option as set forth in Section 2 hereof or three (3) months after termination of service with both the Company and BCI. 7. DEATH OR DISABILITY OF OPTIONEE. Upon the death or Disability of the Optionee while in the employ of the Company, the Option may be exercised at any time within twelve (12) months after the date of death or termination due to Disability, in the case of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, or, in the case of Disability, by the Optionee or his legal guardian or representative, but in any case only to the extent the Optionee was entitled to exercise the Option at such date; provided, however, that if such disabled Optionee shall commence any employment -3- or engagement during such twelve (12) month period with or by a competitor of the Company (INCLUDING, but not limited to, full or part-time employment or independent consulting work, but EXCLUDING any employment or engagement by BCI), as determined solely in the judgment of the Board, the Option shall terminate immediately upon the commencement thereof. In the event the Optionee Transfers and such Option converts to a non-qualified option as provided in Section 6 hereof, in the event of death or Disability while in the service of BCI (or the Company, in the event of a subsequent Transfer), the Option may be exercised by the Optionee's estate, legal guardian, or representative within the twelve (12) month period after termination of service due to death or Disability. To the extent that the Optionee was not entitled to exercise the Option at the date of termination, or to the extent the Option is not exercised within the time specified herein, the Option shall terminate. Notwithstanding the foregoing, the Option shall not be exercisable after the expiration of the term set forth in Section 2 hereof. 8. FORFEITURE OF OPTION. Notwithstanding any other provision of the Option Agreement, if the Optionee's employment is terminated and the Board makes a determination that the Optionee (i) has engaged in any type of disloyalty to the Company, including without limitation, fraud, embezzlement, theft, or dishonesty in the course of his employment, (ii) has been convicted of a felony or other crime involving a breach of trust or other fiduciary duty owed to the Company, (iii) has disclosed trade secrets or confidential information of the Company, (iv) has breached any agreement with the Company in respect of confidentiality, non-disclosure, non-competition or otherwise, then, at the election of the Board, all unexercised Options shall terminate. In the event of such an election by the Board, in addition to immediate termination of all unexercised Options, the Optionee shall forfeit all Shares for which the Company has not yet delivered share certificates to the Optionee and the Company shall refund to the Optionee the Option price paid to the Company with respect to those Shares. Notwithstanding anything herein to the contrary, the Company may withhold delivery of share certificates pending the resolution of any inquiry that could lead to a determination resulting in forfeiture. In the event the Optionee's employment with the Company terminates, but the Optionee Transfers, the preceding forfeiture provisions shall apply in the event Optionee's service is terminated by BCI for any of the reasons stated in the immediately preceding subsections (1) through (iv) hereof; provided that "BCI" shall be substituted for "the Company" where it appears in such preceding subsections. 9. NON-TRANSFERABILITY OF OPTION. The Option may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner either voluntarily or involuntarily by operation of law, other than by will or by the laws of descent or distribution, and may be exercised during the lifetime of the Optionee only by such Optionee. Subject to the foregoing and the terms of the Plan, the terms of the Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. -4- 10. CONTINUATION OF EMPLOYMENT. Neither the Plan nor this Option Agreement shall confer upon any Optionee any right to continue in the employment of the Company, or BCI in the event of Transfer, or limit in any respect the right of the Company or BCI to discharge or release the Optionee at any time, with or without cause and with or without notice. 11. WITHHOLDING. The Company reserves the right to withhold, in accordance with any applicable laws, from any consideration payable to Optionee any taxes required to be withheld by federal, state or local law as a result of the grant or exercise of the Option or the sale or other disposition of the Shares issued upon exercise of the Option. If the amount of any consideration payable to the Optionee is insufficient to pay such taxes or if no consideration is payable to the Optionee, then upon the request of the Company, the Optionee (or such other person entitled to exercise the Option pursuant to Section 7 hereof) shall pay to the Company an amount sufficient for the Company to satisfy any federal, state or local tax withholding requirements the Company may incur, as a result of the grant or exercise of the Option or the sale or other disposition of the Shares issued upon the exercise of the Option. 12. THE PLAN. The Option is subject to, and the Company and the Optionee agree to be bound by, all of the terms and conditions of the Plan as such Plan may be amended from time to time in accordance with the terms thereof. Pursuant to the Plan, the Board is authorized to adopt rules and regulations not inconsistent with the Plan as it shall deem appropriate and proper. A copy of the Plan in its present form is available for inspection during business hours by the Optionee or the persons entitled to exercise the Option at the Company's principal office. 13. CONVERSION TO NON-QUALIFIED OPTION. Notwithstanding anything to the contrary set forth herein, this Option is being granted subject to the condition that in the event the Plan is not approved by the stockholders of the Company within 365 days of the date that the Plan was adopted by the Board, this Option shall automatically be converted into a non-qualified stock option. 14. EARLY DISPOSITION OF STOCK. Subject to the fulfillment by the Optionee of any conditions upon the disposition of Shares received under the Option, the Optionee hereby agrees that if he or she disposes of any Shares received under the Option within two (2) years from date of grant or one (1) year after such Shares were transferred to him or her upon exercise of the Option, he or she will notify the Company in writing within thirty (30) days after the date of such disposition. The Optionee acknowledges that disposition by him or her within two years from the date of grant and one year from the date of exercise of the Option would disqualify him or her from capital gain treatment for any gain realized upon such disposition. -5- 15. ENTIRE AGREEMENT. The Option, together with the Plan and the other exhibits attached thereto or hereto, represents the entire agreement between the parties. 16. GOVERNING LAW. This Option shall be construed in accordance with the laws of the State of New Jersey. 17. AMENDMENT. Subject to the provisions of the Plan, this Option Agreement may only be amended by a writing signed by each of the parties hereto. Date: BLUESTONE SOFTWARE, INC. -------------------------- By: ---------------------------- Title: ------------------------- -6- ACKNOWLEDGMENT The Optionee acknowledges receipt of a copy of the Plan, a copy of which is attached hereto, and represents that he or she has read and is familiar with the terms and provisions thereof, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan. Date: ---------------------------- ------------------------- Signature of Optionee ------------------------- Address ------------------------- City, State, Zip THE OPTION AND THE SECURITIES THAT MAY BE PURCHASED UPON EXERCISE OF THE OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THE OPTION MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A STOCK PURCHASE AND RESTRICTION AGREEMENT TO BE ENTERED INTO BETWEEN THE HOLDER OF THE OPTION AND THE COMPANY UPON EXERCISE OF THIS OPTION, A COPY OF WHICH AGREEMENT IS ON FILE WITH THE SECRETARY OF THE COMPANY. -7- BLUESTONE SOFTWARE, INC. 1996 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN NON-QUALIFIED STOCK OPTION AGREEMENT BLUESTONE SOFTWARE, INC., a Delaware corporation (the "Company"), hereby grants to ____________________________ (the "Optionee") an option (the "Option") to purchase a total of ______________ (___) shares of Common Stock (the "Shares") of the Company, at the price and on the terms set forth herein, and in all respects subject to the terms and provisions of the BLUESTONE SOFTWARE, INC. 1996 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (the "Plan") applicable to non-qualified stock options, which terms and provisions are incorporated by reference herein. Unless otherwise defined herein, capitalized terms used but not defined herein shall have the meanings given to them in the Plan. 1. NATURE OF THE OPTION. The Option is intended to be a nonstatutory stock option and is NOT intended to be an incentive stock option within the meaning of Section 422 of the Code, or to otherwise qualify for any special tax benefits to the Optionee. 2. DATE OF GRANT; TERM OF OPTION. The Option is granted this ____ day of ____________, ____, and it may not be exercised later than 5:00 p.m. on the ____ day of ______________ , _____. 3. OPTION EXERCISE PRICE. The Option exercise price is ______________ ($_____) per Share. 4. EXERCISE OF OPTION. Except as otherwise provided herein, the Option shall be exercisable during its term only in accordance with the terms and provisions of the Plan and this Option Agreement as follows: (A) VESTING. The Option shall vest at a rate of twenty-five percent (25%) of the total number of Shares subject to the Option per year (the total number of Shares so vested being the "Vested Amount") on each consecutive anniversary of the date of this Option Agreement, commencing on the date of this Option Agreement. (B) RIGHT TO EXERCISE. (i) Options that have not yet vested may not be exercised. (ii) The Option may not be exercised for a fraction of a Share. (iii) In the event of Optionee's death, Disability or other termination of service, the exercisability shall be governed by this Section 4, Sections 6 and 7 hereof, and the provisions of the Plan. (iv) In no event may the Option be exercised after the date of expiration of the term of the Option, as set forth in Section 2 hereof. (C) METHOD OF EXERCISE. The Option shall be exercisable by written notice that shall state the election to exercise the Option, the number of Shares in respect to which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such Shares as may be required by the Administrator or pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company or such other person as may be designated by the Company. The written notice shall be accompanied by payment of the purchase price, an executed Stock Purchase and Restriction Agreement and any other agreements required by the Administrator, the terms of the Plan and/or this Option Agreement. The Option will be deemed to be exercised upon the receipt by the Company of such written notice, payment of the purchase price, the Stock Purchase and Restriction Agreement and any other agreements required by the Administrator, the terms of the Plan and/or this Option Agreement. The Optionee shall have no right to vote or receive dividends and shall have no other rights as a stockholder with respect to such Shares, notwithstanding the exercise of the Option, until the issuance by the Company (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing the Shares that are being issued upon exercise of the Option. The Company will issue (or cause to be issued) such stock certificates promptly following the exercise of the Option. The certificate or certificates for the Shares as to which the Option shall be exercised shall be registered in the name of the Optionee and shall contain any legend as may be required under the Plan, the Stock Purchase and Restriction Agreement, any other agreements required by the Administrator and/or applicable law. (D) METHOD OF PAYMENT. The method of payment of the purchase price shall be determined by the Administrator and may consist entirely of cash, check or any combination of such methods of payment, or such other consideration or method of payment as may be authorized by the Administrator and permitted under the Plan. (E) RESTRICTIONS ON EXERCISE. The Option may not be exercised if the issuance of the Shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other laws or regulations. As a condition to the exercise of the Option, -2- the Company may require the Optionee to make any representations and warranties to the Company as may be required by any applicable law or regulation. 5. INVESTMENT REPRESENTATIONS. Unless the Shares have been registered under the Securities Act, in connection with the acquisition of the Option, the Optionee represents and warrants as follows: (A) The Optionee is acquiring the Option, and upon exercise of the Option, Optionee will be acquiring the Shares for investment for his or her own account, not as a nominee or agent, and not with a view to, or for resale in connection with, any distribution thereof. (B) The Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Shares. The Optionee has received all such information as the Optionee deems necessary and appropriate to enable him or her to evaluate the financial risk inherent in making an investment in the Shares and has received satisfactory and complete information concerning the business and financial condition of the Company in response to all inquiries in respect thereof. 6. TERMINATION OF RELATIONSHIP WITH THE COMPANY. Subject to the provisions of Section 8 hereof, upon termination of the Optionee's service with the Company, including termination of service with BCI, for any reason other than death or Disability, the Optionee shall have the right to exercise this Option up to the Vested Amount as of the date of termination for a period of three (3) months from the date of such termination, provided that the Optionee may only exercise the Option to the extent that the Optionee was entitled to exercise the Option at the date of such termination; provided, however, that the Optionee shall not be considered to have terminated his relationship with the Company if he Transfers. 7. DEATH OR DISABILITY OF OPTIONEE. Upon the death or Disability of the Optionee while in the service of the Company, including termination of service with BCI, the Option may be exercised up to the Vested Amount at any time within twelve (12) months after the date of death or termination due to Disability provided the Optionee was entitled to exercise the Option at the date of his or her death or termination due to Disability. In the case of death, the Option may be exercised by the Optionee's estate or by a person who acquired the right to exercise this Option by bequest or inheritance. In the case of Disability, the Option may be exercised by the Optionee or his or her legal guardian or representative, but in any case, the Option may be exercised only to the extent that the Optionee was entitled to exercise the Option at such date; provided, however, that if such disabled Optionee shall commence any employment or engagement during such twelve (12) month period with or by a competitor of the Company (INCLUDING, but not limited to, full or part-time employment or independent consulting work, but EXCLUDING any employment or engagement by BCI), as determined solely in the judgment of the Board, the Option shall terminate immediately upon the commencement thereof. To the extent that the Optionee was not entitled to exercise the Option at the date of termination, or to the extent the Option is not exercised within the time specified herein, the Option shall terminate. -3- Notwithstanding the foregoing, the Option shall not be exercisable after the expiration of the term set forth in Section 2 hereof. 8. FORFEITURE OF OPTION. Notwithstanding any other provision of this Option Agreement, if the Optionee's service with the Company or BCI is terminated and the Board makes a determination that the Optionee (i) has engaged in any type of disloyalty to the Company or BCI, including without limitation, fraud, embezzlement, theft, or dishonesty in the course of his employment or engagement, (ii) has been convicted of a felony or other crime involving a breach of trust or other fiduciary duty owed to the Company or BCI, (iii) has disclosed trade secrets or confidential information of the Company or BCI, or (iv) has breached any agreement with the Company or BCI in respect of confidentiality, non-disclosure, non-competition or otherwise, then, at the election of the Board, all unexercised Options shall terminate. In the event of such an election by the Board, in addition to immediate termination of all unexercised Options, the Optionee shall forfeit all Shares for which the Company has not yet delivered share certificates to the Optionee and the Company shall refund to the Optionee the Option price paid to the Company with respect to those Shares. Notwithstanding anything herein to the contrary, the Company may withhold delivery of share certificates pending the resolution of any inquiry that could lead to a determination resulting in forfeiture. 9. NON-TRANSFERABILITY OF OPTION. The Option may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner either voluntarily or involuntarily by operation of law, other than by will or by the laws of descent or distribution, and may be exercised during the lifetime of the Optionee only by such Optionee. Subject to the foregoing and the terms of the Plan, the terms of this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 10. CONTINUATION OF EMPLOYMENT OR ENGAGEMENT. Neither the Plan nor this Option Agreement shall confer upon any Optionee any right to continue in the service of the Company or BCI or limit, in any respect, the right of the Company or BCI to discharge or release the Optionee at any time, with or without cause and with or without notice. 11. WITHHOLDING. The Company reserves the right to withhold, in accordance with any applicable laws, from any consideration payable to the Optionee any taxes required to be withheld by federal, state or local law as a result of the grant or exercise of the Option or the sale or other disposition of the Shares issued upon exercise of the Option. If the amount of any consideration payable to the Optionee is insufficient to pay such taxes or if no consideration is payable to the Optionee, then upon the request of the Company, the Optionee (or such other person entitled to exercise the Option pursuant to Section 7 hereof) shall pay to the Company an amount sufficient for the Company to satisfy any federal, state or local tax withholding requirements the Company may incur as a result of the grant or exercise of the Option or the sale or other disposition of the Shares issued upon the exercise of the Option. 12. THE PLAN. This Option Agreement is subject to, and the Company and the Optionee agree to be bound by, all of the terms and conditions of the Plan as such Plan may be amended from time to time in accordance with the terms thereof. Pursuant to the Plan, the Board -4- is authorized to adopt rules and regulations not inconsistent with the Plan as it shall deem appropriate and proper. A copy of the Plan in its present form is available for inspection during business hours by the Optionee or the persons entitled to exercise the Option at the Company's principal office. 13. ENTIRE AGREEMENT. This Option Agreement, together with the Plan, and any other and the other exhibits attached thereto or hereto, represents the entire agreement between the parties. 14. GOVERNING LAW. This Option Agreement shall be construed in accordance with the laws of the State of New Jersey. 15. AMENDMENT. Subject to the provisions of the Plan, this Option Agreement may only be amended by a writing signed by each of the parties hereto. Date: BLUESTONE SOFTWARE, INC. ------------------------- By: ----------------------- Title: --------------------- -5- ACKNOWLEDGMENT The Optionee acknowledges receipt of a copy of the Plan, a copy of which is attached hereto, and represents that he or she has read and is familiar with the terms and provisions thereof, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan. Date: --------------------------- --------------------------- Signature of Optionee ------------------------- Address ------------------------- City, State, Zip THE OPTION AND THE SECURITIES THAT MAY BE PURCHASED UPON EXERCISE OF THE OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THE OPTION MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A STOCK PURCHASE AND RESTRICTION AGREEMENT TO BE ENTERED INTO BETWEEN THE HOLDER OF THE OPTION AND THE COMPANY UPON EXERCISE OF THE OPTION, A COPY OF WHICH AGREEMENT IS ON FILE WITH THE SECRETARY OF THE COMPANY. -6- BLUESTONE SOFTWARE, INC. 1996 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN STOCK PURCHASE AND RESTRICTION AGREEMENT This STOCK PURCHASE AND RESTRICTION AGREEMENT is made this _____ day of ____________, 19__, by and between BLUESTONE SOFTWARE, INC., a Delaware corporation (the "Company"), and ("Optionee"). R E C I T A L S: 1. Optionee was granted an Option (the "Option") on ________________, 19___ pursuant to the BLUESTONE SOFTWARE, INC. 1996 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN (the "Plan"), the terms and conditions of which are incorporated herein by reference. In addition, capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Plan. 2. Pursuant to the Option, Optionee was granted the right to purchase _____________ (____) shares of the Company's Common Stock, as adjusted in accordance with the Plan (the "Optioned Shares"). 3. Optionee has elected to exercise the Option to purchase ________________ (_____) of such Optioned Shares (herein referred to as the "Shares") under the Stock Option Agreement evidencing the Option (the "Option Agreement"). 4. As required by the Plan and the Option Agreement, as a condition to Optionee's exercise of the Option, Optionee is required to execute this Agreement which gives the Company certain rights, including, but not limited to, transfer restrictions with respect to the Shares, rights of repurchase and first refusal upon a proposed sale or transfer of the Shares and other rights to repurchase the Shares being issued pursuant to the terms hereof. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. EXERCISE OF OPTION. Subject to the terms and conditions hereof, Optionee shall exercise his or her Option or a portion thereof to purchase ___________________ Shares at an exercise price of $_________ per Share, subject to and in accordance with the terms set forth in this Agreement, payable in accordance with the terms and provisions of the Option Agreement. 2. TRANSFER RESTRICTIONS. (a) The Optionee shall not sell, assign, transfer, pledge, hypothecate, mortgage, encumber or otherwise dispose of all or any of his or her Shares except as otherwise expressly provided in this Agreement. (b) Notwithstanding anything to the contrary contained herein, the Optionee may transfer all or any of his or her Shares (i) by way of gift to his or her spouse, parents, siblings, or lineal descendants of the Optionee or to any trust for the exclusive benefit of any such family member or the Optionee, provided that any such transferee shall agree in writing with the Company, prior to, and as a condition precedent to such transfer, to be bound by all of the provisions of this Agreement to the same extent as if such transferee were the Optionee, or (ii) by will or the laws of descent and distribution, in which event each such transferee shall be bound by all of the provisions of this Agreement to the same extent as if such transferee were the Optionee. (c) Any purported transfer in violation of the provisions of this Agreement shall be void AB INITIO. 3. TERMINATION OF EMPLOYMENT OR ENGAGEMENT. (a) In the event of the termination of the employment or engagement (or other relationship) of the Optionee for any reason, including termination of employment or engagement with BCI, the Company (which term, for purposes of this Section 3, shall include the designees of the Company) shall have the right to purchase from, and if the Company exercises its option pursuant to subparagraphs (d), (e) and (f) below, the Optionee shall sell to the Company upon the exercise of such right at a purchase price per Share equal to the Fair Market Value per share as at the date of termination, all of the Shares owned by the Optionee. (b) In the event the Optionee does not exercise the Option until after the Optionee's termination of employment or other engagement with the Company or BCI, the Company shall have the right to purchase from, and if the Company exercises its option pursuant to subparagraphs (d), (e) and (f) below, the Optionee shall sell to the Company upon the exercise of such right at a purchase price per Share equal to the Fair Market Value per share as at the date of exercise, all of the Shares owned by the Optionee. (c) The number of Shares subject to repurchase pursuant to Sections 3(a) and 3(b) shall be adjusted to give effect to any stock dividend, or other distribution of stock made on or in respect of such Shares, or any subdivision, combination or reclassification of the outstanding capital stock of the Company or received in exchange for the Shares. (d) In order to exercise the option to purchase Optionee's Shares under this Section 3, the Company shall deliver a written notice to the stockholder indicating its election to purchase the Shares and specifying the number of Shares which the Company elects to purchase and the purchase price therefor. -2- (e) If the Company elects not to exercise its rights pursuant to this Section 3 or if the Company is legally prohibited from or unable to repurchase the Shares during the period referred to below, then the Company shall notify the Optionee and each designee of the Company, if any, within the 60-day period following (i) with respect to a repurchase pursuant to Section 3(a), the termination of employment or engagement of the Optionee or (ii) with respect to a repurchase pursuant to Section 3(b), the date of exercise of the Option. In such event, the designees shall have the right, during the 30-day period following the Company's notice, to purchase such number of Shares as the Company shall designate, on the same terms and conditions as were applicable to the Company, which right shall be exercised by giving written notice of acceptance to the Company specifying the number of Shares which such designee elects to purchase and the purchase price therefor. (f) The repurchase of Shares hereunder shall be made on a date selected by the Company, within 120 days after (i) with respect to a repurchase pursuant to Section 3(a), the termination of employment or engagement or (ii) with respect to a repurchase pursuant to Section 3(b), the date of exercise of the Option, by delivery of payment to the Optionee, by check or wire transfer, against receipt of one or more certificates, properly endorsed, evidencing the Optionee's Shares to be so repurchased. (g) Anything contained herein to the contrary notwithstanding, at the option of the Company, any purchaser of Shares pursuant to Section 3 which is not the Company shall agree in writing, in advance, to be bound by and comply with all applicable provisions of this Agreement. 4. RIGHT OF FIRST REFUSAL ON DISPOSITIONS. (a) If at any time the Optionee desires to sell all or any part of his or her Shares pursuant to a bona fide offer from a third party (the "Proposed Transferee"), then the Optionee shall submit a written offer (the "Offer") to sell such Shares (the "Offered Shares") to the Company or any entity or person designated by the Company ("designee"), on terms and conditions, including price, not less favorable to the Company or its designee than those on which the Optionee proposes to sell such Offered Shares to the Proposed Transferee. The Offer shall disclose the identity of the Proposed Transferee, the number of Offered Shares proposed to be sold, the total number of Shares owned by the Optionee, the terms and conditions, including price, of the proposed sale, and any other material facts relating to the proposed sale. The Offer shall further state that the Company or its designee may acquire, in accordance with the provisions of this Agreement, all or any portion of the Offered Shares for the price and upon the other terms and conditions set forth therein. (b) If the Company (or its designee, if one exists) desires to purchase all or any part of the Offered Shares, then the Company or its designee shall communicate in writing its election to purchase (an "Acceptance") to the Optionee, which Acceptance shall state the number of Offered Shares the Company or its designee desires to purchase and shall be given to the Optionee within thirty (30) days after the date the Offer was made to the Company. The Acceptance shall, when taken in conjunction with the Offer, be deemed to constitute a valid, -3- legally binding and enforceable agreement for the sale and purchase of such Offered Shares. Sales of the Offered Shares to be sold to the Company or its designee pursuant to this Section 4 shall be made at the offices of the Company on the 45th day following the date the Offer was made (or if such 45th day is not a business day, then on the next succeeding business day). Such sales shall be effected by the Optionee's delivery to the Company a certificate or certificates evidencing the Offered Shares to be purchased by the Company or its designee, duly endorsed for transfer to the Company or its designee, as the case may be, which Shares shall be delivered free and clear of all liens, charges, claims, and encumbrances of any nature whatsoever, against payment to the Optionee of the purchase price therefor by the Company or its designee, as the case may be. (c) If the Company or its designee does not purchase all of the Offered Shares, then the Offered Shares not so purchased may be sold by the Optionee at any time within 90 days after the date the Offer was made to the Company. Any such sale shall be to the Proposed Transferee, at not less than the price and upon other terms and conditions, if any, not more favorable to the Proposed Transferee than those specified in the Offer. Any Offered Shares not sold within such 90-day period shall continue to be subject to the requirements of a prior offer pursuant to this Section 4. 5. FAILURE TO DELIVER SHARES. If the Optionee becomes obligated to sell any Shares to the Company or its designee under this Agreement and fails to deliver such Shares in accordance with the terms of this Agreement, then the Company or its designee may, at its option, in addition to all other remedies it may have, send to the Optionee the purchase price for such Shares as is herein specified. Thereupon, the Company upon written notice to the Optionee, (a) shall cancel on its books the certificate or certificates representing the Shares to be sold and (b) in the case of a designee, shall issue, in lieu thereof, in the name of such designee, a new certificate or certificates representing such Shares, and thereupon all of the Optionee's rights in and to such Shares shall terminate. 6. FURTHER LIMITATION AS TO TRANSFERS BY THE STOCKHOLDER. In addition to the other restrictions provided in this Agreement or otherwise, if requested by the Company or its underwriters for a public offering of securities of the Company, the Optionee shall not sell or otherwise transfer or dispose of any Shares or other securities of the Company held by such Optionee during the period of fourteen (14) days before, and one hundred eighty (180) days following, the effective date of a registration statement filed by the Company with the Securities and Exchange Commission relating to such offering (other than a registration statement on Form S-8 or Form S-4, or their successors, or any other comparable form for similarly limited purposes promulgated after the date hereof, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another corporation). 7. REMEDIES. (a) The Optionee expressly agrees that the Company or its designee, as the case may be, will be irreparably damaged if this Agreement is not specifically enforced. In case any one or more of the covenants and/or agreements set forth in this Agreement shall have -4- been breached by the Optionee, the Company or its designee (as the case may be) may proceed to protect and enforce their rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach; and/or an action for specific performance of any such covenant or agreement contained in this Agreement and/or a temporary or permanent injunction, in any case without showing any actual damage. The rights, powers and remedies of the parties under this Agreement are cumulative and not exclusive of any other right, power or remedy which such parties may have under any other agreement or law. No single or partial assertion or exercise of any right, power or remedy of a party hereunder shall preclude any other or further assertion or exercise thereof. (b) The Optionee agrees that, until a public market for the Shares exists, the Shares cannot be readily purchased, sold, or evaluated in the open market, that they have a unique and special value, and that the Company and its stockholders would be irreparably damaged if the terms of this Agreement were not capable of being specifically enforced, and for this reason, among others, the Company shall be entitled to a decree of specific performance of the terms hereof or an injunction restraining violation of this Agreement, said right to be in addition to any other remedies of the Company. 8. ASSIGNMENT. The Company may assign its rights under this Agreement to one or more persons or entities, who shall have the right to so exercise such rights in his, her or its own name and for his, her or its own account. If the exercise of any such right requires the consent of any state or other regulatory authority, then the Optionee shall cooperate with the Company in requesting such consent. 9. ADJUSTMENT. The number of Shares subject to the terms and provisions of this Agreement during the term of this Agreement shall be adjusted to give effect to any stock dividend or liquidating dividend of cash and/or property, stock split or other change or reclassification of the outstanding securities of the Company. In such event, any and all new, substituted or additional securities or other property to which the Optionee is entitled by reason of his or her ownership of Shares shall be immediately subject to the terms of this Agreement, and be included in the term "Shares" for all purposes with the same force and effect as the Shares presently subject to such rights and restrictions. 10. LEGENDS. All certificates representing any Shares of the Company subject to the provisions of this Agreement shall have endorsed thereon the following legend in substantially the following form unless in the opinion of counsel such legend is no longer necessary: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY APPLICABLE STATE SECURITIES LAWS. THESE SHARES HAVE NOT BEEN ACQUIRED WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, ASSIGNED, EXCHANGED, MORTGAGED, PLEDGED, HYPOTHECATED OR -5- OTHERWISE TRANSFERRED OR DISPOSED OF, BY GIFT OR OTHERWISE, OR IN ANY WAY ENCUMBERED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO BLUESTONE SOFTWARE, INC. THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT AND UNDER APPLICABLE STATE SECURITIES LAWS. MOREOVER, THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AND RESTRICTED BY THE PROVISIONS OF A CERTAIN STOCK PURCHASE AND RESTRICTION AGREEMENT BETWEEN BLUESTONE SOFTWARE, INC. AND THE STOCKHOLDER, A COPY OF WHICH AGREEMENT WILL BE FURNISHED BY BLUESTONE SOFTWARE, INC. UPON WRITTEN REQUEST AND WITHOUT CHARGE, AND ALL OF THE PROVISIONS OF SUCH AGREEMENT ARE INCORPORATED BY REFERENCE IN THIS CERTIFICATE. 11. INVESTMENT REPRESENTATIONS. Unless the Shares have been registered under the Securities Act of 1933, as amended (the "Act"), in which event the Company will so advise Optionee in writing, Optionee acknowledges, agrees, represents and warrants, in connection with the proposed purchase of the Shares, as follows: (a) The Optionee is purchasing the Shares solely for his or her own account for investment and not with a view to, or for resale in connection with any distribution thereof within the meaning of the Act. The Optionee further represents that he or she does not have any present intention of selling, offering to sell or otherwise disposing of or distributing the Shares or any portion thereof; and that the entire legal and beneficial interest of the Shares he or she is purchasing is being purchased for, and will be held for the account of, the Optionee only and neither in whole nor in part for any other person. (b) The Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Shares. The Optionee has a preexisting personal or business relationship with the officers and directors of the Company and that the Optionee has such knowledge and experience in business and financial matters to enable him or her to evaluate the risks of the prospective investment and to make an informed investment decision with respect thereto and that the Optionee has the capacity to protect his or her own interests in connection with the purchase of the Shares. The Optionee has discussed the Company and its plans, operations and financial condition with its officers, has received all such information as the Optionee deems necessary and appropriate to enable him or her to evaluate the financial risk inherent in making an investment in the Shares and has received satisfactory and -6- complete information concerning the business and financial condition of the Company in response to all inquiries in respect thereof. (c) The Optionee realizes that his or her purchase of the Shares will be a speculative investment and that Optionee is able, without impairing his or her financial condition, to hold the Shares for an indefinite period of time and to suffer a complete loss on the investment. (d) The Company has disclosed in writing that: (i) the sale of the Shares has not been registered under the Act, and the Shares must be held indefinitely unless a transfer of them is subsequently registered under the Act or an exemption from such registration is available, and the Company is under no obligation to register the Shares; and (ii) the Company shall make a notation in its records of the aforementioned restrictions on transfer and legends. (e) The Optionee is aware of the provisions of Rule 144, promulgated under the Act, which, in substance, permits limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or an affiliate of such issuer) in a non-public offering subject to the satisfaction of certain conditions, including among other things: the resale occurring not less than one (1) year from the date Optionee has purchased and paid for the Shares; the availability of certain public information concerning the Company; the sale being through a broker in an unsolicited "brokers' transaction" or in a transaction directly with a market maker (as said term is defined under the Securities Exchange Act of 1934, as amended); and that any sale of the Shares may be made by Optionee, if Optionee is an affiliate of the Company, only in limited amounts during any three-month period not exceeding specified limitations. The Optionee understands that at the time Optionee wishes to sell the Shares there may be no public market upon which to make such a sale, and that, even if such public market then exists, the Company may not be satisfying the current public information requirements of Rule 144, and that, in such event, Optionee would be precluded from selling the Shares under Rule 144 even if the one-year minimum holding period had been satisfied. The Optionee understands that in the event all of the requirements of Rule 144 are not satisfied, registration under the Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and such persons and their respective brokers who participate in such transactions do so at their own risk. (f) Without in any way limiting the Optionee's representations and warranties set forth herein, the Optionee shall in no event make any disposition of all or any portion of the Shares that he or she is purchasing unless and until: (i) there is then in effect a Registration Statement under the Act covering such proposed disposition and such disposition is made in accordance with said Registration Statement; or -7- (ii) the Optionee shall have (a) notified the Company of the proposed disposition and furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (b) furnished the Company with an opinion of Optionee's own counsel (satisfactory to the Company) to the effect that such disposition will not require registration of such shares under the Act, and such opinion of the Optionee's counsel shall have been concurred in by counsel for the Company and the Company shall have advised the Optionee of such concurrence. 12. ESCROW. As security for the Optionee's faithful performance of the terms of this Agreement and to insure the availability for delivery of the Optionee's Shares upon exercise, under this Agreement, of the rights of the Company and the rights of the other beneficiaries to this Agreement, the Optionee shall, if requested in writing by the Company, deliver to and deposit with the Chief Financial Officer of the Company or his nominee (the "Escrow Agent"), as Escrow Agent in this transaction, two Stock Assignments duly endorsed (with date and number of shares blank) in the form attached hereto as ATTACHMENT A, together with the certificate or certificates evidencing the Shares; such documents are to be held by the Escrow Agent and delivered to said Escrow Agent pursuant to the Joint Escrow Instructions of the Company and Optionee set forth in ATTACHMENT B attached hereto and incorporated herein by this reference, which instructions shall also be delivered to the Escrow Agent at the closing hereunder. 13. RESTRICTION ON ALIENATION. The Optionee shall not sell, transfer, gift, pledge, hypothecate, assign or otherwise dispose of any of the Shares or any right or interest therein, whether voluntary, by operation of law or otherwise, without the prior written consent of the Company, except a transfer which meets the requirements of this Agreement. Any sale, transfer, gift, pledge, hypothecation, assignment or disposition or purported sale, transfer or other disposition of such Shares by Optionee shall be null and void AB INITIO unless the terms, conditions and provisions of this Agreement are strictly observed. 14. TERM. Except for Sections 3, 4 and 5 hereof, which shall terminate upon the consummation of a Public Offering of shares of the Company's equity capital, this Agreement shall continue in full force and effect until such time as the Optionee has transferred all of the Shares (other than pursuant to Section 2(b)) in accordance with the terms of this Agreement. 15. MISCELLANEOUS. (a) The Company shall not be required (i) to transfer on its books any Shares that shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (ii) to treat as owner of such Shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such Shares shall have been so transferred. -8- (b) Subject to the provisions of this Agreement, Optionee shall, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Company with respect to the Shares. (c) The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. (d) Any notice, consent or other communication required or permitted hereunder shall be given in writing and shall be deemed effectively given: (a) upon personal delivery; (b) two (2) business days after day of deposit if sent by regular mail; (c) one (1) business day after the business day of deposit with a carrier if sent by Federal Express, Express Mail or other express service (receipt requested), in each case to the appropriate addresses, telex numbers and telecopier numbers set forth below (or at such other address or numbers as such party may designate by ten (10) days' advance written notice to the other party hereto): (i) To the Optionee: ------------------- ------------------- ------------------- (ii) To the Company: Bluestone Software, Inc. 1000 Briggs Road Mount Laurel, NJ 08054 Attn: President (e) This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to all compliance with the restrictions on transfer herein set forth, be binding upon Optionee, his heirs, executors, administrators, and permitted successors and assigns. (f) This Agreement shall be construed under the laws of the State of New Jersey and constitutes the entire Agreement of the parties with respect to the subject matter hereof, superseding all prior written or oral agreements with respect thereto, and no amendment or addition hereto shall be deemed effective unless agreed to in writing by the parties hereto. (g) If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, then the remaining provisions shall nevertheless continue in full force and effect without being impaired or invalidated in any way and shall be construed in accordance with the purposes and tenor and effect of this Agreement. -9- (h) Nothing in this Agreement shall be deemed to create any term of employment or engagement or affect in any manner whatsoever the right or power of the Company or BCI to terminate Optionee's employment or engagement. (i) Notwithstanding (i) the execution and delivery of this Agreement by the parties hereto or (ii) anything to the contrary contained herein, if the Optionee's employment or engagement with the Company or BCI (as the case may be) is terminated and the Board makes a determination that the Optionee (A) has engaged in any type of disloyalty to the Company or BCI, including without limitation, fraud, embezzlement, theft, or dishonesty in the course of his or her employment or engagement, (B) has been convicted of a felony, (C) has disclosed trade secrets or confidential information of the Company or BCI, or (D) has breached any agreement with the Company or BCI in respect of confidentiality, non-disclosure, non-competition or otherwise, then, at the election of the Board, the Optionee shall forfeit all shares for which the Company has not yet delivered share certificates to the Optionee or Escrow Agent, as the case may be, and the Company shall refund to the Optionee the Option purchase price paid to the Company upon exercise of the Option with respect to those Shares. In addition, the Company may withhold delivery of share certificates pending the resolution of any inquiry that could lead to a determination resulting in forfeiture. -10- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above-written. BLUESTONE SOFTWARE, INC. By: ------------------------------------ Title: ------------------------------------ OPTIONEE: ---------------------------------- (Signature) ---------------------------------- (Print Name) Address: ------------------------------------ -11- EX-10.3 6 EXHIBIT 10.3 Exhibit 10.3 BLUESTONE SOFTWARE, INC. EMPLOYEE CONFIDENTIALITY AGREEMENT Recognizing that the success of Bluestone Software, Inc., a Delaware corporation (the "Company"), depends, in part, on the protection of trade secrets, innovations, formulae, software, algorithms and information held or utilized by the Company, and recognizing that during my employment I may have access or contribute to such matters, and in consideration of my employment by the Company and intending to be legally bound by this Agreement, I agree to the following: 1. During and after my employment, without the prior written consent of an officer of the Company, I will not disclose or use for my direct or indirect benefit or the direct or indirect benefit of a third party, and I will use my best efforts to maintain, the confidentiality of all confidential information that I acquire because of my employment. In general, "confidential information" means: any information that the Company treats as confidential, including, but not limited to, any information relating to research, processes, inventions, products, methods, formulae, algorithms, computer codes or instructions (including source and object code and related documentation), all computer inputs and outputs (regardless of the media on which stored or located), computer processing systems or techniques, concepts, layouts, flowcharts, specifications, know-how, user or service manuals or other like textual materials, software, documentation, equipment, costs, customer lists, customer leads, compensation records and plans, business studies, business procedures, and finances, the identities of customers, contractors or suppliers and prospective customers, contractors or suppliers; the terms of contracts or agreements with customers, contractors or suppliers; any information relating to the Company's relationship with actual or prospective customers, contractors or suppliers and the needs and requirements of, and the Company's course of dealing with, any such actual or prospective customers, contractors or suppliers; any personnel information; any customer or vendor credit information; any other materials prepared by me in the course of, relating to or arising out of my employment by the Company, or prepared by any other Company employee or contractor for the Company or its customers; and any other materials that have not been made available to the general public. Failure to mark any of the confidential information as confidential or proprietary will not affect its status as confidential information under the terms of this Agreement. I acknowledge that Confidential Information may include both information owned by the Company and information disclosed to the Company by the customers of the Company on a confidential basis. During and after my employment by the Company, I will not disclose the Confidential Information of one customer to any other customer of the Company, without the prior written consent of an officer of the Company, and will comply with all of the internal policies and procedures of the Company with respect to the use of Confidential Information of customers. 2. During and after my employment, I will not remove from the Company's offices or premises any documents, records, notebooks, files, correspondence, reports, memoranda, computer tapes, computer disks or similar materials of or containing information of the type identified in the preceding paragraph, or other materials or property of the Company of any kind (collectively, "Materials"), unless necessary in accordance with my duties and responsibilities of employment by the Company. In the event that I remove any Materials, I will return such Materials to their proper files or places of safekeeping as promptly as possible after the removal has served its specific purpose. Except as may be necessary in the discharge of my assigned duties, I will not make, retain, remove or distribute any copies of any of such Materials for any reason whatsoever and I will not divulge to any third person the nature or contents of any of such Materials or of any other oral or written information. Upon the termination of my employment with the Company, I will return to the Company all originals and copies of such Materials then in my possession, whether prepared by me or by others. If, at any time after such termination, I become aware that any such originals, copies or extracts of the foregoing are in my possession, then I will immediately surrender the possession thereof to the Company. 3. I acknowledge that any and all writings, documents, inventions, discoveries, computer programs or instructions (whether in source code, object code, or any other form), algorithms, formulae, plans, customer lists, memoranda, tests, research, designs, specifications, models, data, diagrams, flow charts, overhead foils, instructional guides, and/or techniques (whether reduced to written form or otherwise) that I make, conceive, discover, or develop, either solely or jointly with any other person, at any time during the term of my employment, whether during working hours or at the Company's facility or at any other time or location, and whether upon the request or suggestion of the Company or otherwise, that relate to or are useful in any way in connection with any business carried on or contemplated by the Company (collectively, the "Intellectual Work Product") will be the sole and exclusive property of the Company. I will promptly and fully disclose all the Intellectual Work Product to the Company, and I will have no claim for additional compensation for the Intellectual Work Product. 4. I acknowledge that all Intellectual Work Product that is copyrightable will be considered a work made for hire under United States Copyright Law. To the extent that any copyrightable Intellectual Work Product may not be considered a work made for hire under the applicable provisions of the copyright law, or to the extent that, notwithstanding the foregoing provisions, I may retain an interest in any Intellectual Work Product that is not copyrightable, I hereby irrevocably assign and transfer to the Company any and all right, title, or interest that I may have in the Intellectual Work Product under copyright, patent, trade secret and trademark law, in perpetuity or for the longest period otherwise permitted by law, without the necessity of further consideration. The Company will be entitled to obtain and hold in its own name all copyrights, patents, trade secrets and trademarks with respect thereto. 5. At the sole request and expense of the Company, either before or after the termination of my employment, I will assist the Company in acquiring and maintaining copyright, patent, trade -2- secret and trademark protection upon, and confirming its title to, such Intellectual Work Product. My assistance will include signing all applications for copyrights and patents and other documents, cooperating in legal proceedings and taking any other steps considered desirable by the Company. 6. In the event the Company is unable after reasonable effort to secure my signature on any of the documents referenced in Paragraph 5 above, whether because of my physical or mental incapacity or for any other reason whatsoever, then I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney-in-fact, to act for and in my behalf and stead to execute and file any such documents and to do all other lawfully permitted acts to further the prosecution and issuance of any such trade secret, patent, copyright, trademark, or other analogous protection, with the same legal force and effect as if executed by me. 7. During the period of my employment by the Company and for a period of one (1) year thereafter, I will not, directly or indirectly, perform any services within the scope of or similar to the services performed by me under this Agreement for or on behalf of any business that (i) designs, develops, markets, supports and sells Internet or intranet software development tools and related products and services, and (ii) is competitive with any business conducted by the Company. During the period of my employment by the Company for a period of one (1) year thereafter, I will not, directly or indirectly, contact, solicit, call on, or otherwise deal in any way with any customer, vendor or contractor with whom the Company shall have dealt at any time during the period of my performance of services to the Company, for a purpose which is competitive with the business of the Company, or influence or attempt to influence any customer, vendor or contractor of the Company to terminate or modify any written or oral agreement or course of dealing with the Company. For the one (1) year period immediately following the termination of my employment with the Company, I will not, directly or indirectly, employ, engage or retain, or arrange to have any other person or entity employ, engage or retain any person who is an employee, contractor, consultant or agent of the Company or shall have been employed, engaged or retained by the Company as an employee, contractor, consultant or agent at any time during the one (1) year period preceding the date upon which my employment with the Company is terminated; additionally, I will not, directly or indirectly, influence or attempt to influence any such person to terminate or modify his or her employment arrangement or engagement with the Company. 8. If the Company provides me with travel advances or other advances of expenses in connection with my employment, I will make a prompt settlement of all such advances after completion of the travel and other activities. If I owe any money to the Company at the time of termination of employment, then it may be deducted from any money otherwise owed to me by the Company. 9. I will devote my full time and effort to my employment and will at all times act and perform the duties of my employment with honesty, integrity, good faith, responsibility, and I will comply with all rules, regulations and policies of the Company. -3- 10. I am not subject to any other agreement that I will violate by signing this Agreement or which prevents me from disclosing confidential information. I agree to disclose the existence and terms of this Agreement to any employer for which I may work during the term of this Agreement (which employment is not hereby authorized) or after the termination of my employment at the Company. 11. This Agreement constitutes the complete agreement between the Company and me and supersedes all prior agreements, oral or written including without limitation, any employment agreements between me and the Company, and any other communication relating to the subject matter of this Agreement. This Agreement may not be amended or modified except in writing and will be governed by the laws of the State of New Jersey without regard to conflicts of law principles. If any provision or portion of any provision of this Agreement shall be determined to be void, invalid or unenforceable for any reason, then the validity and enforceability of the remaining provisions or portions of provisions will not be affected. The Company may assign this Agreement to, and this Agreement will bind and inure to the benefit of, any parent, subsidiary, affiliate or successor of the Company. I acknowledge that this Agreement is not assignable by me. Except as otherwise provided by the immediately subsequent sentence of this provision, I agree that any suit, action or other legal proceeding arising out of or relating to this Agreement, including, but not limited to, any action commenced by the Company for preliminary or permanent injunctive or other equitable relief, will be instituted in the United States District Court for the District of New Jersey, or if such court does not have or will not accept jurisdiction, in any court of general jurisdiction in Burlington County, New Jersey, and I consent and submit to the personal and exclusive jurisdiction of such courts in any such suit, action or proceeding. This provision shall not prevent the Company from seeking to enforce this Agreement in any other court of competent jurisdiction. I agree that service of process upon me may be effected by certified mail or by any other means permitted by law, and I waive any objection which I may have to the laying of venue of any such suit, action or proceeding in any such court and any claim or defense of inconvenient forum. If an action at law or in equity is necessary to enforce or interpret the terms of this Agreement, then the prevailing party shall be entitled to recover, in addition to any other relief, reasonable attorneys' fees, costs and disbursements. 12. I acknowledge that it is impossible to measure fully in monetary damages the injury that will be caused to the Company in the event of a breach or threatened breach of this Agreement, and I waive the claim or defense that the Company has an adequate remedy at law. I will not, in any action or proceeding to enforce the provisions of this Agreement, assert the claim or defense that such a remedy at law exists. The Company will be entitled to injunctive relief to enforce the provisions of this Agreement, without prejudice to any other remedies the Company may have at law or in equity. -4- 13. I acknowledge that this Agreement does not constitute a right to continued employment and my employment by the Company may be terminated by the Company at any time, with or without cause. Witness: Agreed and Accepted: Signature: Signature: ---------------------------- -------------------------- Company Representative Name: ------------------------------- Date: ------------------------------- -5- BLUESTONE SOFTWARE, INC. EMPLOYEE CONFIDENTIALITY AGREEMENT Recognizing that the success of Bluestone Software, Inc., a Delaware corporation (the "Company"), depends, in part, on the protection of trade secrets, innovations, formulae, software, algorithms and information held or utilized by the Company, and recognizing that during my employment I may have access or contribute to such matters, and in consideration of my employment by the Company and intending to be legally bound by this Agreement, I agree to the following: 1. During and after my employment, without the prior written consent of an officer of the Company, I will not disclose or use for my direct or indirect benefit or the direct or indirect benefit of a third party, and I will use my best efforts to maintain, the confidentiality of all confidential information that I acquire because of my employment. In general, "confidential information" means: any information that the Company treats as confidential, including, but not limited to, any information relating to research, processes, inventions, products, methods, formulae, algorithms, computer codes or instructions (including source and object code and related documentation), all computer inputs and outputs (regardless of the media on which stored or located), computer processing systems or techniques, concepts, layouts, flowcharts, specifications, know-how, user or service manuals or other like textual materials, software, documentation, equipment, costs, customer lists, customer leads, compensation records and plans, business studies, business procedures, and finances, the identities of customers, contractors or suppliers and prospective customers, contractors or suppliers; the terms of contracts or agreements with customers, contractors or suppliers; any information relating to the Company's relationship with actual or prospective customers, contractors or suppliers and the needs and requirements of, and the Company's course of dealing with, any such actual or prospective customers, contractors or suppliers; any personnel information; any customer or vendor credit information; any other materials prepared by me in the course of, relating to or arising out of my employment by the Company, or prepared by any other Company employee or contractor for the Company or its customers; and any other materials that have not been made available to the general public. Failure to mark any of the confidential information as confidential or proprietary will not affect its status as confidential information under the terms of this Agreement. I acknowledge that Confidential Information may include both information owned by the Company and information disclosed to the Company by the customers of the Company on a confidential basis. During and after my employment by the Company, I will not disclose the Confidential Information of one customer to any other customer of the Company, without the prior written consent of an officer of the Company, and will comply with all of the internal policies and procedures of the Company with respect to the use of Confidential Information of customers. 2. During and after my employment, I will not remove from the Company's offices or premises any documents, records, notebooks, files, correspondence, reports, memoranda, computer tapes, computer disks or similar materials of or containing information of the type identified in the preceding paragraph, or other materials or property of the Company of any kind (collectively, "Materials"), unless necessary in accordance with my duties and responsibilities of employment by the Company. In the event that I remove any Materials, I will return such Materials to their proper files or places of safekeeping as promptly as possible after the removal has served its specific purpose. Except as may be necessary in the discharge of my assigned duties, I will not make, retain, remove or distribute any copies of any of such Materials for any reason whatsoever and I will not divulge to any third person the nature or contents of any of such Materials or of any other oral or written information. Upon the termination of my employment with the Company, I will return to the Company all originals and copies of such Materials then in my possession, whether prepared by me or by others. If, at any time after such termination, I become aware that any such originals, copies or extracts of the foregoing are in my possession, then I will immediately surrender the possession thereof to the Company. 3. I acknowledge that any and all writings, documents, inventions, discoveries, computer programs or instructions (whether in source code, object code, or any other form), algorithms, formulae, plans, customer lists, memoranda, tests, research, designs, specifications, models, data, diagrams, flow charts, overhead foils, instructional guides, and/or techniques (whether reduced to written form or otherwise) that I make, conceive, discover, or develop, either solely or jointly with any other person, at any time during the term of my employment, whether during working hours or at the Company's facility or at any other time or location, and whether upon the request or suggestion of the Company or otherwise, that relate to or are useful in any way in connection with any business carried on or contemplated by the Company (collectively, the "Intellectual Work Product") will be the sole and exclusive property of the Company. I will promptly and fully disclose all the Intellectual Work Product to the Company, and I will have no claim for additional compensation for the Intellectual Work Product. 4. I acknowledge that all Intellectual Work Product that is copyrightable will be considered a work made for hire under United States Copyright Law. To the extent that any copyrightable Intellectual Work Product may not be considered a work made for hire under the applicable provisions of the copyright law, or to the extent that, notwithstanding the foregoing provisions, I may retain an interest in any Intellectual Work Product that is not copyrightable, I hereby irrevocably assign and transfer to the Company any and all right, title, or interest that I may have in the Intellectual Work Product under copyright, patent, trade secret and trademark law, in perpetuity or for the longest period otherwise permitted by law, without the necessity of further consideration. The Company will be entitled to obtain and hold in its own name all copyrights, patents, trade secrets and trademarks with respect thereto. 5. At the sole request and expense of the Company, either before or after the termination of my employment, I will assist the Company in acquiring and maintaining copyright, patent, trade secret and trademark protection upon, and confirming its title to, such Intellectual Work Product. My assistance will include signing all applications for copyrights and patents and other documents, cooperating in legal proceedings and taking any other steps considered desirable by the Company. 6. In the event the Company is unable after reasonable effort to secure my signature on any of the documents referenced in Paragraph 5 above, whether because of my physical or mental incapacity or for any other reason whatsoever, then I hereby irrevocably designate and appoint the -2- Company and its duly authorized officers and agents as my agent and attorney-in-fact, to act for and in my behalf and stead to execute and file any such documents and to do all other lawfully permitted acts to further the prosecution and issuance of any such trade secret, patent, copyright, trademark, or other analogous protection, with the same legal force and effect as if executed by me. 7. For the one (1) year period immediately following the termination of my employment with the Company, I will not, directly or indirectly, employ, engage or retain, or arrange to have any other person or entity employ, engage or retain any person who is an employee, contractor, consultant or agent of the Company or shall have been employed, engaged or retained by the Company as an employee, contractor, consultant or agent at any time during the one (1) year period preceding the date upon which my employment with the Company is terminated; additionally, I will not, directly or indirectly, influence or attempt to influence any such person to terminate or modify his or her employment arrangement or engagement with the Company. 8. If the Company provides me with travel advances or other advances of expenses in connection with my employment, I will make a prompt settlement of all such advances after completion of the travel and other activities. If I owe any money to the Company at the time of termination of employment, then it may be deducted from any money otherwise owed to me by the Company. 9. I will devote my full time and effort to my employment and will at all times act and perform the duties of my employment with honesty, integrity, good faith, responsibility, and I will comply with all rules, regulations and policies of the Company. 10. I am not subject to any other agreement that I will violate by signing this Agreement or which prevents me from disclosing confidential information. I agree to disclose the existence and terms of this Agreement to any employer for which I may work during the term of this Agreement (which employment is not hereby authorized) or after the termination of my employment at the Company. 11. This Agreement constitutes the complete agreement between the Company and me and supersedes all prior agreements, oral or written including without limitation, any employment agreements between me and the Company, and any other communication relating to the subject matter of this Agreement. This Agreement may not be amended or modified except in writing and will be governed by the laws of the State of New Jersey without regard to conflicts of law principles. If any provision or portion of any provision of this Agreement shall be determined to be void, invalid or unenforceable for any reason, then the validity and enforceability of the remaining provisions or portions of provisions will not be affected. The Company may assign this Agreement to, and this Agreement will bind and inure to the benefit of, any parent, subsidiary, affiliate or successor of the Company. I acknowledge that this Agreement is not assignable by me. Except as otherwise provided by the immediately subsequent sentence of this provision, I agree that any suit, action or other legal proceeding arising out of or relating to this Agreement, including, but not limited to, any action commenced by the Company for preliminary or permanent injunctive or other equitable relief, will be instituted in the United States District Court for the District of New Jersey, or if such court does not have or will not accept jurisdiction, in any court of general jurisdiction in Burlington -3- County, New Jersey, and I consent and submit to the personal and exclusive jurisdiction of such courts in any such suit, action or proceeding. This provision shall not prevent the Company from seeking to enforce this Agreement in any other court of competent jurisdiction. I agree that service of process upon me may be effected by certified mail or by any other means permitted by law, and I waive any objection which I may have to the laying of venue of any such suit, action or proceeding in any such court and any claim or defense of inconvenient forum. If an action at law or in equity is necessary to enforce or interpret the terms of this Agreement, then the prevailing party shall be entitled to recover, in addition to any other relief, reasonable attorneys' fees, costs and disbursements. 12. I acknowledge that it is impossible to measure fully in monetary damages the injury that will be caused to the Company in the event of a breach or threatened breach of this Agreement, and I waive the claim or defense that the Company has an adequate remedy at law. I will not, in any action or proceeding to enforce the provisions of this Agreement, assert the claim or defense that such a remedy at law exists. The Company will be entitled to injunctive relief to enforce the provisions of this Agreement, without prejudice to any other remedies the Company may have at law or in equity. 13. I acknowledge that this Agreement does not constitute a right to continued employment and my employment by the Company may be terminated by the Company at any time, with or without cause. Witness: Agreed and Accepted: Signature: Signature: ---------------------------- ------------------------ Company Representative Name: ----------------------------- Date: ----------------------------- -4- EX-10.4 7 EXHIBIT 10.4 Exhibit 10.4 BLUESTONE SOFTWARE, INC. EXECUTIVE EMPLOYMENT AGREEMENT THIS EXECUTIVE EMPLOYMENT AGREEMENT is made on this 18th day of April, 1997 by and between Mel Baiada, a resident of 124 Pheasant Fields Lane, Moorestown, New Jersey 08057 (the "Employee"), and BLUESTONE SOFTWARE, INC., a corporation organized and existing under the laws of the State of Delaware (the "Company"), and successor by merger to Bluestone Consulting Inc., a New Jersey corporation. WHEREAS, the Company is engaged in the business of designing, developing, supporting, marketing and selling Internet and intranet software development tools and related products and services (as may be expanded by the Company during the term of this Agreement, the "Business"); WHEREAS, the Employee currently owns all of the issued and outstanding capital stock of the Company and, after the equity financing pursuant to the Series A Preferred Stock Purchase Agreement (the "Stock Purchase Agreement") among the Company and the investors listed therein, will hold a majority of the issued and outstanding capital stock of the Company on a fully-diluted basis; WHEREAS, the Employee owns all of the issued and outstanding capital stock of Bluestone Consulting, Inc., a Delaware corporation (the "Services Company"), an affiliate of the Company; and WHEREAS, the Company desires to employ the Employee and the Employee desires to be employed by the Company for a one (1) year period upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and obligations contained herein, and intending to be legally bound, the parties, subject to the terms and conditions set forth herein, agree as follows: 1. EMPLOYMENT AND TERM. (a) The Company hereby employs the Employee and the Employee hereby accepts employment as President and Chief Executive Officer of the Company (the "Position"), for a period commencing on the date hereof (the "Commencement Date") and continuing until April 18th, 1998 (the "Initial Term") upon the terms and conditions hereinafter set forth. (b) This Agreement shall automatically renew for successive additional one (1) year terms (each, a "Renewal Period") unless notice of termination is given under Section 8 or the Company elects not to renew the Agreement based upon a majority vote of the entire Board of Directors of the Company (the "Board") (which in the case of a Board consisting of four directors shall mean at least three votes in favor of non-renewal) and written notice of such intention is given to the Employee not later than thirty (30) days prior to the expiration of the Initial Term or any Renewal Period, as applicable. The Initial Term of employment and any Renewal Periods hereunder are hereinafter referred to collectively as the "Term." 2. DUTIES. (a) During the Term, the Employee shall serve the Company faithfully and to the best of his ability and shall devote, subject to Section 2(b), his full time, attention, skill and efforts to the performance of the duties required by or appropriate for the Position. The Employee shall assume such duties and responsibilities as may be customarily incident to such a position, and such additional and other duties as may be assigned to the Employee from time to time by the Board, including, without limitation, the duties and responsibilities set forth in SCHEDULE A attached hereto. The Employee shall report to the Board. (b) The Employee may serve as President and Chief Executive Officer of Bluestone Consulting, Inc., a Delaware corporation (the "Services Company"), until on or about December 31, 1997. The Employee may elect to serve as chairman and/or a member of the board of directors of the Services Company without restriction. 3. COMPENSATION. The Company shall pay the Employee, and the Employee hereby agrees to accept, as compensation for all services rendered hereunder and for the Employee's intellectual property and other covenants and assignments as provided for in Sections 4, 5 and 6 hereof, the compensation set forth in this Section 3. 3.1 SALARY. The Company shall pay the Employee an initial base salary at the annual rate of One Hundred Fifty Thousand Dollars ($150,000) (as the same may hereafter be adjusted, the "Base Salary"). The Base Salary shall be inclusive of all applicable income, social security and other taxes and charges that are required by law to be withheld by the Company, are requested to be withheld by the Employee, and shall be withheld and paid in accordance with the Company's normal payroll practice for its similarly situated employees from time to time in effect. The Base Salary may be adjusted from time to time by the Board in its discretion in accordance with the normal executive employee compensation review practices of the Company. 3.2 BONUS PROGRAM. The Company shall pay to the Employee a cash bonus in the amount of Fifty Thousand Dollars ($50,000) (or such greater amount as determined by the Board in its sole discretion) for the fiscal year ended December 31, 1997. Such bonus will paid to the Employee on or before January 31, 1998. Thereafter, the Employee shall be entitled -2- to participate in any executive bonus program that may be established by and at the discretion of the Company pursuant to which the Board may award bonuses to executive employees, based upon the achievement of written individual and corporate objectives such as the Board shall determine. 3.3 REPURCHASE AGREEMENT The Employee and the Company shall enter into a repurchase agreement in respect of certain shares of Common Stock of the Company owned by the Employee. The Repurchase Agreement shall set forth, among other things, the number of shares subject to the Company's repurchase right, the vesting schedule and the purchase price per share. 3.4 FRINGE BENEFITS. The Employee shall be entitled to participate in any health or dental programs of the Company. The Employee shall be entitled to participate in all vacation and other fringe benefit programs of the Company to the extent and on the same terms and conditions as are accorded to other officers and key employees of the Company. Notwithstanding the above, the Employee is entitled to three (3) weeks paid vacation per calendar year. 3.5 REIMBURSEMENT OF EXPENSES. The Employee shall be reimbursed for all normal items of travel and entertainment and miscellaneous expenses reasonably incurred by him on behalf of the Company, provided that such expenses are documented and submitted to the Company all in accordance with the reimbursement policies of the Company as in effect from time to time. 4. CONFIDENTIALITY. The Employee recognizes and acknowledges that the Proprietary Information (as hereinafter defined) is a valuable, special and unique asset of the Company. As a result, both during the Term and thereafter, the Employee shall not, without the prior written consent of the Company, for any reason either directly or indirectly divulge to any third-party or use for his own benefit, or for any purpose other than the exclusive benefit of the Company, any confidential, proprietary, business and technical information or trade secrets of the Company or of any subsidiary or affiliate of the Company (the "Proprietary Information") revealed, obtained or developed in the course of his employment with the Company. Proprietary Information shall include, but shall not be limited to: the intangible personal property described in Section 5(b) hereof; any information relating to methods of production, manufacture and research; hardware and software configurations, computer codes or instructions (including source and object code listings, program logic algorithms, subroutines, modules or other subparts of computer programs and related documentation, including program notation), computer inputs and outputs (regardless of the media on which stored or located) and computer processing systems, techniques, designs, architecture, and interfaces; the identities of, the Company's relationship with, the terms of contracts and agreements with, the needs and requirements of, and the Company's course of dealing with, the Company's actual and prospective customers, contractors and suppliers; and any other materials prepared by the Employee in the course of his employment by the Company, or prepared by any other employee or contractor of the Company for the Company or its customers, (including concepts, layouts, flow charts, specifications, -3- know-how, user or service manuals, plans, sketches, blueprints, costs, business studies, business procedures, finances, marketing data, methods, plans, personnel information, customer and vendor credit information and any other materials that have not been made available to the general public). Nothing contained herein shall restrict the Employee's ability to make such disclosures during the course of his employment as may be necessary or appropriate to the effective and efficient discharge of the duties required by or appropriate for the Position or as such disclosures may be required by law. Furthermore, nothing contained herein shall restrict the Employee from divulging or using for his own benefit or for any other purpose any Proprietary Information that is readily available to the general public so long as such information did not become available to the general public as a direct or indirect result of the Employee's breach of this Section 4. Failure by the Company to mark any of the Proprietary Information as confidential or proprietary shall not affect its status as Proprietary Information under the terms of this Agreement. 5. PROPERTY. (a) All right, title and interest in and to Proprietary Information shall be and remain the sole and exclusive property of the Company. During the Term, the Employee shall not remove from the Company's offices or premises any documents, records, notebooks, files, correspondence, reports, memoranda or similar materials of or containing Proprietary Information, or other materials or property of any kind belonging to the Company unless necessary or appropriate in accordance with the duties and responsibilities required by or appropriate for the Position and, in the event that such materials or property are removed, all of the foregoing shall be returned to their proper files or places of safekeeping as promptly as possible after the removal shall serve its specific purpose. The Employee shall not make, retain, remove and/or distribute any copies of any of the foregoing for any reason whatsoever, except as may be necessary in the discharge of the assigned duties, and shall not divulge to any third person the nature of and/or contents of any of the foregoing or of any other oral or written information to which he may have access or with which for any reason he may become familiar, except as disclosure shall be necessary in the performance of the duties; and upon the termination of his employment with the Company, he shall return to the Company all originals and copies of the foregoing then in the possession, whether prepared by the Employee or by others. (b) (i) The Employee acknowledges that all right, title and interest in and to any and all writings, documents, inventions, discoveries, computer programs or instructions (whether in source code, object code, or any other form), algorithms, formulae, plans, memoranda, tests, research, designs, innovations, systems, analyses, specifications, models, data, diagrams, flow charts, and/or techniques (whether reduced to written or electronic form or otherwise) that the Employee creates, makes, conceives, discovers or develops, either solely or jointly with any other person, at any time during the Term, whether during working hours or at the Company's facility or at any other time or location, and whether upon the request or suggestion of the Company or otherwise, and that relate to or are useful in any way in connection with the Business now or hereafter carried on by the Company (collectively, "Intellectual Work -4- GV: #44228 v6 (Y4K06!.WPD) Product") shall be the sole and exclusive property of the Company. The Employee shall promptly disclose to the Company all Intellectual Work Product, and the Employee shall have no claim for additional compensation for the Intellectual Work Product. (ii) The Employee acknowledges that all the Intellectual Work Product that is copyrightable shall be considered a work made for hire under United States Copyright Law. To the extent that any copyrightable Intellectual Work Product may not be considered a work made for hire under the applicable provisions of the United States Copyright Law, or to the extent that, notwithstanding the foregoing provisions, the Employee may retain an interest in any Intellectual Work Product that is not copyrightable, the Employee hereby irrevocably assigns and transfers to the Company any and all right, title, or interest that the Employee may have in the Intellectual Work Product under copyright, patent, trade secret, trademark and other intellectual property laws, in perpetuity or for the longest period otherwise permitted by law, without the necessity of further consideration. The Company shall be entitled to obtain and hold in its own name all copyrights, patents, trade secrets, and trademarks with respect thereto. (iii) The Employee shall reveal promptly all information relating to the Intellectual Work Product to an appropriate officer of the Company, cooperate with the Company and execute such documents as may be necessary or appropriate (A) in the event that the Company desires to seek copyright, patent, trademark or other analogous protection thereafter relating to the Intellectual Work Product, and when such protection is obtained, renew and restore the same, or (B) to defend any opposition proceedings in respect of obtaining and maintaining such copyright, patent, trademark or other analogous protection. (iv) In the event that the Company is unable after reasonable effort to secure the Employee's signature on any of the documents referenced in Section 5(b)(iii) hereof, whether because of the Employee's physical or mental incapacity or for any other reason whatsoever, the Employee hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as the Employee's agent and attorney-in-fact, to act for and in his behalf and stead to execute and file any such documents and to do all other lawfully permitted acts to further the prosecution and issuance of any such copyright, patent, trademark or other analogous protection with the same legal force and effect as if executed by the Employee. 6. COVENANT NOT TO COMPETE. (a) During the Term and for a period of one (1) year thereafter (the "Restricted Period"), the Employee shall not, in the United States or in any country in which the Company is conducting or has conducted business at any time during the one (1) year period immediately preceding the termination of his employment, do any of the following directly or indirectly without the prior written consent of the Company in its sole discretion: (i) engage or participate, directly or indirectly, in any business activity competitive with the Business or the business of any of the Company's subsidiaries or affiliates (other than the Services Company), as conducted during the Term; -5- (ii) become interested (as owner, proprietor, promoter, stockholder, lender, partner, co-venturer, director, officer, employee, agent, consultant or otherwise) in any person, firm, corporation, association or other entity engaged in any business that is competitive with the Business or the business of any subsidiary or affiliate (other than the Services Company) of the Company as conducted during the Term, or become interested in (as owner, stockholder, lender, partner, co-venturer, director, officer, employee, agent, consultant or otherwise) any portion of the business of any person, firm, corporation, association or other entity where such portion of such business is competitive with the Business of the Company or the business of any subsidiary or affiliate (other than the Services Company) of the Company as conducted during the Term (notwithstanding the foregoing, (i) the Employee may hold up to five percent (5%) of the outstanding securities of any class of any publicly-traded securities of a company that is engaged in activities referenced in Section 6(a) hereof and (ii) the Employee may serve on the Board and the board of directors of the Services Company); (iii) solicit or call on, either directly or indirectly, any (A) customer with whom the Company shall have dealt at any time during the one (1) year period immediately preceding the termination of the Employee's employment hereunder, or (B) supplier or distributor with whom the Company shall have dealt at any time during the one (1) year period immediately preceding the termination of the Employee's employment hereunder, except in respect of customers, suppliers or distributors of the Services Company; (iv) influence or attempt to influence any supplier, distributor, customer or potential customer of the Company to terminate or modify any written or oral agreement or course of dealing with the Company; or (v) influence or attempt to influence any person either (A) to terminate or modify the employment, consulting, agency, distributorship or other arrangement with the Company, or (B) to employ or retain, or arrange to have any other person or entity employ or retain, any person who has been employed or retained by the Company as an employee, consultant, agent or distributor of the Company at any time during the one (1) year period immediately preceding the termination of the Employee's employment hereunder. (b) The Employee hereby acknowledges that the limitations as to time, character or nature and geographic scope placed on his subsequent employment by this Section 6 are reasonable and fair and will not prevent or materially impair his ability to earn a livelihood. 7. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE EMPLOYEE. (a) The Employee represents and warrants to the Company that: (i) There are no restrictions, agreements or understandings whatsoever to which the Employee is a party which would prevent or make unlawful the -6- Employee's execution of this Agreement or the Employee's employment hereunder, or which is or would be inconsistent or in conflict with this Agreement or the Employee's employment hereunder, or would prevent, limit or impair in any way the performance by the Employee of the obligations hereunder; and (ii) The Employee has disclosed to the Company all restraints, confidentiality commitments or other employment restrictions that he has with any other employer, person or entity. (b) Upon and after his termination or cessation of employment with the Company and until such time as no obligations of the Employee to the Company hereunder exist under Section 6, the Employee (i) shall provide copies of Sections 4, 5 and 6 of this Agreement to any prospective employer or other person, entity or association in the Business, with whom or which the Employee proposes to be employed, affiliated, engaged, associated or to establish any business or remunerative relationship prior to the commencement thereof and (ii) shall notify the Company of the name and address of any such person, entity or association prior to his employment, affiliation, engagement, association or the establishment of any business or remunerative relationship. 8. EARLY TERMINATION. The Employee's employment hereunder may be terminated during the Term upon the occurrence of any one of the events described in this Section 8. 8.1 TERMINATION FOR DISABILITY. (a) In the event of the disability of the Employee such that the Employee is unable to perform the duties and responsibilities hereunder by reasons of illness, injury or incapacity for a period of more than one hundred twenty (120) consecutive calendar days or more than ninety (90) working days, in the aggregate, during any six (6) month period ("Disability"), the Employee's employment hereunder may be terminated upon the majority vote of the entire Board (which in the case of a Board consisting of four directors shall mean at least three votes in favor of termination). (b) In the event of a termination of the Employee's employment hereunder pursuant to Section 8.1(a), the Employee will be entitled to receive: all accrued and unpaid (as of the date of such termination) Base Salary and benefits and other forms of compensation and benefits payable or provided in accordance with the terms of any then existing compensation or benefit plan or arrangement, including payment prescribed under any disability or life insurance plan or arrangement in which he is a participant or to which he is a party as an employee of the Company. In addition to he foregoing, in the event of a termination under Section 8.1, the Employee shall receive a cash severance payment in an amount equal to six (6) months of his Base Salary on the date of termination. -7- 8.2 TERMINATION BY DEATH. In the event that the Employee dies during the Term, the Employee's employment hereunder shall be terminated thereby and the Company shall pay to the Employee's executors, legal representatives or administrators an amount equal to: the accrued and unpaid portion of the Base Salary, benefits and other compensation for the month in which he dies, as well as a payment in an amount equal to six (6) months of his Base Salary on the date of termination. 8.3 TERMINATION FOR CAUSE. (a) Upon a majority vote of the entire Board (which in the case of a Board consisting of four directors shall mean at least three votes in favor of termination), the Company may elect to terminate the Employee's employment hereunder at any time for cause upon written notice to the Employee. For purposes of this Agreement, the term "cause" shall mean: (i) a material breach by the Employee of any of the obligations under Sections 5, 6 or 7 of this Agreement, which breach remains uncured for a period of ninety (90) days after the Employee has received written notice from the Company of such breach; (ii) the Employee's willful or gross neglect of his duties hereunder, or willful or gross misconduct in the performance of such duties, so as to cause material harm to the Company; (iii) a judicial determination that the Employee has committed fraud, misappropriation or embezzlement against the Company; or (iv) conviction of the Employee for any felony which, as determined in good faith by the Board, constitutes a crime involving moral turpitude and results in material harm to the Company. (b) In the event of a termination of the Employee's employment hereunder pursuant to Section 8.3(a), the Employee shall be entitled to receive all accrued but unpaid (as of the effective date of such termination) Base Salary, benefits and bonuses. All Base Salary, benefits and bonuses shall cease at the time of such termination, subject to the terms of any benefit or compensation plan then in force and applicable to the Employee. 8.4 TERMINATION BY EMPLOYEE. (a) The Employee may terminate his employment hereunder, upon at least four (4) weeks prior written notice to the Company. (b) In the event of a termination of the Employee's employment hereunder pursuant to Section 8.4(a), the Employee shall be entitled to receive all accrued but -8- unpaid (as of the effective date of such termination) Base Salary, benefits and bonuses. All Base Salary, benefits and bonuses shall cease at the time of such termination, subject to the terms of any benefit or compensation plan then in force and applicable to the Employee. 8.5 TERMINATION WITHOUT CAUSE. (a) Upon a majority vote of the entire Board (which in the case of a Board consisting of four directors shall mean at least three votes in favor of termination), the Company may elect to terminate the Employee's employment hereunder without cause upon thirty (30) days written notice to the Employee. (b) In the event of a termination of the Employee's employment hereunder pursuant to Section 8.5(a), the Employee shall be entitled to receive all accrued but unpaid (as of the effective date of such termination) Base Salary, benefits and bonuses. In addition to the foregoing, in the event of a termination under Section 8.5, the Employee shall receive a cash severance payment in an amount equal to six (6) months of his Base Salary on the date of termination. All Base Salary, benefits and bonuses shall cease at the time of such termination, subject to the terms of any benefit or compensation plan then in force and applicable to the Employee. 9. SURVIVAL OF PROVISIONS. The provisions of this Agreement set forth in Sections 3.3 and 4 through 20 hereof shall survive the termination of the Employee's employment hereunder. 10. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the Company and the Employee and their respective successors, executors, administrators, heirs and/or permitted assigns; provided that the Employee may not assign this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the Company in its sole discretion. 11. NOTICE. Any notice hereunder by either party shall be given by personal delivery, by sending such notice by certified mail, return-receipt requested, by overnight delivery with a reputable courier service, or by telecopier, addressed or telecopied, as the case may be, to the other party at its address set forth below or at such other address designated by notice in the manner provided in this section. Such notice shall be deemed to have been received upon the date of actual delivery if personally delivered or, in the case of mailing, two (2) days after deposit with the U.S. mail, or if by overnight delivery, or the date of delivery or, in the case of facsimile transmission, when confirmed by the facsimile machine report. If to the Employee: Mel Baiada 124 Pheasant Fields Lane Moorestown, New Jersey 08057 -9- Fax: (609) 778-4925 If to the Company: Bluestone Software, Inc. 1000 Briggs Road Mount Laurel, NJ 08054 Attention: Board of Directors Fax: (609) 778-8125 with a copy to: Pepper, Hamilton & Scheetz 1235 Westlakes Drive Suite 400 Berwyn, PA 19312 Attention: Christopher F. Wright, Esquire Fax: (610) 640-7835 12. ENTIRE AGREEMENT AND AMENDMENTS. This Agreement contains the entire agreement and understanding of the parties hereto relating to the subject matter hereof, and merges and supersedes all prior and contemporaneous discussions, agreements and understandings of every nature between the parties hereto relating to the employment of the Employee with the Company. This Agreement may not be changed or modified, except by an agreement in writing signed by each of the parties hereto. 13. WAIVER. The waiver of the breach of any term or provision of this Agreement shall not operate as or be construed to be a waiver of any other or subsequent breach of this Agreement. 14. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of New Jersey, without regard to the principles of conflicts of laws of any jurisdiction. 15. INVALIDITY. If any provision of this Agreement shall be determined to be void, invalid, unenforceable or illegal for any reason, then the validity and enforceability of all of the remaining provisions hereof shall not be affected thereby. If any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, then such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such amendment to apply only to the operation of such provision in the particular jurisdiction in which such adjudication is made; provided that, if any provision contained in this Agreement shall be adjudicated to be invalid or unenforceable because such provision is held to be -10- excessively broad as to duration, geographic scope, activity or subject, then such provision shall be deemed amended by limiting and reducing it so as to be valid and enforceable to the maximum extent compatible with the applicable laws of such jurisdiction, such amendment only to apply with respect to the operation of such provision in the applicable jurisdiction in which the adjudication is made. 16. SECTION HEADINGS. The section headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation. 17. NUMBER OF DAYS. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and legal holidays; provided that, if the final day of any time period falls on a Saturday, Sunday or day which is a legal holiday in New Jersey, then such final day shall be deemed to be the next day which is not a Saturday, Sunday or legal holiday. 18. SPECIFIC ENFORCEMENT; EXTENSION OF PERIOD. (a) The Employee acknowledges that the restrictions contained in Sections 4, 5, 6 and 7 hereof are reasonable and necessary to protect the legitimate interests of the Company and its affiliates and that the Company would not have entered into this Agreement in the absence of such restrictions. The Employee also acknowledges that any breach by him of Sections 4, 5, 6 or 7 hereof will cause continuing and irreparable injury to the Company for which monetary damages would not be an adequate remedy. The Employee shall not, in any action or proceeding to enforce any of the provisions of this Agreement, assert the claim or defense that an adequate remedy at law exists. In the event of such breach by the Employee, the Company shall have the right to enforce the provisions of Sections 4, 5, 6 and 7 of this Agreement by seeking injunctive or other relief in any court, and this Agreement shall not in any way limit remedies of law or in equity otherwise available to the Company. (b) The periods of time set forth in Section 6 hereof shall not include, and shall be deemed extended by, any time required for litigation to enforce the relevant covenant periods, provided that the Company is successful on the merits in any such litigation. The "time required for litigation" is herein defined to mean the period of time commencing on the earlier of the Employee's first breach of such covenants or the service of process upon the Employee ending on the date of a final non-appealable order or settlement by the parties relating to such litigation. 19. CONSENT TO SUIT. In the case of any dispute under or in connection with this Agreement, the Employee may only bring suit against the Company in the Courts of the State of New Jersey or in the Federal District Court for such geographic location. The Employee hereby consents to the exclusive jurisdiction and venue of the courts of the State of New Jersey or the Federal District Court for such geographic location, provided that such Federal Court has subject matter jurisdiction over such dispute, and the Employee hereby waives any claim he may have at any time as to FORUM NON CONVENIENS with respect to such venue. The Company shall -11- have the right to institute any legal action arising out of or relating to this Agreement in any appropriate court and in any jurisdiction. Any judgment entered against either of the parties in any proceeding hereunder may be entered and enforced by any court of competent jurisdiction. If an action at law or in equity is necessary to enforce or interpret the terms of this Agreement, then the prevailing party shall be entitled to recover, in addition to any other relief, reasonable attorneys' fees, costs and disbursements. 20. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the day and year first written above. BLUESTONE SOFTWARE, INC. By: /s/ Enrico Ballezzi ------------------------------ Title: Chief Financial Officer WITNESS: /s/ Thomas Ballezzi /s/ Mel Baiada - --------------------- ------------------------- Name: Thomas Ballezzi MEL BAIADA -12- EX-10.5 8 EXHIBIT 10.5 Exhibit 10.5 FIRST AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of the 13th day of January, 1999 by and between Mel Baiada, a resident of 124 Pheasant Fields Lane, Moorestown, New Jersey 08057 (the "Employee"), and BLUESTONE SOFTWARE, INC., a corporation organized and existing under the laws of the State of Delaware (the "Company"), and successor by merger to Bluestone Consulting Inc., a New Jersey corporation. BACKGROUND A. On April 18, 1997, Employee and the Company entered into an Executive Employment Agreement (the "Employment Agreement"); and B. The Company and Employee now desire to amend the Employment Agreement, subject to the terms and condition hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and obligations contained herein, and intending to be legally bound, the parties, subject to the terms and conditions set forth herein, agree as follows: 1. Section 1 of the Employment Agreement shall be amended such that the term "Position" shall mean Chairman of the Board and the term "Initial Term" shall continue until June 30, 1999. Effective as of the date hereof, Employee shall no longer hold the title of President or Chief Executive Officer. 2. The first sentence of Section 1(b) of the Employment Agreement shall be deleted and replaced as follows: "This Agreement may be renewed on or before June 30, 1999, for such time (the "Renewal Period") and upon such terms as are approved by the Board of Directors of the Company (the "Board") after recommendation by the President of the Company. The recommendation for renewal shall include an objective compensation and bonus plan for twelve months, together with an evaluation of Employee's performance against reasonable objectives for the first six months of 1999." 3. Schedule A shall be deleted. 4. Section 3.2 of the Employment Agreement shall be amended to delete the first sentence and replace it as follows: "Within thirty days of the date hereof, Employee and the President of the Company will agree in writing on reasonable performance objectives for Employee for the first six months of 1999. Employee's bonus and management stock options will be based upon these objectives, drawn from the management compensation and stock option pools that will be used in 1999 for other management employees." 5. Employee's Contingent Shares, as defined in the Stock Repurchase Agreement, dated as of April 18, 1997 (the "Repurchase Agreement") shall continue to vest in accordance with the terms of the Repurchase Agreement for as long as Employee remains in the Position, subject to the provisions regarding termination herein. 6. If Employee is terminated from the Position, or the Employment Agreement is not renewed in accordance with Section 1(b) of the Employment Agreement as amended in paragraph 2 herein, he shall retain his position as a director on the Board as long as he: 1) retains at least ten percent (10%) ownership of the issued and outstanding Common Stock of the Company, determined on a fully converted basis assuming conversion of all outstanding convertible securities and exercise of all outstanding options, warrants or rights to acquire Common Stock; or 2) until June 30, 2000, whichever is later. 7. If Employee is terminated from the Position in accordance with Section 8.5 of the Employment Agreement, or the Employment Agreement is not renewed in accordance with Section 1(b) of the Employment Agreement as amended in paragraph 2 herein, he will receive twelve (12) months of 1998 base salary as severance, grossed up for benefits and taxes. Such severance will be payable in accordance with the Bluestone payroll schedule. 8. If Employee is terminated from the Position in accordance with Section 8.5 of the Employment Agreement, or the Employment Agreement is not renewed in accordance with Section 1(b) of the Employment Agreement as amended in paragraph 2 herein, his Contingent Shares under the Repurchase Agreement will immediately become Vested Shares, as defined in the Repurchase Agreement. 9. The receipt of the payments and benefits to be provided to Employee under Sections 6, 7 and 8 of this Agreement are conditional upon Employee executing and delivering to the Company a mutual release in the form attached hereto as EXHIBIT A. 10. If Employee is terminated from the Position in accordance with Section 8.3 of the Employment Agreement, he will not receive any severance and will immediately forfeit his Board seat and any other employee title in the Company. 11. The Employment Agreement will terminate automatically if the shares of the Company are registered in a public offering of its securities, or there is a merger where the Company is not the surviving company, a sale of all the Company's stock, or a sale of substantially all the assets of the Company. -2- 12. Employee shall not, in connection with any matter relating to his employment with the Company, knowingly and intentionally disparage the Company or its predecessors, successors (by merger or otherwise), parents, subsidiaries, affiliates and assigns, together with each and every of their present, past and future officers, directors, shareholders and employees (herein collectively referred to as the "Company Group"). The Company represents that, as of the date of this Agreement, there are no documents in Employee's personnel file in which the Company has intentionally and knowingly disparaged Employee and the Company on its behalf and on behalf of the Company Group further agrees that neither it nor any member of the Company Group shall knowingly or intentionally disparage Employee in the future for matters relating to his employment with the Company. 13. The Company will reimburse Employee for reasonable expenses in connection with a legal review of this Agreement. 14. Except as amended herein, the Employment Agreement will remain in full force effect. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the day and year first written above. BLUESTONE SOFTWARE, INC. By: --------------------------- Title: WITNESS: /s/ Mel Baiada - --------------------- ------------------------- Name: MEL BAIADA -3- EX-10.6 9 EXHIBIT 10.6 Exhibit 10.6 BLUESTONE SOFTWARE, INC. EXECUTIVE EMPLOYMENT AGREEMENT THIS EXECUTIVE EMPLOYMENT AGREEMENT is made on this 24th day of April, 1997 by and between Robert Bickel, a resident of 348 E. 2nd Street, Moorestown, New Jersey 08057 (the "Employee"), and BLUESTONE SOFTWARE, INC., a corporation organized and existing under the laws of the State of Delaware (the "Company") and successor by merger to Bluestone Consulting Inc., a New Jersey corporation. WHEREAS, the Company is engaged in the business of designing, developing, supporting, marketing and selling Internet and intranet software development tools and related products and services (as may be expanded by the Company during the term of this Agreement, the "Business"); and WHEREAS, the Company desires to employ the Employee and the Employee desires to be employed by the Company upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and obligations contained herein, and intending to be legally bound, the parties, subject to the terms and conditions set forth herein, agree as follows: 1. EMPLOYMENT AND TERM. The Company hereby employs the Employee and the Employee hereby accepts employment as Senior Vice President and Chief Operating Officer (the "Position") with the Company upon the terms and conditions hereinafter set forth. The Employee understands and agrees that the Employee's employment by the Company is at the will of the Company, and the employment relationship may be terminated either by the Employee or the Company at any time, with or without cause. 2. DUTIES. During the term of his employment, the Employee shall serve the Company faithfully and to the best of his ability and shall devote his full time, attention, skill and efforts to the performance of the duties required by or appropriate for the Position. The Employee shall assume such duties and responsibilities as may be customarily incident to such a position, and such additional and other duties as may be assigned to the Employee from time to time by the President or the Board of Directors of the Company, including, without limitation, the duties and responsibilities set forth in SCHEDULE A attached hereto. The Employee shall report to the President of the Company. 3. COMPENSATION. The Company shall pay the Employee, and the Employee hereby agrees to accept, as compensation for all services rendered hereunder and for the Employee's intellectual property and other covenants and assignments as provided for in Sections 4, 5 and 6 hereof, the compensation set forth in this Section 3. 3.1 SALARY. The Company shall pay the Employee an initial base salary at the annual rate of One Hundred Thirty-Five Thousand Dollars ($135,000) (as the same may hereafter be adjusted, the "Base Salary"). The Base Salary shall be inclusive of all applicable income, social security and other taxes and charges that are required by law to be withheld by the Company, are requested to be withheld by the Employee, and shall be withheld and paid in accordance with the Company's normal payroll practice for its similarly situated employees from time to time in effect. The Base Salary may be adjusted from time to time by the Board of Directors of the Company in its discretion in accordance with the normal executive employee compensation review practices of the Company. 3.2 BONUS PROGRAM. The Employee shall be entitled to participate in any executive bonus program that may be established by and at the discretion of the Company pursuant to which the Board of Directors of the Company may award bonuses to executive employees, based upon the achievement of written individual and corporate objectives such as the Board of Directors shall determine. 3.3 EQUITY PARTICIPATION. (a) After the closing of the venture capital financing contemplated by the Series A Preferred Stock Purchase Agreement, among the Company, Bluestone Consulting, Inc., a Delaware corporation and the investors listed therein, the Company shall grant to the Employee an incentive stock option (the "Option") to purchase Three Hundred Thousand (300,000) shares of common stock, par value $.001 per share, of the Company (the "Common Stock"). The Option shall vest in sixteen (16) equal installments on a quarterly basis over a four (4) year period beginning as of the date of grant of the Option. The exercise price of the Option shall be the fair market value of the Common Stock of the Company on the date of grant of the Option as determined by the Board of Directors of the Company in its sole discretion. The Option shall be subject to and in accordance with the provisions of the 1996 Incentive and Nonqualified Stock Option Plan of the Company, as amended (the "Plan"). (b) All shares of Common Stock issued under the Option, the shall be subject to the terms and provisions of a Stock Purchase and Restriction Agreement as required by the Plan. 3.4 FRINGE BENEFITS. The Employee shall be entitled to participate in any health or dental programs of the Company. The Employee shall be entitled to participate in all vacation and other fringe benefit programs of the Company to the extent and on the same terms and conditions as are accorded to other officers and key employees of the Company. Notwithstanding the above, the Employee is entitled to three (3) weeks paid vacation per calendar year. -2- 3.5 REIMBURSEMENT OF EXPENSES. The Employee shall be reimbursed for all normal items of travel and entertainment and miscellaneous expenses reasonably incurred by him on behalf of the Company, provided that such expenses are documented and submitted to the Company all in accordance with the reimbursement policies of the Company as in effect from time to time. 4. CONFIDENTIALITY. The Employee recognizes and acknowledges that the Proprietary Information (as hereinafter defined) is a valuable, special and unique asset of the Company. As a result, both during the term of his employment and thereafter, the Employee shall not, without the prior written consent of the Company, for any reason either directly or indirectly divulge to any third-party or use for his own benefit, or for any purpose other than the exclusive benefit of the Company, any confidential, proprietary, business and technical information or trade secrets of the Company or of any subsidiary or affiliate of the Company (the "Proprietary Information") revealed, obtained or developed in the course of his employment with the Company. Proprietary Information shall include, but shall not be limited to: the intangible personal property described in Section 5(b) hereof; any information relating to methods of production, manufacture and research; hardware and software configurations, computer codes or instructions (including source and object code listings, program logic algorithms, subroutines, modules or other subparts of computer programs and related documentation, including program notation), computer inputs and outputs (regardless of the media on which stored or located) and computer processing systems, techniques, designs, architecture, and interfaces; the identities of, the Company's relationship with, the terms of contracts and agreements with, the needs and requirements of, and the Company's course of dealing with, the Company's actual and prospective customers, contractors and suppliers; and any other materials prepared by the Employee in the course of his employment by the Company, or prepared by any other employee or contractor of the Company for the Company or its customers, (including concepts, layouts, flow charts, specifications, know-how, user or service manuals, plans, sketches, blueprints, costs, business studies, business procedures, finances, marketing data, methods, plans, personnel information, customer and vendor credit information and any other materials that have not been made available to the general public). Nothing contained herein shall restrict the Employee's ability to make such disclosures during the course of his employment as may be necessary or appropriate to the effective and efficient discharge of the duties required by or appropriate for the Position or as such disclosures may be required by law. Furthermore, nothing contained herein shall restrict the Employee from divulging or using for his own benefit or for any other purpose any Proprietary Information that is readily available to the general public so long as such information did not become available to the general public as a direct or indirect result of the Employee's breach of this Section 4. Failure by the Company to mark any of the Proprietary Information as confidential or proprietary shall not affect its status as Proprietary Information under the terms of this Agreement. -3- 5. PROPERTY. (a) All right, title and interest in and to Proprietary Information shall be and remain the sole and exclusive property of the Company. During the term of his employment, the Employee shall not remove from the Company's offices or premises any documents, records, notebooks, files, correspondence, reports, memoranda or similar materials of or containing Proprietary Information, or other materials or property of any kind belonging to the Company unless necessary or appropriate in accordance with the duties and responsibilities required by or appropriate for the Position and, in the event that such materials or property are removed, all of the foregoing shall be returned to their proper files or places of safekeeping as promptly as possible after the removal shall serve its specific purpose. The Employee shall not make, retain, remove and/or distribute any copies of any of the foregoing for any reason whatsoever, except as may be necessary in the discharge of the assigned duties, and shall not divulge to any third person the nature of and/or contents of any of the foregoing or of any other oral or written information to which he may have access or with which for any reason he may become familiar, except as disclosure shall be necessary in the performance of the duties; and upon the termination of his employment with the Company, he shall return to the Company all originals and copies of the foregoing then in the possession, whether prepared by the Employee or by others. (b)(i) The Employee acknowledges that all right, title and interest in and to any and all writings, documents, inventions, discoveries, computer programs or instructions (whether in source code, object code, or any other form), algorithms, formulae, plans, memoranda, tests, research, designs, innovations, systems, analyses, specifications, models, data, diagrams, flow charts, and/or techniques (whether reduced to written or electronic form or otherwise) that the Employee creates, makes, conceives, discovers or develops, either solely or jointly with any other person, at any time during the term of Employee's employment, whether during working hours or at the Company's facility or at any other time or location, and whether upon the request or suggestion of the Company or otherwise, and that relate to or are useful in any way in connection with the Business now or hereafter carried on by the Company (collectively, "Intellectual Work Product") shall be the sole and exclusive property of the Company. The Employee shall promptly disclose to the Company all Intellectual Work Product, and the Employee shall have no claim for additional compensation for the Intellectual Work Product. (ii) The Employee acknowledges that all the Intellectual Work Product that is copyrightable shall be considered a work made for hire under United States Copyright Law. To the extent that any copyrightable Intellectual Work Product may not be considered a work made for hire under the applicable provisions of the United States Copyright Law, or to the extent that, notwithstanding the foregoing provisions, the Employee may retain an interest in any Intellectual Work Product that is not copyrightable, the Employee hereby irrevocably assigns and transfers to the Company any and all right, title, or interest that the Employee may have in the Intellectual Work Product under copyright, patent, trade secret, trademark and other intellectual -4- property laws, in perpetuity or for the longest period otherwise permitted by law, without the necessity of further consideration. The Company shall be entitled to obtain and hold in its own name all copyrights, patents, trade secrets, and trademarks with respect thereto. (iii) The Employee shall reveal promptly all information relating to the Intellectual Work Product to an appropriate officer of the Company, cooperate with the Company and execute such documents as may be necessary or appropriate (A) in the event that the Company desires to seek copyright, patent, trademark or other analogous protection thereafter relating to the Intellectual Work Product, and when such protection is obtained, renew and restore the same, or (B) to defend any opposition proceedings in respect of obtaining and maintaining such copyright, patent, trademark or other analogous protection. (iv) In the event that the Company is unable after reasonable effort to secure the Employee's signature on any of the documents referenced in Section 5(b)(iii) hereof, whether because of the Employee's physical or mental incapacity or for any other reason whatsoever, the Employee hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as the Employee's agent and attorney-in-fact, to act for and in his behalf and stead to execute and file any such documents and to do all other lawfully permitted acts to further the prosecution and issuance of any such copyright, patent, trademark or other analogous protection with the same legal force and effect as if executed by the Employee. 6. COVENANT NOT TO COMPETE. (a) During the term of his employment and for a period of one (1) year thereafter (the "Restricted Period") the Employee shall not, in the United States or in any country in which the Company is conducting or has conducted business at any time during the one (1) year period immediately preceding the termination of his employment, do any of the following directly or indirectly without the prior written consent of the Company in its sole discretion: (i) engage or participate, directly or indirectly, in any business activity competitive with the Business or the business of any of the Company's subsidiaries or affiliates (other than the Services Company), as conducted during the term of Employee's employment; (ii) become interested (as owner, proprietor, promoter, stockholder, lender, partner, co-venturer, director, officer, employee, agent, consultant or otherwise) in any person, firm, corporation, association or other entity engaged in any business that is competitive with the Business or the business of any subsidiary or affiliate (other than the Services Company) of the Company as conducted during the term of Employee's employment, or become interested in (as owner, stockholder, lender, partner, co-venturer, director, officer, employee, agent, consultant or otherwise) any portion of the business of any person, firm, corporation, association or other entity where such portion of such business is competitive with the Business of the Company or the business of any subsidiary or affiliate (other than the Services Company) of the Company as conducted during the term of Employee's employment -5- (notwithstanding the foregoing, the Employee may hold not more than one percent (1%) of the outstanding securities of any class of any publicly-traded securities of a company that is engaged in activities referenced in Section 6(a) hereof); (iii) solicit or call on, either directly or indirectly, any (A) customer with whom the Company shall have dealt at any time during the one (1) year period immediately preceding the termination of the Employee's employment hereunder, or (B) supplier or distributor with whom the Company shall have dealt at any time during the one (1) year period immediately preceding the termination of the Employee's employment hereunder; (iv) influence or attempt to influence any supplier, distributor, customer or potential customer of the Company to terminate or modify any written or oral agreement or course of dealing with the Company; or (v) influence or attempt to influence any person either (A) to terminate or modify the employment, consulting, agency, distributorship or other arrangement with the Company, or (B) to employ or retain, or arrange to have any other person or entity employ or retain, any person who has been employed or retained by the Company as an employee, consultant, agent or distributor of the Company at any time during the one (1) year period immediately preceding the termination of the Employee's employment hereunder. (b) The Employee hereby acknowledges that the limitations as to time, character or nature and geographic scope placed on his subsequent employment by this Section 6 are reasonable and fair and will not prevent or materially impair his ability to earn a livelihood. 7. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE EMPLOYEE. (a) The Employee represents and warrants to the Company that: (i) There are no restrictions, agreements or understandings whatsoever to which the Employee is a party which would prevent or make unlawful the Employee's execution of this Agreement or the Employee's employment hereunder, or which is or would be inconsistent or in conflict with this Agreement or the Employee's employment hereunder, or would prevent, limit or impair in any way the performance by the Employee of the obligations hereunder; and (ii) The Employee has disclosed to the Company all restraints, confidentiality commitments or other employment restrictions that he has with any other employer, person or entity. (b) Upon and after his termination or cessation of employment with the Company and until such time as no obligations of the Employee to the Company hereunder -6- exist, the Employee (i) shall provide copies of Sections 4, 5 and 6 of this Agreement to any prospective employer or other person, entity or association in the Business, with whom or which the Employee proposes to be employed, affiliated, engaged, associated or to establish any business or remunerative relationship prior to the commencement thereof and (ii) shall notify the Company of the name and address of any such person, entity or association prior to his employment, affiliation, engagement, association or the establishment of any business or remunerative relationship. 8. SURVIVAL OF PROVISIONS. The provisions of this Agreement set forth in Sections 3.3 and 4 through 19 hereof shall survive the termination of the Employee's employment hereunder. 9. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the Company and the Employee and their respective successors, executors, administrators, heirs and/or permitted assigns; provided that the Employee may not assign this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the Company in its sole discretion. 10. NOTICE. Any notice hereunder by either party shall be given by personal delivery, by sending such notice by certified mail, return-receipt requested, by overnight delivery with a reputable courier service, or by telecopier, addressed or telecopied, as the case may be, to the other party at its address set forth below or at such other address designated by notice in the manner provided in this section. Such notice shall be deemed to have been received upon the date of actual delivery if personally delivered or, in the case of mailing, two (2) days after deposit with the U.S. mail, or if by overnight delivery, or the date of delivery or, in the case of facsimile transmission, when confirmed by the facsimile machine report. If to the Employee: Robert Bickel 348 E. 2nd Street Moorestown, New Jersey 08057 Fax: (609) 778-8125 If to the Company: Bluestone Software, Inc. 1000 Briggs Road Mount Laurel, NJ 08054 Attention: Mr. Mel Baiada, President Fax: (609) 727-3833 -7- with a copy to: Pepper, Hamilton & Scheetz 1235 Westlakes Drive Suite 400 Berwyn, PA 19312 Attention: Christopher F. Wright, Esquire Fax: (610) 640-7835 11. ENTIRE AGREEMENT AND AMENDMENTS. This Agreement contains the entire agreement and understanding of the parties hereto relating to the subject matter hereof, and merges and supersedes all prior and contemporaneous discussions, agreements and understandings of every nature between the parties hereto relating to the employment of the Employee with the Company. This Agreement may not be changed or modified, except by an agreement in writing signed by each of the parties hereto. 12. WAIVER. The waiver of the breach of any term or provision of this Agreement shall not operate as or be construed to be a waiver of any other or subsequent breach of this Agreement. 13. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of New Jersey, without regard to the principles of conflicts of laws of any jurisdiction. 14. INVALIDITY. If any provision of this Agreement shall be determined to be void, invalid, unenforceable or illegal for any reason, then the validity and enforceability of all of the remaining provisions hereof shall not be affected thereby. If any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, then such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such amendment to apply only to the operation of such provision in the particular jurisdiction in which such adjudication is made; provided that, if any provision contained in this Agreement shall be adjudicated to be invalid or unenforceable because such provision is held to be excessively broad as to duration, geographic scope, activity or subject, then such provision shall be deemed amended by limiting and reducing it so as to be valid and enforceable to the maximum extent compatible with the applicable laws of such jurisdiction, such amendment only to apply with respect to the operation of such provision in the applicable jurisdiction in which the adjudication is made. 15. SECTION HEADINGS. The section headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation. 16. NUMBER OF DAYS. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and legal holidays; provided that, if the final day of any time period falls on a Saturday, Sunday or day which is a legal holiday -8- in New Jersey, then such final day shall be deemed to be the next day which is not a Saturday, Sunday or legal holiday. 17. SPECIFIC ENFORCEMENT; EXTENSION OF PERIOD. (a) The Employee acknowledges that the restrictions contained in Sections 4, 5, 6 and 7 hereof are reasonable and necessary to protect the legitimate interests of the Company and its affiliates and that the Company would not have entered into this Agreement in the absence of such restrictions. The Employee also acknowledges that any breach by him of Sections 4, 5, 6 or 7 hereof will cause continuing and irreparable injury to the Company for which monetary damages would not be an adequate remedy. The Employee shall not, in any action or proceeding to enforce any of the provisions of this Agreement, assert the claim or defense that an adequate remedy at law exists. In the event of such breach by the Employee, the Company shall have the right to enforce the provisions of Sections 4, 5, 6 and 7 of this Agreement by seeking injunctive or other relief in any court, and this Agreement shall not in any way limit remedies of law or in equity otherwise available to the Company. (b) The periods of time set forth in Section 6 hereof shall not include, and shall be deemed extended by, any time required for litigation to enforce the relevant covenant periods, provided that the Company is successful on the merits in any such litigation. The "time required for litigation" is herein defined to mean the period of time commencing on the earlier of the Employee's first breach of such covenants or the service of process upon the Employee ending on the date of a final non-appealable order or settlement by the parties relating to such litigation. 18. CONSENT TO SUIT. In the case of any dispute under or in connection with this Agreement, the Employee may only bring suit against the Company in the Courts of the State of New Jersey or in the Federal District Court for such geographic location. The Employee hereby consents to the exclusive jurisdiction and venue of the courts of the State of New Jersey or the Federal District Court for such geographic location, provided that such Federal Court has subject matter jurisdiction over such dispute, and the Employee hereby waives any claim he may have at any time as to FORUM NON CONVENIENS with respect to such venue. The Company shall have the right to institute any legal action arising out of or relating to this Agreement in any appropriate court and in any jurisdiction. Any judgment entered against either of the parties in any proceeding hereunder may be entered and enforced by any court of competent jurisdiction. If an action at law or in equity is necessary to enforce or interpret the terms of this Agreement, then the prevailing party shall be entitled to recover, in addition to any other relief, reasonable attorneys' fees, costs and disbursements. 19. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. -9- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the day and year first written above. BLUESTONE SOFTWARE, INC. By: /s/ Mel Baiada ------------------------------------ Title: President WITNESS: /s/ Robert Bickel - ----------------------------- --------------------------------------- Name: ROBERT BICKEL -10- EX-10.7 10 EXHIBIT 10.7 Exhibit 10.7 SEVERANCE AGREEMENT This Severance Agreement is a supplement to the offer of employment from Bluestone Software, Inc. (Employer) to Kevin Kilroy (Employee). Both Employer and Employee acknowledge that good and adequate consideration exists for this Severance Agreement. Employer and Employee agree that in the event that Employee's employment is terminated at any time by action of Employer for reasons other than just cause, Employee shall be entitled to: 1. Salary continuation for a minimum of twelve (12) months, from the date of such termination, plus one (1) additional month for each year of service, based upon the salary then in effect (excluding bonuses) on termination. 2. Twelve (12) months of continuation of health insurance benefits. 3. Accrued and unpaid vacation time. 4. Six (6) months of outplacement assistance not to exceed $12,000. 5. Immediate 50% vesting of any unvested options at date of termination, with the right to exercise for five (5) years from date of vesting. For purposes of this Severance Agreement, just cause includes, but is not limited to, theft or other criminal conduct, misappropriation of trade secrets, and so forth. Employee's receipt of the salary continuation provided in this Severance Agreement is conditioned upon Employee's signing and delivering to Employer a binding agreement setting forth the release of any and all claims arising from Employee's employment and/or termination from employment with Employer. /s/ P. Kevin Kilroy ------------------------------------ Employee September 17, 1998 ------------------------------------ Date BLUESTONE SOFTWARE, INC. BY: /s/ Mel Baiada --------------------------------- DATE: September 17, 1998 ------------------------------- EX-10.8 11 EXHIBIT 10.8 Exhibit 10.8 SEVERANCE AGREEMENT This Severance Agreement is a supplement to the offer of employment from Bluestone Software, Inc. (Employer) to Robert Bickel (Employee). Both Employer and Employee acknowledge that good and adequate consideration exists for this Severance Agreement. Employer and Employee agree that in the event that Employee's employment is terminated at any time by action of Employer for reasons other than just cause, Employee shall be entitled to: 1. Salary continuation for a minimum of twelve (12) months, from the date of such termination, plus one (1) additional month for each year of service, based upon the salary then in effect (excluding bonuses) on termination. 2. Twelve (12) months of continuation of health insurance benefits. 3. Accrued and unpaid vacation time. 4. Six (6) months of outplacement assistance not to exceed $12,000. 5. Immediate 50% vesting of any unvested options at date of termination, with the right to exercise for five (5) years from qdate of vesting. For purposes of this Severance Agreement, just cause includes, but is not limited to, theft or other criminal conduct, misappropriation of trade secrets, and so forth. Employee's receipt of the salary continuation provided in this Severance Agreement is conditioned upon Employee's signing and delivering to Employer a binding agreement setting forth the release of any and all claims arising from Employee's employment and/or termination from employment with Employer. /s/ Robert Bickel ------------------------------------ Employee September 17, 1998 ------------------------------------ Date BLUESTONE SOFTWARE, INC. BY: /s/ Mel Baiada --------------------------------- DATE: September 17, 1998 ------------------------------- EX-10.9 12 EXHIBIT 10.9 Exhibit 10.9 SEVERANCE AGREEMENT This Severance Agreement is a supplement to the offer of employment from Bluestone Software, Inc. (Employer) to John Capobianco (Employee). Both Employer and Employee acknowledge that good and adequate consideration exists for this Severance Agreement. Employer and Employee agree that in the event that Employee's employment is terminated at any time by action of Employer for reasons other than just cause, Employee shall be entitled to: 1. Salary continuation for a minimum of twelve (12) months, from the date of such termination, plus one (1) additional month for each year of service, based upon the salary then in effect (excluding bonuses) on termination. 2. Twelve (12) months of continuation of health insurance benefits. 3. Accrued and unpaid vacation time. 4. Six (6) months of outplacement assistance not to exceed $12,000. 5. Immediate 50% vesting of any unvested options at date of termination, with the right to exercise for five (5) years from date of vesting. For purposes of this Severance Agreement, just cause includes, but is not limited to, theft or other criminal conduct, misappropriation of trade secrets, and so forth. Employee's receipt of the salary continuation provided in this Severance Agreement is conditioned upon Employee's signing and delivering to Employer a binding agreement setting forth the release of any and all claims arising from Employee's employment and/or termination from employment with Employer. /s/ John H. Capobianco ------------------------------------ Employee September 17, 1998 ------------------------------------ Date BLUESTONE SOFTWARE, INC. BY: /s/ Mel Baiada ------------------------------------ DATE: September 17, 1998 ------------------------------- EX-10.10 13 EXHIBIT 10.10 Exhibit 10.10 SEVERANCE AGREEMENT This Severance Agreement is a supplement to the offer of employment from Bluestone Software, Inc. (Employer) to Enrico J. Ballezzi (Employee). Both Employer and Employee acknowledge that good and adequate consideration exists for this Severance Agreement. Employer and Employee agree that in the event that Employee's employment is terminated at any time by action of Employer for reasons other than just cause, Employee shall be entitled to: 1. Salary continuation for a minimum of twelve (12) months, from the date of such termination, plus one (1) additional month for each year of service, based upon the salary then in effect (excluding bonuses) on termination. 2. Twelve (12) months of continuation of health insurance benefits. 3. Accrued and unpaid vacation time. 4. Six (6) months of outplacement assistance not to exceed $12,000. 5. Immediate 50% vesting of any unvested options at date of termination, with the right to exercise for five (5) years from date of vesting. For purposes of this Severance Agreement, just cause includes, but is not limited to, theft or other criminal conduct, misappropriation of trade secrets, and so forth. Employee's receipt of the salary continuation provided in this Severance Agreement is conditioned upon Employee's signing and delivering to Employer a binding agreement setting forth the release of any and all claims arising from Employee's employment and/or termination from employment with Employer. /s/ Enrico J. Ballezzi ------------------------------------ Employee September 17, 1998 ------------------------------------ Date BLUESTONE SOFTWARE, INC. BY: /s/ Mel Baiada -------------------------------- DATE: September 17, 1998 ------------------------------- EX-10.11 14 EXHIBIT 10.11 Exhibit 10.11 BLUESTONE SOFTWARE INC. CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (this "Agreement") is made as of the 3rd day of May, 1999 (the "Effective Date") by and between Andrew J. Filipowski ("Consultant") and BLUESTONE SOFTWARE INC. ("Company"). W I T N E S S E T H: WHEREAS, Company desires to engage Consultant to provide consulting services to Company in accordance with the terms and conditions of this Agreement; and WHEREAS, Consultant desires to provide such services to Company. NOW, THEREFORE, in consideration of the mutual promises and the mutual benefits described in this Agreement, Consultant and Company, intending to be legally bound, hereby agree as follows: 1. ENGAGEMENT. Upon the terms and subject to the conditions set forth in this Agreement, Company agrees to engage Consultant, as an independent contractor, to render the services described in this Agreement to and on behalf of Company and Consultant hereby agrees to render such services to and on behalf of Company. 2. SERVICES OF CONSULTANT. At Company's request, Consultant agrees to provide strategic and general business advice to Company, during the Term (as hereinafter defined) at mutually agreeable times and locations, but in no event more than (a) the equivalent of two (2) full business days per month or (b) forty-eight (48) full business days during the Term and at all time subject to Consultant's prior commitments. 3. COMPENSATION. In full consideration of the provision of Consultant's services during the Term, Company agrees to grant contemporaneously with the execution hereof, to Consultant, 70,000 fully vested non-qualified stock options (the "Stock Options") under the Amended and Restated Bluestone Software, Inc. 1996 Incentive and Non-Qualified Stock Option Plan (the "Plan"). The exercise price of the Stock Options shall be $1.29 per share. The Stock Options shall be subject to the terms and conditions of the Plan, a copy of which is attached hereto as Exhibit __. 4. EXPENSES. Company shall reimburse Consultant for all out-of-pocket expenses incurred by Consultant in connection with the performance of Consultant's duties to Company, subject to documentation acceptable to Company in accordance with its policy regarding reimbursement of expenses, a copy of the Company's policy is attached hereto as Exhibit __. -1- 5. CONFIDENTIAL INFORMATION. Company expressly acknowledges that Consultant has been and will continue to be actively involved, including but not limited to, in the capacity of shareholder, partner, investor, executive, officer, director, employee, agent, consultant and advisor, in those ventures and entities set forth on Exhibit A attached hereto. Without the prior written consent of Company, except as shall be necessary in the performance of Consultant's duties that are specifically assigned by Company to Consultant, Consultant shall not disclose or use for Consultant's direct or indirect benefit or the direct or indirect benefit of any third party, during and after Consultant's engagement, the confidentiality of any Confidential Information (as hereinafter defined) of Company. "Confidential Information" means: (i) the terms of this Agreement and the terms of the engagement by Company of the Consultant, and (ii) any information relating to research and development; processes; inventions; products; methods; computer codes or instructions (including source and object code listings, program logic algorithms, subroutines, modules or other subparts of computer programs and related documentation, including program notation); computer processing systems and techniques; concepts; layouts; flowcharts; specifications; know-how; any associated user or service manuals or other like textual materials (including any other data and materials used in performing Consultant's duties); all computer inputs and outputs (regardless of the media on which stored or located); hardware and software configurations; designs; architecture; interfaces; plans; sketches; blueprints; and any other materials prepared by Consultant in the course of, relating to or arising out of his or her engagement by Company, or prepared by any other Company consultant or consultant for Company or its customers; costs; business studies; business procedures; finances; marketing and sales data, methods, plans and efforts; the identities of customers, consultants and suppliers and prospective customers, consultants and suppliers; the terms of contracts and agreements with customers, consultants and suppliers; Company's relationship with actual and prospective customers, consultants and suppliers and the needs and requirements of, and Company's course of dealing with, any such actual or prospective customers, consultants and suppliers; personnel information; customer and vendor credit information; and any other materials that have not been made available to the general public. The term Confidential Information shall not include any information which: (a) was previously known to Consultant; or (b) is or become publicly known through no wrongful act of Consultant; or (c) is rightfully received by Consultant from a third party without similar restrictions and without breach of this or a similar agreement; or (d) is furnished to a third party by the Company without a similar restriction on the rights of a third party; or -2- (e) is approved for release by written authorization of the Company; or (f) is disclosed pursuant to the requirement of a government agency or by operation of law. 6. TERM. The term of the Agreement (the "Term") shall begin as of the Effective Date and remain in effect for two (2) years thereafter. 7. RELATIONSHIP BETWEEN PARTIES. Consultant will be retained by Company strictly for the purposes and to the extent set forth in this Agreement and his relationship to Company shall be that of an independent consultant. Consultant shall not be considered under the provisions of this Agreement or otherwise as an employee of Company. Consultant shall be responsible for the timely payment of his own self-employment and income taxes and Company shall not deduct or withhold from any monies payable to Consultant hereunder any amount on account of any tax or employee benefit. 8. MISCELLANEOUS. (a) This Agreement shall not be assignable by either party without the prior written consent of the other. (b) This Agreement, together with the Plan, contains the entire agreement and understanding of the parties relating to the subject matter hereof and merges and supersedes all prior discussions, agreements and understandings of every nature between them. This Agreement may not be changed or modified, except by an agreement in writing signed by both of the parties hereto. The waiver of the breach of any term or provision of this Agreement shall not operate as or be construed to be a waiver of any other or subsequent breach of this Agreement. (c) This Agreement shall be construed and enforced in accordance with the laws of the State of New Jersey, without regard to conflicts of law principles of New Jersey or any other jurisdiction. (d) If any provision of this Agreement shall be determined to be void, invalid, unenforceable or illegal for any reason, the validity and enforceability of all of the remaining provisions hereof shall not be affected thereby. If any particular provisions of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such amendment to apply only to the operation of such provision in the particular jurisdiction in which such adjudication is made; PROVIDED THAT, if any one or more of the provisions contained in this Agreement shall be adjudicated to be invalid or unenforceable because such provision is held to be excessively broad as to duration, geographic scope, activity or subject, such provision shall be deemed amended by limiting and reducing it so as to be valid and enforceable to the maximum -3- extent compatible with the applicable laws of such jurisdiction, such amendment only to apply with respect to the operation of such provision in the applicable jurisdiction in which the adjudication is made. -4- IN WITNESS WHEREOF, the parties have caused this Consulting Agreement to be executed the day and year first above written. BLUESTONE SOFTWARE INC. By: /s/ P. Kevin Kilroy ---------------------------------- Its: President ---------------------------------- /s/ Andrew J. Filipowski ---------------------------------- Andrew J. Filipowski -5- EX-10.13 15 EXHIBIT 10.13 Exhibit 10.13 SUBCONTRACT AGREEMENT THIS AGREEMENT is made this 23rd day of April, 1998, between Bluestone Software, Inc., a Delaware corporation ("Software"), and Bluestone Consulting, Inc., a Delaware corporation ("Consulting"). W I T N E S S E T H: WHEREAS, Software is in the business of developing, selling, licensing and providing support services for its own software products (the "Sapphire Business") and selling, licensing and providing support services for software products of other companies (the "GUI Business"); and WHEREAS, Software is a party to certain support agreements pursuant to which Software is obligated to perform prepaid support services for software sold by Software in connection with the GUI Business (the "Support Agreements"); and WHEREAS, in consideration of the payments by Software to Consulting set forth in this agreement, Consulting has agreed to perform all obligations of Software under the Support Agreements; and WHEREAS, Consulting intends to create and expand its operations in the business of reselling and servicing software produced by other companies, and NOW, THEREFORE, in consideration of the foregoing, and intending to be legally bound, Software and Consulting hereby agree as follows: 1. SUBCONTRACT. Software and Consulting agree that commencing on the opening of business on the date hereof (the "Effective Time"), Consulting agrees to perform, on behalf of Software, all obligations of Software under the Support Agreements, provided however, that no notification of such agreement shall be made to the customers under such Support Agreements. 2. PROVISION OF SERVICES. Consulting shall employ sufficient work staff, commencing on the Effective Time, to enable Consulting to render the services agreed to hereunder. Consulting shall be solely liable for any and all obligations arising after the Effective Date with respect to employees who provide the services called for under this agreement. 3. PAYMENT. In consideration of Consulting providing the services called for under this agreement, Software shall pay to Consulting the amount of Six Hundred Thousand Dollars ($600,000), which amount shall be payable prior to March 31, 1999, in increments and at intervals mutually agreeable to Software and Consulting. 4. INDEMNIFICATION. Software shall indemnify, defend and hold harmless Consulting from and against any and all claims, demands, liabilities, damages, losses, suits, costs and expenses (including reasonable attorneys' fees) of every kind, nature and type, incurred by Consulting, related to or arising out of the performance of the Support Agreements which relate to, arose or were incurred with respect to a period prior to the Effective Time. Consulting shall indemnify, defend and hold harmless Software from and against any and all claims, demands, liabilities, damages, losses, suits, costs and expenses (including reasonable attorneys' fees) of every kind, nature and type, incurred by Software, related to or arising out of the Support Agreements which relate to, arise or are incurred with respect to a period from and after the Effective Time and to any claims made by employees of Consulting with respect to compensation obligations. 5. AMENDMENT. This agreement may not be changed, modified, discharged or terminated orally or in any manner other than by an agreement in writing signed by the parties hereto. 6. COUNTERPARTS. This agreement may be executed in separate counterparts, each of which, when so executed and delivered, shall be deemed to be an original; but such counterparts shall together constitute one and the same instrument. 7. ENTIRE AGREEMENT. This agreement contains the entire agreement and understanding of the parties relating to the subject matter hereof, and merge and supersede all prior discussions, agreements and understandings of every nature between them. 8. SUCCESSOR AND ASSIGNS. This agreement and the covenants herein set forth shall bind, inure to the benefit and be enforceable against the respective successors and assigns of the parties hereto. Neither party may assign any of its rights or duties under this agreement without the written consent of the other party. 9. HEADINGS. The headings in this agreement are for convenience of reference only and shall not affect its interpretation. 10. GOVERNING LAW. This agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to conflicts of laws principles of any jurisdiction. -2- IN WITNESS WHEREOF, the parties hereto have duly executed this agreement as of the date first above written. BLUESTONE SOFTWARE, INC. By: /s/ Mel Baiada ----------------------------- Name: Mel Baiada Title: President BLUESTONE CONSULTING, INC. By: /s/ Thomas Ballezzi ----------------------------- Name: Thomas Ballezzi Title: Chief Operating Officer -3- EX-10.14 16 EXHIBIT 10.14 Exhibit 10.14 INTERCOMPANY SERVICES AGREEMENT THIS INTERCOMPANY SERVICES AGREEMENT, is made on this 17th day of April, 1997 by and between Bluestone Software, Inc, a Delaware corporation (the "Products Company"), and Bluestone Consulting, Inc., a Delaware corporation (the "Services Company"). BACKGROUND WHEREAS, the Products Company and the Services Company have entered into a Contribution and Distribution Agreement dated April 17, 1997 (the "Contribution Agreement"), whereby the Products Company has agreed to transfer to the Services Company the Services Business (as defined in the Contribution Agreement) in exchange for the initial issuance of all of the common stock of the Services Company; and WHEREAS, the parties hereto desire to each provide certain services to the other party to facilitate an orderly transition for the operations of each of the Products Business and the Services Business after the transfer of the Services Business by the Products Company to the Services Company. TERMS NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: Section 1. DEFINITIONS Capitalized terms used and not otherwise defined herein shall have the meaning ascribed to those terms in the Contribution Agreement. As used in this Agreement, the following terms used herein have the following meanings: "CONSULTING SERVICES" shall mean all services as described in SCHEDULE 1 hereto, but excluding those services which will be provided to the Services Company by the Products Company pursuant to other agreements, including any VAR Agreements relating to the right to sell the Products Company training services and the right to resell the SAPPHIRE/WEB product, and which the Products Company and the Services Company have entered or will enter into in connection with the transactions contemplated by the Contribution Agreement. "FULLY ALLOCATED COST" shall mean all of the Products Company's or the Services Company's, as applicable, costs, direct and indirect, of providing its respective Services, including all labor, occupancy, material expenditures and overhead, calculated and allocated as set forth on SCHEDULE 1 or SCHEDULE 2, as applicable, in each case in accordance with GAAP. "SERVICES" shall mean collectively the Consulting Services and the Software Services. "SERVICES PERIOD" shall mean, with respect to a particular Service, the period of time commencing on the date hereof during which such Service will be provided pursuant hereto, as indicated in SCHEDULE 1 or SCHEDULE 2 hereto, as applicable. "SOFTWARE SERVICES" shall mean all services as described in SCHEDULE 2 hereto, but excluding those services which will be provided to the Products Company by the Services Company pursuant to other agreements which the Products Company and the Services Company have entered or will enter into in connection with the transactions contemplated by the Contribution Agreement. Section 2. CONSULTING SERVICES (a) After the Closing Date, the Products Company shall provide to the Services Company the Consulting Services during the applicable Services Period, as set forth on SCHEDULE 1 hereto. (b) The Products Company will perform, or will ensure that the Consulting Services are performed as set forth on SCHEDULE 1 hereto, in a manner which is substantially similar in nature, quality and timeliness to those provided to the Services Business during fiscal year 1996 prior to the Closing Date; provided that except as required by Section 6(d) hereof, the Products Company will not be required to perform or to cause to be performed any of the Consulting Services for the benefit of any third party or any other entity other than the Services Company. The Products Company makes no other warranties, express or implied, with respect to the Consulting Services. To the extent that the Services Company wishes the Products Company to provide any Consulting Service not listed on SCHEDULE 1, the Products Company may, in its sole discretion and at its sole option as determined by the Board of Directors of the Products Company, provide such Consulting Service or cause such Consulting Service to be provided to the Services Company, during the Services Period and at a charge to be agreed upon by the Boards of Directors of the Services Company and the Products Company. (c) The Products Company shall not be obligated to perform or to cause to be performed any Consulting Service in a volume or quantity which exceeds the historical volumes or quantities of Consulting Services performed for the Services Business. In the event of non-performance of any Consulting Service due to Force Majeure (as hereinafter defined), the parties agree to work together in good faith to arrange for an alternative means by which the Services Company may obtain, at the Services Company's sole cost, the Consulting Services so affected. (d) Consulting Services provided pursuant to the terms of this Agreement shall be charged as set forth on SCHEDULE 1. -2- (e) At the Services Company's request, the Products Company shall allow the Services Company reasonable access to the Products Company's employees that perform the Consulting Services (the "Products Personnel") during the term of this Agreement for the purpose of assisting the Services Company in the operation of the Services Business and transferring the Consulting Services to the Services Company or to third parties designated by the Services Company. The Services Company agrees to schedule such access so as to minimize disruption to such the Products Personnel's employment obligations to the Products Company. the Services Company will reimburse the Products Company, promptly following the Products Company's request and receipt of supporting documentation, for any out-of-pocket expenses incurred by the Products Company in connection with such assistance provided by the Products Personnel (including, without limitation, documented reasonable travel expenses). Section 3. SOFTWARE SERVICES (a) After the Closing Date, the Services Company shall provide to the Products Company the Software Services during the applicable Services Period, as set forth on SCHEDULE 2 hereto. (b) The Services Company will perform, or will ensure that the Software Services are performed as set forth on SCHEDULE 2 hereto, in a manner which is substantially similar in nature, quality and timeliness to those provided to the Services Business during fiscal year 1996 prior to the Closing Date; provided that the Services Company shall provide or cause to be provided Software Services only to the extent such Software Services relate to the continued conduct of the Products Business; provided, further, that except as required by Section 6(d) hereof, the Services Company will not be required to perform or to cause to be performed any of the Software Services for the benefit of any third party or any other entity other than the Products Company. The Services Company makes no other warranties, express or implied, with respect to the Software Services. To the extent that the Products Company (as determined by the Board of Directors of the Products Company) wishes the Services Company to provide any Software Service not listed on SCHEDULE 2, the Services Company may, in its sole discretion and at its sole option, provide such Software Service or cause such Consulting Service to be provided to the Products Company, during the Services Period and at a charge to be agreed upon by the Boards of Directors of the Services Company and the Products Company. (c) The Services Company shall not be obligated to perform or to cause to be performed any Consulting Service in a volume or quantity which exceeds the historical volumes or quantities of Software Services performed for the Services Business. In the event of non-performance of any Consulting Service due to Force Majeure (as hereinafter defined), the parties agree to work together in good faith to arrange for an alternative means by which the Services Company may obtain, at the Services Company's sole cost, the Software Services so affected. (d) Software Services provided pursuant to the terms of this Agreement shall be charged at prices set forth on SCHEDULE 2. -3- (e) At the Services Company's request, the Services Company shall allow the Products Company reasonable access to the Services Company's employees that perform the Software Services (the "Services Personnel") during the term of this Agreement for the purpose of assisting the Services Company in the operation of the Products Business and transferring the Software Services to the Products Company or to third parties designated by the Products Company. The Products Company agrees to schedule such access so as to minimize disruption to such the Services Personnel's employment obligations to the Services Company. The Products Company will reimburse the Services Company, promptly following the Services Company's request and receipt of supporting documentation, for any out-of-pocket expenses incurred by the Services Company in connection with such assistance provided by the Services Company Personnel (including, without limitation, documented reasonable travel expenses). Section 4. REIMBURSEMENT AND BILLING Charges for Services (i) shall be charged to and payable by the Services Company or the Products Company, as applicable, (ii) shall be billed monthly, on the fifteenth day of the month following the month in which such Services were rendered, and (iii) shall be due and payable upon receipt of invoice, with a grace period of ten (10) days. Charges not paid when due shall bear interest at the rate of eighteen percent (18%) per annum from the eleventh day after date payment is due until the date paid. Section 5. TERM AND TERMINATION The initial term of this Agreement shall be for one (1) year from the date hereof. Thereafter, this Agreement shall automatically renew for successive one-year periods, provided that either party hereto may give four (4) months' written notice to the other party at any time after the first anniversary of this Agreement of its intention to terminate this Agreement. Section 6. MISCELLANEOUS (a) Each party's maximum liability to, and the sole remedy of, the other party for breach of this Agreement shall be the greater of (i) a refund of the price paid for the particular Service or (ii) the non-breaching party's cost of performing the Service itself or (iii) the non- breaching party's cost of obtaining the Service from a third party; provided that the non- breaching party shall exercise all reasonable efforts under the circumstances to minimize the cost of any such alternatives to the Services by selecting the most cost effective alternatives which provide the functional equivalent of the Services replaced. Notwithstanding anything to the contrary herein, in no event shall either party have any liability for loss of profit, goodwill or other special or consequential damages as a result of provision of or failure to provide the services under the terms of this Agreement. (b) Each party (an "Indemnifiying Party") shall indemnify, defend and hold harmless the other party and its Affiliates (an "Indemnified Party") from, against and in respect of any Damages imposed on, sustained, incurred or suffered by or asserted against the -4- Indemnified Party, directly or indirectly relating to or arising out of any act or omission of the Indemnifying Party or any of its Affiliates in connection with the provision of the Services under this Agreement, except to the extent any Damages are due to the willful misconduct or fraud of the Indemnified Party or a failure by the Indemnified Party to comply with its obligations under this Agreement. (c) No party to this Agreement shall be responsible for failure or delay in performance of any Services, nor shall any party be responsible for failure or delay in receiving such Service, if caused by an act of God, act of public enemy, war, government acts or regulations, fire, flood, hurricane, embargo, quarantine, epidemic, labor stoppages beyond its reasonable control, accident, explosion, unusually severe weather or other cause similar or dissimilar to the foregoing beyond its control (herein called "Force Majeure"). (d) No party to this Agreement may assign any of its rights or obligations under this Agreement without the prior written consent of the other party hereto. Notwithstanding the foregoing, any party may assign its rights and obligations with respect to the provision of Services hereunder to any of its Affiliates; provided that any such assignment shall terminate in the event such Affiliate ceases to be such. (e) Any waiver of any provision of this Agreement must be in writing and signed by the party against whom it is to be effective in order to be effective. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. Any amendment of this Agreement must be in writing and signed by each of the parties hereto. (f) In the event of a conflict between the terms and conditions of this Agreement and the terms and conditions of the Contribution Agreement, the terms and conditions of the Contribution Agreement shall govern, supersede and prevail. (g) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware without reference to the choice of law principles thereof. Each party hereby irrevocably submits to the exclusive jurisdiction of any state or federal court located in New Jersey for the purposes of any suit, action or other proceeding arising out of this Agreement or any transaction contemplated hereby. (h) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. (i) (1) Each party recognizes that in the performance of this Agreement confidential and/or proprietary information belonging to any other party regarding the Services may be disclosed or become known to the other party or its respective Affiliates ("Confidential Information"). Unless otherwise expressed in writing to the other party, information, including that expressed orally, that is exchanged between the parties shall be presumed to be confidential -5- and/or proprietary. Each party agrees to take such precautions as it normally takes with its confidential and/or proprietary information to hold in confidence any and all written confidential and/or proprietary information with respect to the Services which belongs to the other party. This obligation shall not apply to: (A) information that, at the time of disclosure, is in the public domain; (B) information that, after disclosure, is published or otherwise becomes part of the public domain through no fault of the party to whom the information was disclosed; (C) information that a party can show through its records was in its possession or the possession of an Affiliate at the time of disclosure; and (D) information that may be received by a party in good faith from a source other than the other party which source has no duty of nondisclosure to such other party or, if such source does have a duty of non-disclosure, the receiving party was unaware of or had no reasonable basis for knowing thereof. (2) Each party shall maintain, however, the right to disclose such information if required to do so by law, but shall endeavor to keep and assist the other parties in keeping it confidential by all appropriate means. If a party finds it necessary to disclose any such information in any judicial or administrative hearing or proceeding, then the party shall attempt to disclose such information "in camera" or subject to "protective order" or on some other non-public basis. (3) Upon termination of this Agreement, the parties shall return each other's Confidential Information, provided that the parties shall be entitled to retain one record copy in their legal departments to determine the extent of their continuing obligations. (j) All notices or other communications hereunder shall be deemed to have been duly given and made if in writing and if served by personal delivery upon the party for whom it is intended, if delivered by registered or certified mail, return receipt requested, or by a national courier service, or if sent by telecopier, provided that the telecopy is promptly confirmed by telephone confirmation thereof, to the person at the address set forth below, or such other address as may be designated in writing hereafter, in the same manner, by such person: -6- To the Products Company: Bluestone Software, Inc. 1000 Briggs Road Mt. Laurel, NJ 08054 Telephone: (609) 727-4600 Telecopy: (609) 727-3833 Attn: Mr. Mel Baiada, President To the Services Company: Bluestone Consulting, Inc. 1000 Briggs Road Mt. Laurel, NJ 08054 Telephone: (609) 727-4600 Telecopy: (609) 727-3833 Attn: Mr. Tom Ballezzi, Chief Operating Officer (k) This Agreement, including the schedules and exhibits attached hereto, and the Contribution Agreement, including the schedules and exhibits attached thereto, and the other agreements which the parties hereto have entered into contemporaneously herewith, embody the entire agreement of the parties with regard to the subject matter thereof and supersede any prior communications, commitments, representations or warranties, both written and oral, relating to the subject matter thereof, subject to Section 6(f) hereof. (l) This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer upon any person other than the Products Company, the Services Company, or their successors or permitted assigns, any rights or remedies under or by reason of this Agreement. (m) Each party shall provide to the other party and its auditors and authorized representatives such information relating to the Services and the accuracy of fees invoiced (including the basis on which such fees were derived) as such party shall from time to time reasonably request, and shall permit the party making such request and its auditors and authorized representatives reasonable access, during regular business hours and upon reasonable notice, to its books and records relating to the Services for purposes of verifying the Services provided and the charges therefor. (n) Each party agrees that the Services to be provided under this Agreement are unique and that any breach on its part of this Agreement will be remediable by an order of specific performance. -7- (o) Each of the parties hereto acknowledge that they are separate entities, each of which has entered into this Agreement for independent business reasons. The relationship of the parties hereunder is that of an independent contractor and nothing contained herein shall be deemed to create a joint venture, partnership or any other relationship. (p) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. [SIGNATURE PAGE FOLLOWS] -8- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. BLUESTONE SOFTWARE, INC. By: /s/ Mel Baiada --------------------------------- Name: Mel Baiada Title: President BLUESTONE CONSULTING, INC. By: /s/ Mel Baiada --------------------------------- Name: Mel Baiada Title: President -9- EX-10.15 17 EXHIBIT 10.15 Exhibit 10.15 SERVICE MARK LICENSE AGREEMENT THIS SERVICE MARK AGREEMENT is made on this 17th day of April, 1997 by and between BLUESTONE SOFTWARE, INC., a Delaware corporation (the "Products Company"), and BLUESTONE CONSULTING, INC., a Delaware corporation (the "Services Company"). WHEREAS, the Products Company, successor by merger to Bluestone Consulting Inc., a New Jersey corporation ("Bluestone"), concurrently with the execution and delivery of this Agreement is transferring its professional consulting services group to the Services Company, a newly-formed corporation and an Affiliate (as hereinafter defined) of the Products Company; and WHEREAS, it is the desire and intention of the parties that the Services Company be permitted to use the Licensed Service Marks (as hereunder defined), subject to the terms and conditions set forth in this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and intending to be legally bound hereby, the Products Company and the Services Company hereby agree as follows: 1. DEFINITIONS. Capitalized terms used but not otherwise defined herein shall have the meaning ascribed to those terms in the Contribution and Distribution Agreement dated the date hereof between the Services Company and the Products Company (the "Contribution Agreement"). As used in this Agreement, the following terms shall have the following meanings: "Affiliate" shall mean a person that directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with, the person specified; provided that the Products Company and the Services Company (after giving effect to the Reorganization) shall not be deemed to be Affiliates of each other for purposes of this Agreement. "Change of Control" shall mean (i) a sale, transfer or other disposition of greater than fifty percent (50%) of the shares of the capital stock then outstanding of the Services Company (except if such transferee is then an Affiliate); (ii) a sale, transfer or other disposition of greater than fifty percent (50%) of the shares, or all or substantially all of the assets of the Services Company (except if such transferee is then an Affiliate); (iii) the merger or consolidation of the Company with or into another corporation (except an Affiliate), other than a merger or consolidation of the Services Company in which the holders of the shares of the Services Company's voting capital stock outstanding immediately before such merger or consolidation hold greater than fifty percent (50%) of the surviving entity's voting capital stock after such consolidation or merger. "Default" has the meaning set forth in Section 8 hereof. "Services" shall mean any services performed by the Services Company, including, without limitation, professional consulting services to those customers involved in GUI, object-oriented, database technologies and client/server development. 2. LICENSE. The Products Company grants to the Services Company a non-exclusive, perpetual, worldwide royalty-free license to use the Licensed Service Marks in connection with the Services under the conditions herein set forth (the "License"). The Services Company may sublicense such use of the Licensed Service Marks to any Affiliate of the Services Company upon obtaining the prior written consent of the Products Company, which consent shall not be unreasonably withheld, provided that such sublicensee agrees, as part of such sublicense agreement, to be bound by the terms and conditions of this Agreement. 3. QUALITY OF SERVICES. The Products Company has previously examined the nature and quality of the Services offered by the Services Company in connection with the Licensed Service Marks. Based upon that examination, the Products Company has determined that the Services currently offered and performed by the Services Company's predecessor meet the Products Company's standards of high quality. Any materially adverse changes to the nature and quality of the Services offered under the Licensed Service Marks proposed by the Services Company must be approved by the Products Company in writing as a condition precedent to the Services Company implementing and offering such changes to the Services under the Licensed Service Marks. 4. INSPECTION. Every six (6) months, the Services Company shall provide the Products Company with representative samples of all literature, packages, labels and advertising bearing the Licensed Service Marks prepared by or for the Services Company and intended to be used by the Services Company (the "Licensed Service Marks Materials"). The Products Company shall have the right to approve or disapprove (which approval will not be unreasonably withheld or denied, and which disapproval must be reasonable) the use of the Licensed Service Marks Materials by the Services Company. 5. USE OF LICENSED SERVICE MARKS. Whenever the Services Company uses the Licensed Service Marks in advertising or in any other manner in connection with the Services, the Services Company shall indicate the Products Company's ownership of the Licensed Service Marks with a registration symbol [ ("(-Registered Trademark-)")]. When using the Licensed Service Marks under this Agreement, the Services Company undertakes to comply with all applicable laws in force at any time in the United States. -2- 6. PRIOR RESTRICTIONS. The assignments, licenses and sublicenses granted by the parties hereto pursuant to this Agreement are expressly made subject to any and all prior rights of third parties. 7. OWNERSHIP OF LICENSED SERVICE MARKS. The Services Company acknowledges that the Products Company owns the exclusive right, title and interest in and to the Licensed Service Marks, and the Services Company will not at any time knowingly do or cause to be done any act or thing in any way impairing or tending to impair any part of such right, title and interest. In connection with the use of the Licensed Service Marks, the Services Company shall not in any manner represent that it has any ownership in the Licensed Service Marks or registration thereof, and the Services Company acknowledges that neither this Agreement nor the Services Company's use of the Licensed Service Marks shall create in the Services Company's favor any right, title or interest in or to the Licensed Service Marks, and all use of the Licensed Service Marks by the Services Company shall inure to the benefit of the Products Company. Upon termination of this Agreement, the Services Company and any Affiliate that has sublicensed the use of the Licensed Service Marks shall immediately cease all use of the Licensed Service Marks and shall not thereafter adopt any other designation confusingly similar to the Licensed Service Marks. 8. DEFAULT. The occurrence of any of the following shall constitute a default ("Default") hereunder: a. If the Services Company becomes insolvent or makes an assignment of assets or business for the benefit of creditors, or if a petition in bankruptcy is filed by the Services Company, or if the Services Company is adjudicated bankrupt, or if a bill in equity or other proceeding for the appointment of a receiver or other custodian for the Services Company's business or assets is filed and consented to by the Services Company, or if a receiver or other custodian is appointed, or if proceedings for composition with creditors under any state or federal law is instituted by or against the Services Company or if the real or personal property of the Services Company is attached or levied upon by any sheriff, marshall, or constable, and is not reasonably cured; or b. If the Services Company fails to comply with any material provision of this Agreement. 9. TERMINATION. a. In the event of any Default which, is not cured within thirty (30) days after receipt of a written "Notice to Cure" thereof from the Products Company, the Products Company may immediately terminate this Agreement and the License, in addition to and not in limitation of all other remedies at law or in equity. Notwithstanding the foregoing sentence, this Agreement shall immediately terminate automatically in the event of a Default pursuant to Section 8(a) hereof. -3- b. The Products Company may terminate upon thirty (30) days written notice in the event of a Change of Control of the Services Company, PROVIDED, HOWEVER, that the Services Company shall have the right, upon written notice of the exercise of such right, to continue the License for a period not to exceed one (1) year from the date of the Change of Control. 10. MODIFICATION. a. Notwithstanding anything in this Agreement to the contrary, the Products Company retains the right, which right shall be exercised in the reasonable judgment of the Products Company, to change, alter, modify, revise, replace or otherwise supplement (each, a "Change") the Licensed Service Marks. In addition to other reasons which may make such a Change advisable, the Products Company may do so to update its image, avoid, settle or compromise a threatened infringement action, avoid the need to commence any such action, or in response to comments received from the United States Patent and Trademark Office. b. In the event that the Products Company determines to Change the Licensed Service Marks, the Services Company and any Affiliate that has sublicensed the use of the Licensed Service Marks shall accept, use, promote and display the Licensed Service Marks as changed (the "New Trademarks") and shall cease using the Licensed Service Marks which has been changed (the "Old Trademarks"), and shall take such other action, including corrective advertising, at the Services Company's expense as may be reasonably required by the Products Company PROVIDED, HOWEVER, that for a period of nine (9) months after the date the Services Company receives notice of the Change, the Services Company may continue to use the Old Trademarks while exhausting its existing stock of supplies and materials containing the Old Trademarks. Upon notification by the Products Company, or at such later date if designated by the Products Company, the New Trademarks shall become the Licensed Service Marks. c. The Services Company shall provide to the Products Company two (2) months prior written notice if it intends to abandon any Licensed Service Mark. d. The Products Company shall provide to the Services Company two (2) months prior written notice if the Products Company intends to abandon any Licensed Service Mark. 11. OTHER MARKS. The Services Company may adopt or license other trademarks or service marks to use with or without the Licensed Service Marks in accordance with the terms of this Agreement. 12. CONFIDENTIALITY. a. PROTECTION OF PROPRIETARY INFORMATION. The parties hereto shall safeguard against unauthorized use and disclosure all of the proprietary information, in their possession or which comes into their possession that is owned by the parties hereto and is not -4- subject to confidentiality provisions in a separate agreement. The parties hereto agree to use the same degree of care that each uses to protect its own information of a similar nature, but in no event less than a reasonable degree of care under the circumstances. The obligations not to use or disclose proprietary information shall survive the termination of this Agreement. b. EXCEPTIONS TO PROTECTION OF PROPRIETARY INFORMATION. The parties acknowledge that any item of proprietary information pursuant to Section 12 shall be excepted from such requirements to the extent that: (1) the item or its use is or becomes known in the trade without the fault of the party claiming the exception; (2) the item or its use is or becomes available on an unrestricted basis to the party claiming the exception from an unaffiliated source that is not under a confidentiality obligation; or (3) disclosure of the item or its use by any party is the result of a court or government action; provided that the party disclosing such item pursuant to this subsection (b) shall provide reasonable prior written notification to the other parties of such action, and provided further that disclosure solely pursuant to this subsection (b) shall not release disclosing party from its obligation otherwise to maintain the item in confidence unless otherwise permitted by this Agreement. 13. INFRINGEMENT. a. In the event that the Products Company or the Services Company becomes aware of actu al or threatened infringement of the Licensed Service Marks, such party shall promptly notify the other party in writing. Within thirty (30) days of becoming so aware or receipt of such notice, as the case may be, the Products Company shall have the right to initiate actions to resolve the infringement at its sole cost and expense. The Services Company shall have the right to participate in any such infringement action at its own expense. If the Products Company does not initiate actions to resolve the infringement within the above thirty (30) days, then the Services Company shall have the right to initiate actions to resolve the infringement at the Services Company's sole cost and expense. b. In the event that the Products Company or the Services Company becomes aware of any actual or threatened trademark infringement action against the Products Company or the Services Company or any permitted sublicensee involving the use of the Licensed Service Marks, such party shall promptly notify the other party in writing. Within thirty (30) days of becoming aware or receipt of such notice, as the case may be, the Products Company shall have the right to defend and control the defense of such action and take such other actions to resolve the matter on reasonable terms and conditions as may be appropriate at the Products Company's expense. The Services Company shall have the right to participate in any such action at its own expense. If the Products Company elects not to defend and control a defense of such -5- action, then the Services Company shall have the right to defend and control defense of such action at the Services Company's expense. c. Both parties shall provide full cooperation with the other party at all times in connection with any infringement action pursuant to this Section 13, including being named as a party to the action, if necessary. If only one party is participating in such action, then the other party's cooperation shall be at such other party's sole expense. 14. ASSIGNMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto, except that either party may assign its rights to an Affiliate hereunder. 15. NOTICE. All notices, requests, demands and other communication hereunder shall be in writing and shall be deemed to have been duly given if personally delivered, if sent by facsimile transmission (with confirmation postmarked on the same day), if sent by overnight courier service or, if mailed, when mailed by United States first-class, certified or registered mail, postage prepaid, to other party at the following addresses (or at such addresses as shall be given in writing by any party to the other): If to the Products Company, to: Bluestone Software, Inc. 1000 Briggs Road Mount Laurel, NJ 08054 Fax: (609) 727-3833 Attention: Mr. Mel Baiada, President If to the Services Company, to: Bluestone Consulting, Inc. 1000 Briggs Road Mount Laurel, NJ 08054 Fax: (609) 727-3833 Attention: Mr. Thomas Ballezzi, Chief Operating Officer 16. WAIVER AND AMENDMENT. No waiver by any party to this Agreement of any breach or Default shall be effective unless the same shall be in writing and signed. No waiver by any party of any breach or Default shall be construed to constitute a waiver of, or consent to, the present or future breach or Default of any other term or provision hereof. No alteration, amendment or modification of this Agreement shall be effective or binding to any extent whatsoever except by an instrument in writing and signed by both of the parties hereto. -6- 17. ENTIRE AGREEMENT. This Agreement and the Contribution Agreement constitutes the entire agreement between the parties as to the subject matter hereto and supersedes all prior agreements or understandings between the Products Company and the Services Company, whether written or oral. 18. HEADINGS. The headings, titles and subtitles herein are inserted for convenience of reference only and shall not control or affect the meaning or construction of any of the provisions hereof. 19. SEVERABILITY. If any provision of this Agreement shall be deemed to be invalid or unenforceable by any court of competent jurisdiction, the remaining provisions shall be valid and enforceable and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. 20. GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. In connection with any dispute arising between the parties under this Agreement each party hereto consents to the exclusive jurisdiction and venue of any federal or state court located in the State of New Jersey and each party waives any claim, it may have at any time to FORUM NON CONVENIENS with respect to such venue. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. BLUESTONE SOFTWARE, INC. By: /s/ Mel Baiada ------------------------ Name: Mel Baiada Title: President BLUESTONE CONSULTING, INC. By: /s/ Mel Baiada ------------------------ Name: Mel Baiada Title: President -7- EX-10.16 18 EXHIBIT 10.16 Exhibit 10.16 AMENDED AND RESTATED CONVERTIBLE AND SUBORDINATED NOTE THIS CONVERTIBLE NOTE AND THE SHARES INTO WHICH IT MAY BE CONVERTED HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. FOR VALUE RECEIVED, this Amended and Restated Convertible Note (this "Convertible Note") is made on this 17th day of April, 1997 by Bluestone Software, Inc. (the "Products Company"), a Delaware corporation and successor by merger to Bluestone Consulting, Inc., a New Jersey corporation (the "Former Corporation" and together with the Products Company, the "Company"), having its principal place of business at 1000 Briggs Road, Mount Laurel, New Jersey 08054, in favor of Mark Baiada (the "Payee") on the terms and conditions set forth herein. W I T N E S S E T H: WHEREAS, as of January 1, 1996, the Company executed a Convertible Note in favor of Payee in the principal amount of One Million Dollars ($1,000,000) (the "Original Convertible Note"), which Original Convertible Note is convertible into 700,000 shares of common stock of the Company; WHEREAS, pursuant to a Contribution and Distribution Agreement dated of even date herewith by and between the Products Company and Bluestone Consulting, Inc., a Delaware corporation (the "Services Company"), the Products Company will contribute certain of its assets relating to its services business to the Services Company in exchange for all of the issued and outstanding stock of the Services Company and the assumption by the Services Company of certain liabilities of the Products Company, as more specifically set forth in the Contribution and Distribution Agreement, and immediately thereafter, the Products Company shall distribute all of the issued and outstanding stock of the Services Company to Mr. Mel Baiada, the sole shareholder of the Products Company; WHEREAS, pursuant to and in connection with the Contribution and Distribution Agreement, the Services Company has agreed to assume FIVE HUNDRED THOUSAND DOLLARS ($500,000) of the principal amount of the Original Convertible Note (the "Assumed Principal Amount"), with the remaining FIVE HUNDRED THOUSAND DOLLARS ($500,000) of the principal amount of the Original Convertible Note remaining as a liability of the Products Company (the "Retained Principal Amount"); WHEREAS, to effect the assumption by the Services Company of the Assumed Principal Amount, the Services Company shall execute a Convertible Note in favor of Payee, which note shall be convertible into the common stock of the Services Company in accordance with its terms; and WHEREAS, this Convertible Note is issued by the Products Company to (i) amend and restate in its entirety the Original Convertible Note to effect the Products Company's continuing indebtedness relative to the Retained Principal Amount and (ii) reflect the assumption by the Services Company of the Assumed Principal Amount. NOW THEREFORE, intending to be legally bound hereby and intending to have this Amended and Restated Convertible Note govern the terms and conditions of the Retained Convertible Note, the Products Company hereby makes this Convertible Note in favor of Payee upon the terms and conditions set forth as follows: 1. PAYMENT. Subject to the terms and conditions hereafter set forth, the Company hereby promises to pay to the order of Payee, the Principal in the amount of Five Hundred Thousand Dollars ($500,000) as follows: a. PAYMENT OF PRINCIPAL. To the extent not paid sooner pursuant to Section 2 hereof, the Principal shall be due and payable, in lawful money of the United States, to Payee on December 31, 2002. b. PAYMENT OF INTEREST. Interest on the Principal outstanding under this Convertible Note shall accrue from the date hereof at a rate of ten percent (10%) per annum, compounded annually, without set off or deductions and shall continue to accrue until the entire Principal is paid in full. The Company shall make annual payments of accrued interest to Payee, in arrears, on or before each anniversary of the date of this Convertible Note, or if such interest payment date is a Saturday, Sunday or a legal holiday, then on the next business day following such interest payment date. All computations of the interest rate hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) this Convertible Note is outstanding. c. PAYMENT. Both principal and interest are payable in lawful money of the United States of America by wire (or intra-bank) transfer of same day funds to the account of the Payee at such banking institution as the Payee designates or, if requested by the Payee, by certified or official bank check payable to the Payee mailed to the Payee at the address of the Payee as set forth in the records of the Company or such other address as shall be designated in writing by the Payee to the Company. 2. PREPAYMENT. The Company may, at any time after the date hereof with the prior written consent of the Payee, pay all amounts due under this Convertible Note without penalty or premium, in whole or in part, upon payment of the Principal hereof, together with interest on the 2 Principal amount paid hereunder to the date of such payment. Any partial prepayments of this Convertible Note shall be applied first to accrued interest and then to original principal. 3. SUBORDINATION OF CONVERTIBLE NOTE. Anything in this Convertible Note to the contrary notwithstanding, the indebtedness evidenced by this Convertible Note, and any renewals or extensions thereof, including Principal and interest, shall at all times be wholly subordinate and junior in right of payment, to the extent and in the manner hereinafter set forth in this Section 3, to all principal of and interest on all indebtedness of the Company to PNC Bank, N.A. (the "Bank"), whether outstanding on the date hereof or created or incurred after the date hereof. Such indebtedness of the Company to which this Convertible Note is subordinate and junior is sometimes hereinafter referred to as "Senior Indebtedness". a. In the event of any liquidation, dissolution or winding up of the Company, or of any execution, sale, receivership, insolvency, bankruptcy, liquidation, readjustment, reorganization or other similar proceeding relative to the Company or its property, all principal and interest owing on all Senior Indebtedness shall first be paid in full before any payment is made upon the indebtedness evidenced by this Convertible Note. In any such event, any payment or distribution of any kind or character, whether in cash, property or securities (other than in securities or other evidences of indebtedness, the payment of which is subordinated to the payment of all Senior Indebtedness which may at the time be outstanding) that shall be made upon or in respect of this Convertible Note shall be paid over to the Bank, for application in payment thereof unless and until such Senior Indebtedness shall have been paid or satisfied in full. b. In the event that this Convertible Note is declared or becomes due and payable because of the occurrence of any default hereunder or otherwise other than at the option of the Company , under circumstances when the foregoing clause (a) shall not be applicable, the holder of the Convertible Note shall be entitled to payment only after there shall first have been paid in full all Senior Indebtedness outstanding at the time the Convertible Note becomes due and payable because of any such event, or payment shall have been provided for in a manner satisfactory to the Bank. c. During the continuance of any default in the payment of either principal or interest on any Senior Indebtedness, no payment of principal or interest shall be made on the Convertible Note. d. For the thirty (30) day period after the occurrence of, and during the continuance of, any event of default with respect to Senior Indebtedness of which the holder of the Convertible Note has been given notice by the Company or the Bank, the holder of the Convertible Note will not (i) demand payment of principal or interest on the Convertible Note or otherwise cause the Convertible Note to become due or (ii) exercise any remedies with respect to the Convertible Note, unless and until all Senior Indebtedness shall have been paid in full or the Bank shall have otherwise consented in writing. 3 e. The provisions of this Section 3 are solely for the purpose of defining the relative rights of the Bank on the one hand, and the holder of the Convertible Note on the other hand, and nothing herein shall impair, as between the Company and the holder of the Convertible Note, the obligation of the Company, which is unconditional and absolute, to pay the principal of and interest on the Convertible Note in accordance with its terms; nor shall anything herein prevent the holder of the Convertible Note from exercising all remedies otherwise permitted by applicable law or hereunder upon default hereunder, subject to the rights under this Section 3 of the Bank. f. Notwithstanding anything to the contrary set forth herein, nothing in this Section 3 shall limit the rights of the holder of the Convertible Note to convert the principal amount of the Convertible Note as provided in Section 4 hereof. 4. OPTIONAL CONVERSION. Payee shall have the right, at Payee's option, at any time and from time to time prior to repayment of all amounts due under this Convertible Note or maturity of this Convertible Note, to convert all or any portion of the outstanding Principal due under this Convertible Note into up to Seven Hundred Thousand (700,000) fully paid and nonassessable shares (the "Conversion Shares") of the Company's common stock, par value $.001 per share (the "Common Stock"), at a conversion price equal $.71 per share (the "Conversion Price"). The number of Conversion Shares and the Conversion Price are each as set forth in Section 5 hereof. a. In order to exercise the conversion privilege, Payee shall surrender this Convertible Note, duly endorsed, to the Company's principal address set forth above, together with written notice of conversion to the Company that Payee elects to convert this Convertible Note or the portion thereof specified in said notice. As promptly as practicable after the surrender of this Convertible Note as aforesaid, in full or in part, and in any event within ten (10) days thereafter, the Company, at its expense, shall issue and deliver to Payee a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of this Convertible Note or portion thereof registered in the name of Payee in accordance with the provisions of this Section 4 and a check or cash in respect of any fractional interest in respect of a share of Common Stock arising upon such conversion, as provided below. In case this Convertible Note shall be surrendered for partial conversion, the Company shall execute and deliver to Payee, without charge, a new Convertible Note in an aggregate principal amount equal to the unconverted portion of the surrendered Convertible Note, provided that, except for the amount of shares into which the new Convertible Note may be converted, the new Convertible Note shall have all of the same terms and conditions as this Convertible Note. b. Each conversion shall be deemed to have been effected immediately prior to the close of business on the day on which this Convertible Note shall have been surrendered and the conversion notice shall have been received by the Company, as aforesaid and Payee shall be deemed to have become on said date the holder of record of the shares of Common Stock issuable upon such conversion. c. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon conversion of this Convertible Note. If any fractional share of Common 4 Stock would be issuable upon the conversion of this Convertible Note, then the Company shall make an adjustment therefor in cash at the conversion price. d. Upon any conversion of this Convertible Note, or any portion hereof, appropriate cash adjustment shall be made for or on account of any interest accrued hereon or such portion. Upon conversion of all or any portion of the unpaid Principal amount hereof, the principal obligation due hereunder shall be deemed reduced to the extent of the value of the aggregate conversion price of the Common Stock acquired thereby. 5. ADJUSTMENTS. The Exercise Price and the number of shares purchasable hereunder are subject to adjustment from time to time as follows: a. STOCK DIVIDEND, SPLIT OR SUBDIVISION OF SHARES. If the number of shares of Common Stock outstanding at anytime after the date hereof is increased or deemed increased by a stock dividend payable in shares of Common Stock or other securities (other than options granted under an employee stock option plan) convertible into or exchangeable for shares of Common Stock ("Equivalents") or by a subdivision or split-up of shares of Common Stock or Equivalents (other than a change in par value, from par value to no par value or from no par value to par value), then, following the effective date fixed for the determination of holders of Common Stock or Equivalents entitled to receive such stock dividend, subdivision or split-up, the Conversion Price shall be appropriately decreased (but in no event shall the Conversion Price be decreased below the par value of the Common Stock issuable upon conversion of this Convertible Note) and the number of Conversion Shares shall be increased in proportion to such increase in outstanding shares (on a fully diluted basis). b. COMBINATION OF SHARES. If, at any time after the date hereof, the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock (other than a change in par value, from par value to no par value or from no par value to par value), then, following the effective date for such combination, the Conversion Price shall be appropriately increased and the number of Conversion Shares shall be decreased in proportion to such decrease in outstanding shares (on a fully diluted basis). 6. CONSOLIDATION OR MERGER. If any consolidation or merger of the Company or the sale of all or substantially all its assets shall be effected, then, as a condition of such consolidation, merger or sale, lawful and adequate provision shall be made whereby the holder of this Convertible Note shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock of the Company immediately theretofore receivable upon the conversion of this Convertible Note, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares equal to the number of shares of Common Stock immediately theretofore so receivable by such holder had such consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of such holder to the end that the provisions hereof (including without limitation provisions for adjustment of the conversion price) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of such conversion rights. The Company shall not effect any such consolidation, merger of sale, unless prior to 5 or simultaneously with the consummation thereof, the successor (if other than the Company) resulting from such consolidation or merger or the purchaser of such assets shall assume by written instrument executed and mailed or delivered to the holder hereof, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to receive. 7. NOTICE OF ADJUSTMENT OF CONVERSION SHARES OR CONVERSION PRICE. Upon any adjustment of the number of Conversion Shares or the Conversion Price, then and in each such case, the Company shall give written notice thereof, to the holder hereof, which notice shall state the conversion price resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 8. COLLECTION. Should the indebtedness evidenced by this Convertible Note or any part hereof be collected at law or in equity or in bankruptcy, receivership or other court proceedings, or this Convertible Note placed in the hands of attorneys for collection, the Company agrees to pay, in addition to principal and interest due and payable hereon, all costs of collection, including reasonable attorneys' fees, incurred by the Payee in collecting this Convertible Note. 9. BANKRUPTCY OF THE COMPANY. In the event of an actual or deemed entry of any order for relief with respect to the Company under the Federal Bankruptcy Code, this Convertible Note, all interest thereon and all other amounts payable hereunder shall automatically become and be due and payable, without presentment, demand, protest, or any notice of any kind, all of which are hereby expressly waived by the Company. 10. WAIVER OF PRESENTMENT. The Company hereby waives presentment for payment, demand, notice of demand, notice of nonpayment or dishonor, protest and notice of protest of this Convertible Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Convertible Note. The Company agrees that the Company's liability shall be unconditional, without regard to the liability of any other party, and shall not be affected in any manner by any indulgence, extensions of time, renewal, waiver or modification granted or consented to by the Payee. The Company agrees that additional guarantors or sureties may become parties hereto without notice to the Company or affecting its liability hereunder. The Company hereby waives and releases all errors, defects and imperfections in any proceeding instituted by the Payee under the terms of this Convertible Note. 11. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants as follows: a. The Company is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has all requisite corporate power and authority to own and lease its property, to carry on its business as presently conducted and as proposed to be conducted 6 (as previously disclosed to Payee) and to execute and deliver, and to perform all of its obligations under this Convertible Note. b. The execution, delivery and performance by the Company of this Convertible Note is within the Company's corporate powers, have been duly authorized by all necessary corporate action, and do not and will not contravene or cause a breach or default under (i) the Company's Certificate of Incorporation or Bylaws, (ii) any law or any order, decree, writ, judgment, award, injunction or similar legal restriction currently applicable to the Company, or (iii) any contractual provision or restriction contained in any indenture, loan or credit agreement, guaranty, mortgage, deed of trust, bond, note, or other agreement, instrument or understanding which binds or affects or purports to bind or affect the Company; nor will such execution, delivery or performance result in or require the creation of any lien, security interest or other charge or encumbrance (other than pursuant hereto) upon or with respect to any of the Company's properties. c. No authorization, approval or consent or other action by, and no notice to or filing with, any governmental authority, regulatory body or other person or entity is required for the due execution, delivery or performance by the Company of this Convertible Note or the consummation of the transactions contemplated hereby and thereby, except for any federal or Blue Sky filings, which filings shall be made within the required time periods. d. This Convertible Note when executed and delivered hereunder will be, the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 12. NOTICES. All notices and other communications from the Company to Payee shall be in writing, and shall be delivered by hand, sent by overnight courier, or mailed by first-class certified or registered mail, postage prepaid, to the address furnished to the Company in writing by Payee. All notices and other communications from Payee or in connection herewith to the Company shall be in writing, and shall be delivered by hand, sent by overnight courier, or mailed by first-class certified or registered mail, postage prepaid, to the Company at its principal office set forth above. If the Company should at any time change the location of its principal office to a place other than as set forth below, then it shall give prompt written notice to Payee and thereafter all references in this Convertible Note to the location of its principal office at the particular time shall be as so specified in such notice. 13. NO RIGHTS AS STOCKHOLDER. Notwithstanding Payee's rights hereunder, until the conversion of this Convertible Note, Payee shall not have or exercise any rights by virtue hereof as a stockholder of the Company. 14. CHANGE OR WAIVER. Any term of this Convertible Note may be changed or waived only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. 7 15. HEADINGS. The headings in this Convertible Note are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Convertible Note. 16. SEVERABILITY. If any provision of this Convertible Note is held to be invalid or unenforceable by a court of competent jurisdiction, then the other provisions of this Convertible Note shall remain in full force and effect and shall be liberally construed in favor of the Payee in order to effect the provisions of this Convertible Note. 17. REMEDIES NOT EXCLUSIVE. All rights and remedies of the Payee under this Convertible Note and any applicable law are separate and cumulative, and the exercise of one shall not limit or prejudice the exercise of any other such rights or remedies. The enumeration in this Convertible Note of any waivers or consents by the Company shall not be deemed exclusive of any additional waivers or consents by the Company which may be deemed to exist in law or equity. No delay or omission by the Payee in exercising any right or remedy shall operate as a waiver thereof. No waiver of any rights and remedies hereunder, and no modification or amendment of this Note, shall be deemed made by the Payee unless in writing and duly signed by an officer of the Payee. Any such written waiver shall apply only to the particular instance specified therein and shall not impair the further exercise of such right or remedy or of any other right or remedy of the Payee, and no single or partial exercise of any right or remedy under this Convertible Note shall preclude any other or further exercise thereof or any other right or remedy. 18. SUCCESSORS AND ASSIGNS. This Convertible Note inures to the benefit of the Payee and binds the Company, and their respective successors and assigns, and the words "Payee" and the "Company" whenever occurring herein all be deemed and construed to include such respective successors and assigns. 19. GOVERNING LAW. This Convertible Note is made and delivered in and shall be governed by the laws of the State of Delaware without regard to principles of conflicts or choice of laws of any jurisdiction. 8 IN WITNESS WHEREOF, the Company has executed this Convertible Note by its duly authorized officer as of the date set forth above. BLUESTONE SOFTWARE, INC. By: /s/ Mel Baiada -------------------------------- Mel Baiada President 9 EX-10.17 19 EXHIBIT 10.17 Exhibit 10.17 THIS NOTE IS SUBORDINATED PURSUANT TO THE TERMS OF THAT CERTAIN SUBORDINATION AGREEMENT, DATED APRIL 17, 1997, BY AND AMONG PNC BANK, NATIONAL ASSOCIATION, BLUESTONE SOFTWARE, INC. AND BLUESTONE CONSULTING, INC. BLUESTONE SOFTWARE, INC. PROMISSORY NOTE $500,000 April 17, 1997 FOR VALUE RECEIVED, the undersigned, Bluestone Software, Inc., Inc., a Delaware corporation and successor by merger to Bluestone Consulting Inc., a New Jersey corporation, (the "Borrower"), HEREBY PROMISES TO PAY to the order of Bluestone Consulting, Inc., a Delaware corporation (the "Payee"), the principal sum of FIVE HUNDRED THOUSAND DOLLARS ($500,000) on December 31, 2005. Interest will accrue on the unpaid principal amount of this Promissory Note at the rate of ten percent (10%) per annum, in arrears, and shall be payable annually on each anniversary date of this note (each such date, an "Interest Payment Date"), or if an Interest Payment Date is a Saturday, Sunday or holiday, on the first business day following such Interest Payment Date, and no interest on the amount payable shall accrue for the intervening period. All computations of the interest rate hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) this Promissory Note is outstanding. This Note is subordinated pursuant to the terms of that certain Subordination Agreement, dated April 17, 1997, by and among PNC Bank, National Association, the Borrower and the Payee. Both principal and interest are payable in lawful money of the United States of America by wire transfer or intra-bank transfer, of immediately available funds to the account of the Payee at such banking institution as the Payee designates or, if requested by the Payee, by certified or official bank check payable to the Payee mailed to the Payee at the address of the Payee as set forth in the records of the Borrower or such other address as shall be designated in writing by the Payee to the Borrower. The Borrower may, at its option, at any time after the date hereof, pay all amounts due under this Promissory Note without penalty or premium, in whole or in part, upon payment of the principal amount hereof, together with interest on the principal amount so paid accrued to the date of such payment. Any partial prepayment shall be applied first to accrued interest and then to principal outstanding. Should the indebtedness evidenced by this Promissory Note or any part hereof be collected at law or in equity or in bankruptcy, receivership or other court proceedings, or this Promissory Note placed in the hands of attorneys for collection, the Borrower agrees to pay, in addition to principal and interest due and payable hereon, all costs of collection, including reasonable attorneys' fees, incurred by the Payee in collecting this Promissory Note. In the event of an actual or deemed entry of any order for relief with respect to the Borrower under the Federal Bankruptcy Code, this Promissory Note, all interest thereon and all other amounts payable hereunder shall automatically become and be due and payable, without presentment, demand, protest, or any notice of any kind, all of which are hereby expressly waived by the Borrower. The Borrower hereby waives presentment for payment, demand, notice of demand, notice of nonpayment or dishonor, protest and notice of protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note. The Borrower agrees that the Borrower's liability shall be unconditional, without regard to the liability of any other party, and shall not be affected in any manner by any indulgence, extensions of time, renewal, waiver or modification granted or consented to by the Payee. The Borrower agrees that additional guarantors or sureties may become parties hereto without notice to the Borrower or affecting its liability hereunder. The Borrower hereby waives and releases all errors, defects and imperfections in any proceeding instituted by the Payee under the terms of this Note. If any provision of this Note is held to be invalid or unenforceable by a court of competent jurisdiction, then the other provisions of this Note shall remain in full force and effect and shall be liberally construed in favor of the Payee in order to effect the provisions of this Note. All rights and remedies of the Payee under this Note and any applicable law are separate and cumulative, and the exercise of one shall not limit or prejudice the exercise of any other such rights or remedies. The enumeration in this Note of any waivers or consents by the Borrower shall not be deemed exclusive of any additional waivers or consents by the Borrower which may be deemed to exist in law or equity. No delay or omission by the Payee in exercising any right or remedy shall operate as a waiver thereof. No waiver of any rights and remedies hereunder, and no modification or amendment of this Note, shall be deemed made by the Payee unless in writing and duly signed by an officer of the Payee. Any such written waiver shall apply only to the particular instance specified therein and shall not impair the further exercise of such right or remedy or of any other right or remedy of the Payee, and no single or partial exercise of any right or remedy under this Note shall preclude any other or further exercise thereof or any other right or remedy. This Promissory Note inures to the benefit of the Payee and binds the Borrower, and their respective successors and assigns, and the words "Payee" and "Borrower" whenever occurring herein all be deemed and construed to include such respective successors and assigns. This Promissory Note is made and delivered in and shall be governed by the laws of the State of New Jersey without regard to principles of conflicts or choice of laws of any jurisdiction. BLUESTONE SOFTWARE, INC. By: /s/ Mel Baiada ---------------------------------- President EX-10.20 20 EXHIBIT 10.20 Exhibit 10.20 LOAN AND SECURITY AGREEMENT This LOAN AND SECURITY AGREEMENT is entered into as of December 8, 1997, by and between SILICON VALLEY BANK, a California-chartered bank ("Bank"), with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at Wellesley Office Park, 40 William Street, Suite 350, Wellesley, Massachusetts 02181, doing business under the name "Silicon Valley East" ("Bank") and BLUESTONE SOFTWARE, INC., a Delaware corporation with its principal place of business at 1000 Briggs Road, Mount Laurel, New Jersey 08054-4101 ("Borrower"). RECITALS Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advances" means a loan advance under the Committed Revolving Line. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, such Person's, managers and members. "Bank Expenses" means all reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents, (including fees and expenses of appeal or review, or those incurred in any Insolvency Proceeding) whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including, without limitation: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Borrowing Base" means an amount equal to (i) Eighty percent (80%) of Eligible Accounts as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower, plus (ii) an amount equal to One Hundred percent (100.0%) of any Certificate of Deposit maintained at the Bank, and specifically pledged to Bank, up to $400,000.00. -1- "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Closing Date" means the date of this Agreement. "Code" means the Massachusetts Uniform Commercial Code. "Collateral" means the property described on EXHIBIT A attached hereto. "Committed Revolving Line" means a credit extension of up to One Million Seven Hundred Fifty Thousand Dollars ($1,750,000.00). "Committed Equipment Line" means a credit extension of up to Five Hundred Thousand Dollars ($500,000.00). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Credit Extension" means each Advance, Equipment Advance, or any other extension of credit by Bank for the benefit of Borrower hereunder. "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.4. Unless otherwise agreed to by Bank in writing, Eligible Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; (b) Accounts with respect to an account debtor, fifty percent (50%) of whose Accounts outstanding at any time the account debtor has failed to pay within ninety (90) days of invoice date; (c) Accounts with respect to an account debtor, including Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank; (d) Accounts with respect to which the account debtor does not have its principal place of business in the United States; (e) Accounts with respect to which the account debtor is a federal, state, or local governmental entity or any department, agency, or instrumentality thereof, except for those Accounts of the United States or any department, agency or instrumentality thereof as to which the payee has -2- assigned its rights to payment thereof to Bank and the assignment has been acknowledged, pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C. 3727); (f) Accounts with respect to which Borrower is liable to the account debtor, but only to the extent of any amounts owing to the account debtor (sometimes referred to as "contra" accounts, e.g. accounts payable, customer deposits, credit accounts etc.); (g) Accounts generated by demonstration or promotional equipment, or with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; (h) Accounts with respect to which the account debtor is an Affiliate, officer, employee, or agent of Borrower; (i) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and (j) Accounts the collection of which Bank reasonably determines to be doubtful. "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "Equipment Advance" has the meaning set forth in Section 2.1.2. "Equipment Availability End Date" has the meaning set forth in Section 2.1.2. "Equipment Maturity Date" is defined in Section 2.1.2. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "GAAP" means generally accepted accounting principles as in effect in the United States from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above. -3- "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Liquid Assets" shall mean cash, or cash equivalents (as determined under GAAP) plus the undrawn amounts under the Committed Revolving Line. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other present or future agreement entered into between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents. "Maturity Date" means the later of the Equipment Maturity Date or the Revolving Maturity Date. "Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "Payment Date" means the first calendar day of each month commencing on the first such date after the Closing Date and ending on the Revolving Maturity Date. "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; (e) In addition to the foregoing, Indebtedness in the amount of $150,000.00 incurred to purchase Equipment not financed by Bank; and (f) Indebtedness secured by Permitted Liens. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; and -4- (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and as to which adequate reserves are maintained on Borrower's Books in accordance with GAAP, PROVIDED the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any Equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such Equipment or indebtedness incurred solely for the purpose of financing the acquisition of such Equipment, or (ii) existing on such equipment at the time of its acquisition, PROVIDED that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; (e) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, PROVIDED that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. "Responsible Officer" means each of the Chief Executive Officer, the President, the Chief Financial Officer and the Controller of Borrower. "Revolving Maturity Date" shall mean one day prior to the date which is one year from the Closing Date. "Schedule" means the schedule of exceptions attached hereto, if any. "Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank (and identified as being such by Borrower and Bank). "Subsidiary" means with respect to any Person, corporation, partnership, company association, joint venture, or any other business entity of which more than fifty percent (50%) of the voting stock or other equity interests is owned or controlled, directly or indirectly, by such Person or one or more Affiliates of such Person. "Tangible Net Worth" means as of any applicable date, the consolidated total assets of Borrower and its Subsidiaries MINUS, without duplication, (i) the sum of any amounts attributable to (a) goodwill, -5- (b) intangible items such as unamortized debt discount and expense, patents, trade and service marks and names, copyrights and research and development expenses except prepaid expenses, and (c) all reserves not already deducted from assets, AND (ii) Total Liabilities. "Total Liabilities" means as of any applicable date, any date as of which the amount thereof shall be determined, all obligations that should, in accordance with GAAP be classified as liabilities on the consolidated balance sheet of Borrower, including in any event all Indebtedness, but specifically excluding Subordinated Debt. 1.2 ACCOUNTING AND OTHER TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations and determinations made hereunder shall be made in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. The terms "including"/ "includes" shall always be read as meaning "including (or includes) without limitation", when used herein or in any other Loan Document. 2. LOAN AND TERMS OF PAYMENT 2.1 CREDIT EXTENSIONS. Borrower promises to pay to the order of Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof. 2.1.1 (a) Subject to and upon the terms and conditions of this Agreement, Bank agrees to make Advances to Borrower in an aggregate outstanding amount not to exceed the Committed Revolving Line or the Borrowing Base, whichever is less. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at any time during the term of this Agreement. (b) Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of EXHIBIT B hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1 to Borrower's deposit account with Bank. (c) The Committed Revolving Line shall terminate on the Revolving Maturity Date, at which time all Advances under this Section 2.1 and other amounts due under this Agreement (except as otherwise expressly specified herein) shall be immediately due and payable. 2.1.2 EQUIPMENT ADVANCES. (a) Subject to and upon the terms and conditions of this Agreement, at any time from the date hereof through six (6) months following the Closing Date (the "Equipment Availability End Date"), Bank agrees to make advances (each an "Equipment Advance" and collectively, the "Equipment Advances") to Borrower in an aggregate outstanding amount not to exceed the Committed Equipment Line. To evidence the Equipment Advance or Equipment Advances, Borrower shall deliver to Bank, at the time of each Equipment Advance request, an invoice for the equipment to be purchased. The Equipment Advances shall be used only to purchase Equipment or refinance Equipment purchased after January 1, 1997 and shall not exceed One Hundred Percent (100%) of the invoice amount of such equipment approved from time to time by Bank, excluding taxes, shipping, warranty charges, freight discounts and installation expense. Software may, however, constitute up to twenty-five percent (25.0%) of each Equipment Advance aggregate Equipment Advances. -6- (b) Interest shall accrue from the date of each Equipment Advance at a per annum rate equal to One and One Half of One percentage points (1.50%) above the Prime Rate. and shall be payable monthly for each month through the month in which the Equipment Availability End Date falls. Any Equipment Advances that are outstanding on the Equipment Availability End Date will be payable in thirty six (36) equal monthly installments of principal, plus all accrued interest, beginning on the Payment Date of each month following the Equipment Availability End Date and ending on the date which is thirty six (36) months after the Equipment Availability End Date (the "Equipment Maturity Date"). Equipment Advances, once repaid, my not be reborrowed. (c) When Borrower desires to obtain an Equipment Advance, Borrower shall notify Bank (which notice shall be irrevocable) by facsimile transmission to be received no later than 3:00 p.m. Pacific time one (1) Business Day before the day on which the Equipment Advance is to be made. Such notice shall be substantially in the form of Exhibit B. The notice shall be signed by a Responsible Officer or its designee and include a copy of the invoice for the Equipment to be financed. 2.2 OVERADVANCES. If, at any time or for any reason, the amount of Obligations owed by Borrower to Bank pursuant to Section 2.1.1 of this Agreement is greater than the lesser of (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of such excess. 2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS. (a) INTEREST RATE. Except as set forth in Section 2.3(b), any Advances shall bear interest, on the average daily balance thereof, at a per annum rate equal to One and One Half percentage point (1.50%) above the Prime Rate. (b) DEFAULT RATE. All Obligations shall bear interest, from and after the occurrence of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (c) PAYMENTS. Interest hereunder shall be due and payable on each Payment Date. Borrower hereby authorizes Bank to debit any accounts with Bank, including, without limitation, Account Number _____________________ for payments of principal and interest due on the Obligations and any other amounts owing by Borrower to Bank. Bank will notify Borrower of all debits which Bank has made against Borrower's accounts. Any such debits against Borrower's accounts in no way shall be deemed a set-off. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. (d) COMPUTATION. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment, whether directed to Borrower's deposit account with Bank or to the Obligations or otherwise, shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment in respect of the Obligations unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 3:00 p.m. Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall -7- instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.5 FEES. Borrower shall pay to Bank the following: (a) COMMITTED REVOLVING LINE FACILITY FEE. As compensation for the Bank's maintenance of sufficient funds available for such purpose, the Bank shall have earned a Committed Revolving Line Facility Fee (so referred to herein), which fee shall be paid as of the Closing Date, in an amount equal to One Half of One percent (0.50%) of the Committed Revolving Line. The Borrower shall not be entitled to any credit, rebate or repayment of any Committed Revolving Line Facility Fee previously earned by the Bank pursuant to this Section notwithstanding any termination of the within Agreement, or suspension or termination of the Bank's obligation to make loans and advances hereunder; (b) COMMITTED EQUIPMENT LINE FACILITY FEE. As compensation for the Bank's maintenance of sufficient funds available for such purpose, the Bank shall have earned a Committed Equipment Line Facility Fee, which fee shall be paid as of the Closing Date, in an amount equal to Two Thousand Five Hundred Dollars ($2,500.00); (c) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's customary fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for each appraisal of Collateral and financial analysis and examination of Borrower performed from time to time by Bank or its agents; (d) BANK EXPENSES. Upon demand from Bank, including, without limitation, upon the date hereof, all Bank Expenses incurred through the date hereof, including reasonable attorneys' fees and expenses, and, after the date hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due. 2.6 ADDITIONAL COSTS. In case any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof); (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (c) imposes upon Bank any other condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error. 2.7 TERM. Except as otherwise set forth herein, this Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for a term ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. -8- Notwithstanding termination of this Agreement, Bank's lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 3. CONDITIONS OF LOANS 3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Agreement; (b) a certificate of the Secretary of Borrower with respect to articles, bylaws, incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) an opinion of Borrower's counsel; (d) Warrant Purchase Agreement; (e) Antidilution Agreement; (f) Registration Rights Agreement; (g) financing statements (Forms UCC-1); (h) insurance certificate; (i) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof; (j) Certificate of Foreign Qualification (if applicable); and (k) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions: (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Credit Extension. The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section3.2(b). 4. CREATION OF SECURITY INTEREST 4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt payment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. Borrower acknowledges that Bank may place a "hold" on any Deposit Account pledged as Collateral -9- to secure the Obligations. Notwithstanding termination of this Agreement, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 4.3 CERTIFICATE OF DEPOSIT COLLATERAL. Borrower grants to Bank as additional security for the purpose of securing the Obligations a valid, first priority security interest in a certain certificate of deposit, maintained with the Bank, identified as CD# ___________, in the original principal amount of $400,000.00, as may be substituted or replaced (the "CERTIFICATES OF DEPOSIT"). The Certificate of Deposit may not be terminated, or redeemed until all Obligations hereunder are paid in full, and this Agreement is terminated. 4.4 RIGHT TO INSPECT. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours, to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral. 5. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified. 5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Articles/Certificate of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound Borrower is not in default under any agreement to which it is a party or by which it is bound, which default could have a Material Adverse Effect. 5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible title to the Collateral, free and clear of Liens, except for Permitted Liens. 5.4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide existing obligations. The service or property giving rise to such Eligible Accounts has been performed or delivered to the account debtor or to the account debtor's agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor whose accounts are included in any Borrowing Base Certificate as an Eligible Account. 5.5 MERCHANTABLE INVENTORY. All Inventory is in all material respects of good and marketable quality, free from all material defects. 5.6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed in the Schedule, Borrower has not done business and will not without at least thirty (30) days prior written notice to Bank do business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. 5.7 LITIGATION. Except as set forth in the Schedule, there are no actions or proceedings pending, or, to Borrower's knowledge, threatened by or against Borrower or any Subsidiary before any court or administrative agency -10- in which an adverse decision could have a Material Adverse Effect or a material adverse effect on Borrower's interest or Bank's security interest in the Collateral. 5.8 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All consolidated financial statements related to Borrower and any Subsidiary that have been delivered by Borrower to Bank fairly present in all material respects Borrower's consolidated financial condition as of the date thereof and Borrower's consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank on or about the Closing Date. 5.9 SOLVENCY. Borrower is able to pay its debts (including trade debts) as they mature. 5.10 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. 5.11 ENVIRONMENTAL CONDITION. None of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the release, or other disposition of hazardous waste or hazardous substances into the environment. 5.12 TAXES. Borrower and each Subsidiary has filed or caused to be filed all tax returns required to be filed on a timely basis, and has paid, or has made adequate provision for the payment of, all taxes reflected therein. 5.13 SUBSIDIARIES. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 5.14 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted. 5.15 FULL DISCLOSURE. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following: -11- 6.1 GOOD STANDING. Borrower shall maintain its and each of its Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, to the extent consistent with prudent management of Borrower's business, in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall deliver to Bank: (a) as soon as available, but in any event within twenty-five (25) days after the end of each month, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during such period, in a form and certified by an officer of Borrower reasonably acceptable to Bank; (b) as soon as available, but in any event within ninety (90) days after the end of Borrower's fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000) or more; and (d) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time. Within fifteen (15) days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of EXHIBIT C hereto, together with aged listings of accounts receivable. Within twenty-five (25) days after the last day of each month, Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of EXHIBIT D hereto. Bank shall have a right from time to time hereafter to audit Borrower's Accounts at Borrower's expense, provided that such audits will be conducted no more often than every six (6) months unless an Event of Default has occurred and is continuing; provided however, should the first audit of Borrower's Accounts be satisfactory to the Bank, as determined in the sole discretion of the Bank, such audits will be conducted no more often than every twelve (12) months unless an Event of Default has occurred and is continuing. 6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good and marketable condition, free from all material defects. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than One Hundred Thousand Dollars ($100,000). 6.5 TAXES. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is (i) contested in good faith by appropriate proceedings , (ii) is reserved against (to the extent required by GAAP) by Borrower and (iii) no lien other than a Permitted Lien results. -12- 6.6 INSURANCE. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower's. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as are reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. At Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7 PRINCIPAL DEPOSITORY. Borrower shall maintain its principal depository and operating accounts with Bank. 6.8 TANGIBLE NET WORTH. Borrower shall maintain, as of the last day of each calendar month, a Tangible Net Worth of not less than One Million Dollars ($1,000,000.00); provided however, the Borrower shall evidence a Tangible Net Worth of not less than One Million Five Hundred Thousand Dollars ($1,500,000.00) for the third quarter of fiscal year ending 1997. 6.9 LIQUID ASSETS. Borrower shall maintain, as of the last day of each calendar month, Liquid Assets of not less than One Million Dollars ($1,000,000.00) 6.10 FURTHER ASSURANCES. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS Borrower covenants and agrees that, so long as any Credit Extension hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Advances, Borrower will not do any of the following: 7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than Transfers: (i) of inventory in the ordinary course of business, (ii) of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; (iii) that constitute payment of normal and usual operating expenses in the ordinary course of business; (iv) of worn-out or obsolete Equipment; or (v) Equipment whose original cost was not greater than $100,000.00, in the aggregate. 7.2 CHANGES IN BUSINESS, OWNERSHIP, OR MANAGEMENT, BUSINESS LOCATIONS. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto), or suffer a material change in Borrower's ownership or management. Borrower will not, without at least thirty (30) days prior written notification to Bank, relocate its chief executive office or add any new offices or business locations. -13- 7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person except with respect to acquisitions of stock or property for a purchase price of not greater than $250,000.00, in the aggregate, provided no indebtedness is assumed in connection with such transaction, and provided that the Borrower will, immediately after the consummation of such transaction, continue to comply with all terms and conditions of this Agreement. 7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness. 7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 7.6 DISTRIBUTIONS. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock, other than dividends required to be made to shareholders in an amount sufficient to cover the tax liability of such shareholders on account of the attribution of the Borrower's income to such shareholder provided that such payment does not result (or would result solely as a result of the passage of time) in an Event of Default. 7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a nonaffiliated Person. 7.9 SUBORDINATED DEBT. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 7.10 INVENTORY. Store the Inventory with a bailee, warehouseman, or similar party unless Bank has received a pledge of any warehouse receipt covering such Inventory. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory only at the location set forth in Section 10 hereof and such other locations of which Borrower gives Bank prior written notice and as to which Borrower signs and files a financing statement where needed to perfect Bank's security interest. 7.11 COMPLIANCE. Become an "investment company" or a company controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Advance for such purpose; fail to meet the minimum funding requirements of ERISA; permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral; or permit any of its Subsidiaries to do any of the foregoing. 8. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1 PAYMENT DEFAULT. If Borrower fails to pay, when due, any of the Obligations. -14- 8.2 COVENANT DEFAULT. (a) If Borrower fails to perform any obligation under Sections 6.3, 6.6, 6.7, 6.8 or 6.9 or violates any of the covenants contained in Article 7 of this Agreement, or (b) If Borrower fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Advances will be required to be made during such cure period); 8.3 MATERIAL ADVERSE CHANGE. If there (i) occurs a material adverse change in the business, operations, or condition (financial or otherwise) of the Borrower, or (ii) is a material impairment of the priority of Bank's security interests in the Collateral; 8.4 ATTACHMENT. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within thirty (30) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within thirty (30) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be required to be made during such cure period); 8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within 30 days (provided that no Advances will be made prior to the dismissal of such Insolvency Proceeding); 8.6 OTHER AGREEMENTS. If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or that could have a Material Adverse Effect; 8.7 SUBORDINATED DEBT. If Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; 8.8 JUDGMENTS. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Fifty Thousand Dollars ($50,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment); or 8.9 MISREPRESENTATIONS. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate or writing delivered to Bank by Borrower or any Person acting on Borrower's behalf pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. -15- 9. BANK'S RIGHTS AND REMEDIES 9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (c) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (d) Without notice to or demand upon Borrower, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's premises, Borrower hereby grants Bank a license to enter such premises and to occupy the same, without charge; (e) Without notice to Borrower set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-free license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, mask works, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (g) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable, and apply the proceeds thereof to the Obligations in whatever manner or order it deems appropriate; (h) Bank may credit bid and purchase at any public sale, or at any private sale as permitted by law; and (i) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. 9.2 POWER OF ATTORNEY. Effective only upon the occurrence and uring the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security -16- interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; and (e) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated. 9.3 ACCOUNTS COLLECTION. Upon the occurrence and during the continuance of an Event of Default, Bank may notify any Person owing funds to Borrower of Bank's security interest in such funds and verify the amount of such Account, and Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank's trustee, and if requested or required by Bank, immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit. 9.4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves under the Committed Revolving Line as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not expressly set forth herein as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: -17- If to Borrower Bluestone Software, Inc. 1000 Briggs Road Mount Laurel, New Jersey 08054-4101 Attn: Mr. Enrico Ballezzi, CFO FAX: (609) 727-3833 If to Bank Silicon Valley Bank 40 William Street Wellesley, Massachusetts 02181 Attn: Pamela J. Aldsworth, Vice President FAX: (781) 431-9906 with a copy to: Riemer & Braunstein Three Center Plaza Boston, Massachusetts 02108 Attn: David A. Ephraim, Esquire The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 11. CHOICE OF LAW AND VENUE; JURY WAIVER The laws of the Commonwealth of Massachusetts shall apply to this Agreement. BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS, BORROWER ACCEPTS JURISDICTION OF THE COURTS AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 12. GENERAL PROVISIONS 12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; PROVIDED, HOWEVER, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 12.2 INDEMNIFICATION. Borrower shall , indemnify ,defend, protect and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to -18- transactions between Bank and Borrower whether under the Loan Documents, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 TIME OF ESSENCE. Time is of the essence for the performance of all obligations set forth in this Agreement. 12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be amended or terminated except by a writing signed by Borrower and Bank. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. 12.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.7 SURVIVAL. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. 12.8 CONFIDENTIALITY. In handling any confidential information Bank shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank, and (v) as Bank may deem appropriate in connection with the exercise of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. 12.9 COUNTERSIGNATURE. This Agreement shall become effective only when it shall have been executed by Borrower and Bank (provided, however, in no event shall this Agreement become effective until signed by an officer of Bank in California). -19- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. BLUESTONE SOFTWARE, INC. By:/s/ E.J. Ballezzi --------------------------------------------- Title: Chief Financial Officer ------------------------------------------ SILICON VALLEY BANK, d/b/a SILICON VALLEY EAST By:/s/ Pamela Aldsworth --------------------------------------------- Name: Pamela Aldsworth ------------------------------------------- Title: Vice President ------------------------------------------ SILICON VALLEY BANK By:/s/ Michael Jordan --------------------------------------------- Name: Michael Jordan ------------------------------------------- Title: Loan Docs Officer ------------------------------------------ (Signed in Santa Clara County, California) -20- EX-10.21 21 EXHIBIT 10.21 Exhibit 10.21 FIRST LOAN MODIFICATION AGREEMENT This First Loan Modification Agreement is entered into as of August 16, 1998, by and between BLUESTONE SOFTWARE, INC., a Delaware corporation with its principal place of business at 1000 Briggs Road, Mount Laurel, New Jersey 08054-4101 ("Borrower") and SILICON VALLEY BANK, a California-chartered bank ("Bank"), with its principal place of business at 3003 Tasman Drive, Santa Clara, CA 95054 and with a loan production office located at Wellesley Office Park, 40 William Street, Suite 350, Wellesley, MA 02481, doing business under the name "Silicon Valley East". 1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of December 8, 1997, evidenced by, among other documents, a certain Loan and Security Agreement dated as of December 8, 1997 (the "Loan Agreement"). The Loan Agreement established in favor of the Borrower: (i) a revolving line of credit in the maximum principal amount of One Million Seven Hundred Fifty Thousand Dollars ($1,750,000.00) (the "Revolving Line"), and (ii) an equipment line of credit in the maximum principal amount of Five Hundred Thousand Dollars ($500,000.00) (the "Equipment Line"). Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement. Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the "Indebtedness". 2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement (together with any other collateral security granted to Bank, the "Security Documents"). Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. A. MODIFICATION(S) TO LOAN AGREEMENT. 1. The Loan Agreement shall be amended by deleting the following definition appearing in Section 1.1 thereof: ""Committed Equipment Line" means a credit extension of up to Five Hundred Thousand Dollars ($500,000.00)." and inserting in lieu thereof the following: ""Committed Equipment Line" means a credit extension of up to Two Million Dollars ($2,000,000.00). Notwithstanding the foregoing, the Committed Equipment Line shall be reduced by the outstanding balance of Equipment Advances made to Borrower pursuant to Section 2.1.2 hereof." 2. The Loan Agreement shall be amended by inserting the following new definition after the definition of "Credit Extension" appearing in Section 1.1 thereof: ""Current Liabilities" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the extent not already included therein, all outstanding Credit Extensions made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendable at the option of Borrower or any Subsidiary to a date more than one year from the date of determination, but excluding Subordinated Debt, and excluding deferred revenues." 3. The Loan Agreement shall be amended by deleting the following definition appearing in Section 1.1 thereof: ""Maturity Date" means the later of the Equipment Maturity Date or the Revolving Maturity Date." and inserting in lieu thereof the following: ""Maturity Date" means the later of the Second Equipment Maturity Date or the Revolving Maturity Date." 4. The Loan Agreement shall be amended by inserting the following new definition after the definition of "Prime Rate" appearing in Section 1.1 thereof: ""Quick Assets" means, as of any applicable date, the consolidated cash, cash equivalents, accounts receivable and investments with maturities of fewer than 90 days of Borrower determined in accordance with GAAP." 5. No further Equipment Advances shall be made under Section 2.1.2. 6. The Loan Agreement shall be amended by inserting after Section 2.1.2 thereof entitled "Equipment Advances" the following new section: "2.1.2.A. 1998-1999 EQUIPMENT ADVANCES. (a) Subject to and upon the terms and conditions of this Agreement, at any time through March 31, 1999 (the "Second Equipment Availability End Date"), Bank agrees to make Equipment Advances under this Section 2.1.2.A to Borrower in an aggregate outstanding amount not to exceed the Committed Equipment Line. To evidence the Equipment Advance or Equipment Advances, Borrower shall deliver to Bank, at the time of each Equipment Advance request, an invoice for the equipment to be purchased. The Equipment Advances shall be used only to purchase Equipment or refinance Equipment purchased after January 1, 1998 and shall not exceed One Hundred Percent (100%) of the invoice amount of such equipment approved from time to time by Bank, excluding taxes, shipping, warranty charges, freight discounts and installation expense. Software may, however, constitute up to twenty-five percent (25.0%) of aggregate Equipment Advances under this Section 2.1.2.A. (b) Interest shall accrue from the date of each Equipment Advance made pursuant to this Section 2.1.2.A at a per annum rate equal to One and One Quarter percentage points (1.25%) above the Prime Rate and shall be payable monthly on -2- the Payment Date of each month through the month in which the Second Equipment Availability End Date falls. Amounts currently amortizing under Section 2.1.2 above shall continue to be repaid as provided in Section 2.1.2 above, and shall be treated as existing Equipment Advances under the Committed Equipment Line. Any Equipment Advances made pursuant to this Section 2.1.2.A that are outstanding on the Second Equipment Availability End Date will be payable in thirty-six (36) equal monthly installments of principal, plus all accrued interest, beginning on the Payment Date of each month following the Second Equipment Availability End Date and ending on March 31, 2002 (the "Second Equipment Maturity Date"). Equipment Advances, once repaid, my not be reborrowed. (c) When Borrower desires to obtain an Equipment Advance, Borrower shall notify Bank (which notice shall be irrevocable) by facsimile transmission to be received no later than 3:00 p.m. Pacific time one (1) Business Day before the day on which the Equipment Advance is to be made. Such notice shall be substantially in the form of Exhibit B. The notice shall be signed by a Responsible Officer or its designee and include a copy of the invoice for the Equipment to be financed." 7. The Loan Agreement shall be amended by deleting the following text appearing as paragraph (a) of Section 2.3 entitled "Interest Rates, Payments, and Calculations": "(a) INTEREST RATE. Except as set forth in Section 2.3(b), any Advances shall bear interest, on the average daily balance thereof, at a per annum rate equal to One and One Half percentage point (1.50%) above the Prime Rate." and inserting in lieu thereof the following: "(a) INTEREST RATE. Except as set forth in Section 2.3(b), any Advances made pursuant to Section 2.1.1 shall bear interest, on the average daily balance thereof, at a per annum rate equal to Three Quarters of One percentage point (0.75%) above the Prime Rate." 8. The Loan Agreement shall be amended by deleting the following text appearing in the first paragraph of Section 6.3 entitled "Financial Statements, Reports, Certificates": "(b) as soon as available, but in any event within ninety (90) days after the end of Borrower's fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank;" and inserting in lieu thereof the following: "(b) as soon as available, but in any event within one hundred twenty (120) days after the end of Borrower's fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements -3- of an independent certified public accounting firm reasonably acceptable to Bank;" 9. The Loan Agreement shall be amended by deleting the following text appearing as Sections 6.8 and 6.9 thereof: "6.8 TANGIBLE NET WORTH. Borrower shall maintain, as of the last day of each calendar month, a Tangible Net Worth of not less than One Million Dollars ($1,000,000.00); provided however, the Borrower shall evidence a Tangible Net Worth of not less than One Million Five Hundred Thousand Dollars ($1,500,000.00) for the third quarter of fiscal year ending 1997. "6.9 LIQUID ASSETS. Borrower shall maintain, as of the last day of each calendar month, Liquid Assets of not less than One Million Dollars ($1,000,000.00)." and inserting in lieu thereof the following: ""6.8 TANGIBLE NET WORTH. Borrower shall maintain, as of the last day of each calendar month, a Tangible Net Worth of not less than Three Million Dollars ($3,000,000.00). For purposes hereof, Tangible Net Worth shall be defined as Borrower's equity plus Subordinated Debt less intangible assets. 6.9 ADJUSTED QUICK RATIO. Borrower shall maintain, as of the last day of each calendar month, a ratio of Quick Assets to Current Liabilities of at least 1.25 to 1.0." 10. The Compliance Certificate appearing as EXHIBIT D to the Loan Agreement is hereby replaced with the Compliance Certificate attached as EXHIBIT A hereto. 4. FEE. Borrower shall pay to Bank a modification fee equal to Three Thousand Seven Hundred Fifty Dollars ($3,750.00), which fee shall be due on the date hereof and which shall be deemed fully earned as of the date hereof. The Borrower shall also reimburse Lender for legal fees and expenses incurred in connection with this amendment to the Loan Documents. 5. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 6. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Indebtedness. 7. NO DEFENSES OF BORROWER. Borrower agrees that, as of this date, it has no defenses against the obligations to pay any amounts under the Indebtedness. 8. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower's representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. -4- Bank's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. 9. JURISDICTION/VENUE. Borrower accepts for itself and in connection with its properties, unconditionally, the non-exclusive jurisdiction of any state or federal court of competent jurisdiction in the Commonwealth of Massachusetts in any action, suit, or proceeding of any kind against it which arises out of or by reason of this Loan Modification Agreement; provided, however, that if for any reason Bank cannot avail itself of the courts of the Commonwealth of Massachusetts, then venue shall lie in Santa Clara County, California. 10. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank (provided, however, in no event shall this Loan Modification Agreement become effective until signed by an officer of Bank in California). This Loan Modification Agreement is executed as of the date first written above. BORROWER: BANK: BLUESTONE SOFTWARE, INC. SILICON VALLEY BANK, doing business as SILICON VALLEY EAST By:/s/ E. J. Ballezzi By:/s/ Pamela Aldsworth ------------------------------- ------------------------------- Name: E. J. Ballezzi Name: Pamela Aldsworth ----------------------------- ----------------------------- Title: Chief Financial Officer Title: Vice President ---------------------------- ---------------------------- SILICON VALLEY BANK By:/s/ Michelle D. Giannini ------------------------------ Name: Michelle D. Giannini ---------------------------- Title: Assistant Vice President --------------------------- (signed in Santa Clara County, California) -5- EX-10.22 22 EXHIBIT 10.22 Exhibit 10.22 SECOND LOAN MODIFICATION AGREEMENT This Second Loan Modification Agreement is entered into as of January 21, 1999, by and between BLUESTONE SOFTWARE, INC., a Delaware corporation with its principal place of business at 1000 Briggs Road, Mount Laurel, New Jersey 08054-4101 ("Borrower") and SILICON VALLEY BANK, a California-chartered bank ("Bank"), with its principal place of business at 3003 Tasman Drive, Santa Clara, CA 95054 and with a loan production office located at Wellesley Office Park, 40 William Street, Suite 350, Wellesley, MA 02481, doing business under the name "Silicon Valley East". 1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of December 8, 1997, evidenced by, among other documents, a certain Loan and Security Agreement dated as of December 8, 1997 between Borrower and Bank, as amended by a First Loan Modification Agreement dated as of August 16, 1998 (as amended, the "Loan Agreement"). The Loan Agreement established in favor of the Borrower: (i) a revolving line of credit in the maximum principal amount of One Million Seven Hundred Fifty Thousand Dollars ($1,750,000.00) (the "Revolving Line"), and (ii) an equipment line of credit in the maximum principal amount of Two Million Dollars ($2,000,000.00) (the "Equipment Line"). Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement. Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the "Indebtedness". 2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement (together with any other collateral security granted to Bank, the "Security Documents"). Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. A. MODIFICATION(S) TO LOAN AGREEMENT. 1. No further Advances shall be made under the Committed Revolving Line. The outstanding principal balance of Advances made under the Committed Revolving Line, as of January 12, 1999, is Four Hundred Seventy-Three Thousand Three Hundred Sixty-Five and 53/100 Dollars ($473,365.53). 2. No further Equipment Advances shall be made under Section 2.1.2.A. The outstanding principal balance of all Equipment Advances made pursuant to Section 2.1.2.A, as of January 12, 1999, is Nine Hundred Fifty-Nine Thousand Eighty-Five Dollars ($959,085.00). All Equipment Advances currently amortizing under Section 2.1.2 shall continue to be repaid as provided in Section 2.1.2. The outstanding principal balance of all Equipment Advances made pursuant to Section 2.1.2, as of January 12, 1999, is One Hundred Ninety-One Thousand Four Hundred Fifteen and 88/100 Dollars ($191,415.88). 3. The Loan Agreement shall be amended by deleting the following definition appearing in Section 1.1 thereof: ""Borrowing Base" means an amount equal to (i) Eighty percent (80%) of Eligible Accounts as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower, plus (ii) an amount equal to One Hundred percent (100.0%) of any Certificate of Deposit maintained at the Bank, and specifically pledged to Bank, up to $400,000.00." and inserting in lieu thereof the following: ""Borrowing Base" means an amount equal to Eighty percent (80%) of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower." 4. The Loan Agreement shall be amended by deleting the following definition appearing in Section 1.1 thereof: ""Revolving Maturity Date" shall mean one day prior to the date which is one year from the Closing Date." and inserting in lieu thereof the following: ""Revolving Maturity Date" shall mean February 7, 1999." 5. The Loan Agreement shall be amended by inserting the following new definition after the definition of "Subordinated Debt" appearing in Section 1.1 thereof: ""Subordinated Loan" means a loan between the Borrower and investors acceptable to the Bank, which loan shall be expressly subordinate to the Bank with respect to amount and security interest and shall be on terms and conditions acceptable to the Bank in its sole and absolute discretion." 6. The Bank hereby waives: (i) Borrower's existing Default under the Loan Agreement by virtue of Borrower's failure to comply with the Tangible Net Worth covenant in Section 6.8 thereof as of the months ending October 31, 1998, November 30, 1998, and December 31, 1998, and (ii) Borrower's existing Default under the Loan Agreement by virtue of Borrower's failure to comply with the Adjusted Quick Ratio covenant in Section 6.9 thereof as of the months ending October 31, 1998, November 30, 1998, and December 31, 1998. Bank's waiver of Borrower's compliance of said covenants shall apply only to the foregoing periods. NOTWITHSTANDING THE FOREGOING, THE BANK'S WAIVER OF BORROWER'S COMPLIANCE OF THE FOREGOING COVENANTS SHALL BE EFFECTIVE ONLY IF: (i) THE SUBORDINATED LOAN CLOSES ON OR BEFORE JANUARY 15, 1999, AND (ii) THE AGGREGATE AMOUNT OF THE --- SUBORDINATED LOAN IS NO LESS THAN FOUR MILLION FIVE HUNDRED THOUSAND DOLLARS ($4,500,000.00). -2- 7. The aggregate amount of the Subordinated Loan which remains undrawn by the Borrower shall be considered "cash" for purposes of the Tangible Net Worth covenant appearing in Section 6.8 and the Adjusted Quick Ratio covenant appearing in Section 6.9. 8. The Loan Agreement shall be amended by deleting the following text appearing as Section 6.10 thereof: "6.10 FURTHER ASSURANCES. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement." and inserting in lieu thereof the following: "6.10 SUBORDINATE FINANCING. The Borrower shall enter into the Subordinated Loan on terms and with investors acceptable to the Bank on or before January 15, 1999 in the minimum aggregate amount of Four Million Five Hundred Thousand Dollars ($4,500,000.00). 6.11 FURTHER ASSURANCES. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement." 9. The Loan Agreement shall be amended by deleting the following text appearing as paragraph (a) of Section 8.2 entitled "Covenant Default": "(a) If Borrower fails to perform any obligation under Sections 6.3, 6.6, 6.7, 6.8, or 6.9 or violates any of the covenants contained in Article 7 of this Agreement," and inserting in lieu thereof the following: "(a) If Borrower fails to perform any obligation under Sections 6.3, 6.6, 6.7, 6.8, 6.9, or 6.10 or violates any of the covenants contained in Article 7 of this Agreement," 10. The Borrower shall within thirty (30) days of the date of this Second Loan Modification Agreement deliver to the Bank the certificate referred to in Section 2.7 of that certain Warrant to Purchase Stock issued on November 24, 1997 by the Borrower to the Bank. 11. The Borrower ratifies, confirms and reaffirms, all and singular, the terms and conditions of a certain Negative Pledge Agreement dated August 16, 1998 between Borrower and Bank, and acknowledges, confirms and agrees that said Negative Pledge Agreement shall remain in full force and effect. 12. The Compliance Certificate appearing as EXHIBIT D to the Loan Agreement is hereby replaced with the Compliance Certificate attached as EXHIBIT A hereto. -3- 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Indebtedness. 6. NO DEFENSES OF BORROWER. Borrower agrees that, as of this date, it has no defenses against the obligations to pay any amounts under the Indebtedness. 7. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower's representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. 8. JURISDICTION/VENUE. Borrower accepts for itself and in connection with its properties, unconditionally, the non-exclusive jurisdiction of any state or federal court of competent jurisdiction in the Commonwealth of Massachusetts in any action, suit, or proceeding of any kind against it which arises out of or by reason of this Loan Modification Agreement; provided, however, that if for any reason Bank cannot avail itself of the courts of the Commonwealth of Massachusetts, then venue shall lie in Santa Clara County, California. 9. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank (provided, however, in no event shall this Loan Modification Agreement become effective until signed by an officer of Bank in California). -4- This Loan Modification Agreement is executed as of the date first written above. BORROWER: BANK: BLUESTONE SOFTWARE, INC. SILICON VALLEY BANK, doing business as SILICON VALLEY EAST By:/s/ E. J. Ballezzi By: /s/ Ash Lilani ------------------------------- ------------------------------- Name: E. J. Ballezzi Name: Ash Lilani ----------------------------- ----------------------------- Title: Chief Financial Officer Title: ---------------------------- ---------------------------- SILICON VALLEY BANK By: /s/ Michael Jordan ------------------------------- Name: Michael Jordan ----------------------------- Title: ---------------------------- (signed in Santa Clara County, California) -5- EX-10.23 23 EXHIBIT 10.23 Exhibit 10.23 THIRD LOAN MODIFICATION AGREEMENT This Third Loan Modification Agreement is entered into as of March 30, 1999, effective as of February 7, 1999, by and between BLUESTONE SOFTWARE, INC., a Delaware corporation with its principal place of business at 1000 Briggs Road, Mount Laurel, New Jersey 08054-4101 ("Borrower") and SILICON VALLEY BANK, a California-chartered bank ("Bank"), with its principal place of business at 3003 Tasman Drive, Santa Clara, CA 95054 and with a loan production office located at Wellesley Office Park, 40 William Street, Suite 350, Wellesley, MA 02481, doing business under the name "Silicon Valley East". 1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of December 8, 1997, evidenced by, among other documents, a certain Loan and Security Agreement dated as of December 8, 1997 between Borrower and Bank, as amended by a First Loan Modification Agreement dated as of August 16, 1998, and as amended by a Second Loan Modification Agreement dated as of January 21, 1999 (as amended, the "Loan Agreement"). The Loan Agreement established in favor of the Borrower: (i) a revolving line of credit in the maximum principal amount of One Million Seven Hundred Fifty Thousand Dollars ($1,750,000.00) (the "Committed Revolving Line"), and (ii) an equipment line of credit in the maximum principal amount of Two Million Dollars ($2,000,000.00) (the "Committed Equipment Line"). Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement. Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the "Indebtedness". 2. DESCRIPTION OF COLLATERAL. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement (together with any other collateral security granted to Bank, the "Security Documents"). Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. A. MODIFICATION(S) TO LOAN AGREEMENT. 1. The Committed Revolving Line shall no longer be capped at $473,365.53. The "Committed Revolving Line" shall continue to mean a credit extension of up to One Million Seven Hundred Fifty Thousand Dollars ($1,750,000.00). 2. The Loan Agreement shall be amended by inserting immediately following the definition of "Negotiable Collateral" appearing in Section 1.1 thereof the following definitions: ""Net Revenue" means, as of any applicable date, the Borrower's gross revenues (as defined in accordance with GAAP) less returns, allowances and discounts. "Net Revenue Requirement" means the achievement by the Borrower, as of the last day of each fiscal quarter, of a minimum Net Revenue of: (i) Three Million Two Hundred One Thousand Nine Hundred Fifty-Four Dollars ($3,201,954.00) for the quarter ending March 31, 1999; (ii) Four Million Thirty Thousand Seven Hundred Ten Dollars ($4,030,710.00) for the quarter ending June 30, 1999; (iii) Four Million Six Hundred Twenty-Five Thousand Four Hundred Forty-Two Dollars ($4,625,442.00) for the quarter ending September 30, 1999; and (iv) Five Million Seven Hundred Thirty-Three Thousand Four Hundred Seventy-Nine Dollars ($5,733,479.00) for the quarter ending December 31, 1999, and for each quarter thereafter. Borrower's Net Revenue calculation for each fiscal quarter shall be included in the Compliance Certificate as described in Section 6.3 hereof." 3. The Loan Agreement shall be amended by deleting the following definition appearing in Section 1.1 thereof: ""Revolving Maturity Date" shall mean February 7, 1999." and inserting in lieu thereof the following: ""Revolving Maturity Date" shall mean April 1, 2000." 4. The Loan Agreement shall be amended by deleting the following definition appearing in Section 1.1 thereof: ""Subordinated Loan" means a loan between the Borrower and investors acceptable to the Bank, which loan shall be expressly subordinate to the Bank with respect to amount and security interest and shall be on terms and conditions acceptable to the Bank in its sole and absolute discretion." and inserting in lieu thereof the following: ""Subordinated Loan" means a loan between the Borrower and certain Investors (as defined below) dated January 21, 1999, evidenced by, among other documents, (i) a certain Convertible Subordinated Secured Note and Warrant Purchase Agreement dated as of January 21, 1999, (ii) a certain Security Agreement dated January 21, 1999, and (iii) a certain Form of Convertible Subordinated Secured Note. For purposes hereof "Investors" shall mean all of the following: (i) General Electric Capital Corporation, (ii) The P/A Fund, L.P., (iii) Patricof Private Investment Club, L.P., (iv) APA Excelsior IV, L.P., and (v) Coutts & Co. (Cayman) Ltd., cust. for APA for Excelsior IV/Offshore, L.P." 5. No further Equipment Advances shall be made under Section 2.1.2.A. The outstanding principal balance of all Equipment Advances made pursuant to Section 2.1.2.A, as of March 22, 1999, is Nine Hundred Fifty-Nine Thousand Eighty-Five Dollars ($959,085.00). All Equipment Advances currently amortizing under Section 2.1.2 shall continue to be repaid as provided in Section 2.1.2. The outstanding principal balance of all Equipment Advances made pursuant to Section 2.1.2, as of March 22, 1999, is One Hundred Seventy-Eight Thousand Two Hundred Fourteen and 78/100 Dollars ($178,214.78). 6. The Loan Agreement shall be amended by deleting the following text appearing as paragraph (a) of Section 2.3 entitled "Interest Rates, Payments, and Calculations": "(a) INTEREST RATE. Except as set forth in Section 2.3(b), any Advances made pursuant to Section 2.1.1 shall bear interest, on the average daily -2- balance thereof, at a per annum rate equal to Three Quarters of One percentage point (0.75%) above the Prime Rate." and inserting in lieu thereof the following: "(a) INTEREST RATE. Except as set forth in Section 2.3(b), any Advances made pursuant to Section 2.1.1 shall bear interest, on the average daily balance thereof, at a per annum rate equal to Three Quarters of One percentage point (0.75%) above the Prime Rate. Notwithstanding the foregoing, if the Borrower fails to achieve the Net Revenue Requirement for ANY fiscal quarter, any Advances shall bear interest (except as set forth in Section 2.3(b)), on an average daily balance thereof, effective as of the first day of the month following the quarter end in which Borrower failed to achieve such Net Revenue Requirement, at a per annum rate equal to the aggregate of the Prime Rate, PLUS One and One-Quarter percent (1.25%). The effective interest rate shall not decrease as a result of the compliance by the Borrower with the Net Revenue Requirement for subsequent periods." 7. The Loan Agreement shall be amended by deleting the following text appearing as the second paragraph of Section 6.3 entitled "Financial Statements, Reports, Certificates": "Within fifteen (15) days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of EXHIBIT C hereto, together with aged listings of accounts receivable." and inserting in lieu thereof the following: "Borrower shall deliver to Bank, on a semi-monthly basis within seven (7) business days of the fifteenth (15th) and last day of each month, a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of EXHIBIT C hereto, together with aged listings of accounts receivable. Notwithstanding the foregoing, if at any time during the preceding month the outstanding principal balance under the Committed Revolving Line is no greater than $1,000,000.00, the Borrowing Base Certificate and the aged listings of accounts receivable shall be delivered by Borrower to Bank within fifteen (15) days of the last day of each such month." 8. The Loan Agreement shall be amended by deleting the following text appearing as the fourth paragraph of Section 6.3 entitled "Financial Statements, Reports, Certificates": "Bank shall have a right from time to time hereafter to audit Borrower's Accounts at Borrower's expense, provided that such audits will be conducted no more often than every six (6) months unless an Event of Default has occurred and is continuing; provided however, should the first audit of Borrower's Accounts be satisfactory to the Bank, as determined in the sole discretion of the Bank, such audits will be conducted no more often than every twelve (12) months unless an Event of Default has occurred and is continuing." -3- and inserting in lieu thereof the following: "Bank shall have a right from time to time hereafter to audit Borrower's Accounts at Borrower's expense, provided that such audits will be conducted no more often than every six (6) months unless an Event of Default has occurred and is continuing." 9. The Loan Agreement shall be amended by deleting the following text appearing as Sections 6.8 and 6.9 thereof: "6.8 TANGIBLE NET WORTH. Borrower shall maintain, as of the last day of each calendar month, a Tangible Net Worth of not less than Three Million Dollars ($3,000,000.00). For purposes hereof, Tangible Net Worth shall be defined as Borrower's equity plus Subordinated Debt less intangible assets. 6.9 ADJUSTED QUICK RATIO. Borrower shall maintain, as of the last day of each calendar month, a ratio of Quick Assets to Current Liabilities of at least 1.25 to 1.0." and inserting in lieu thereof the following: "6.8 TANGIBLE NET WORTH. Borrower shall maintain, as of the last day of each calendar month, a Tangible Net Worth of not less than: (i) One Million Seven Hundred Fifty Thousand Dollars ($1,750,000.00) for each month through the month ending May 31, 1999, (ii) Three Million Dollars ($3,000,000.00) for the months ending June 30, 1999, July 31, 1999 and August 31, 1999, and (iii) Four Million Five Hundred Thousand Dollars ($4,500,000.00) for each month thereafter. The Bank hereby reserves the right, in its sole and absolute discretion, to reset such Tangible Net Worth covenant upon a public offering of stock by the Borrower. For purposes hereof, Tangible Net Worth shall be defined as Borrower's equity plus Subordinated Debt less intangible assets. 6.9 ADJUSTED QUICK RATIO. Borrower shall maintain, as of the last day of each calendar month, a ratio of Quick Assets to Current Liabilities of at least 1.50 to 1.0." 10. The aggregate amount of the Subordinated Loan which remains undrawn by the Borrower, but unconditionally available to be drawn by the Borrower in immediately available funds, shall be considered "cash" for purposes of the Tangible Net Worth covenant appearing in Section 6.8 and the Adjusted Quick Ratio covenant appearing in Section 6.9. 11. The Borrower may repay principal and interest amounts under the Subordinated Loan, PROVIDED that an Event of Default as defined in the Loan Agreement has not occurred and is not continuing and would not exist immediately after such payment. 12. The Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and conditions of a certain Negative Pledge Agreement dated as of August 16, 1998 between Borrower and Bank, and acknowledges, confirms and agrees that said Negative Pledge Agreement shall remain in full force and effect. -4- 13. The Borrowing Base Certificate appearing as EXHIBIT C to the Loan Agreement is hereby replaced with the Compliance Certificate attached as EXHIBIT A hereto. 14. The Compliance Certificate appearing as EXHIBIT D to the Loan Agreement is hereby replaced with the Compliance Certificate attached as EXHIBIT B hereto. 4. FEE. Borrower shall pay to Bank a modification fee equal to Eight Thousand Seven Hundred Fifty Dollars ($8,750.00), which fee shall be due on the date hereof and shall be deemed fully earned as of the date hereof. ADDITIONALLY, IF BORROWER FAILS TO ACHIEVE THE NET REVENUE REQUIREMENT (AS DEFINED IN THE LOAN AGREEMENT, AS AMENDED) FOR ANY FISCAL QUARTER, THE BORROWER SHALL PAY TO BANK A ONE-TIME FEE EQUAL TO FOUR THOUSAND THREE HUNDRED SEVENTY-FIVE DOLLARS ($4,375.00), WHICH FEE SHALL BE DUE ON THE SAME DUE DATE AS THE COMPLIANCE CERTIFICATE INDICATING BORROWER'S FAILURE TO ACHIEVE SUCH NET REVENUE REQUIREMENT AS PROVIDED IN SECTION 6.3 HEREOF. THE ABOVE REFERENCED FEE SHALL BE NON-REFUNDABLE AND DEEMED FULLY EARNED. The Borrower shall also reimburse Bank for all legal fees and expenses incurred in connection with this amendment to the Existing Loan Documents. 5. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 6. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Indebtedness. 7. NO DEFENSES OF BORROWER. Borrower agrees that, as of this date, it has no defenses against the obligations to pay any amounts under the Indebtedness. 8. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower's representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker will be released by virtue of this Loan Modification Agreement. 9. JURISDICTION/VENUE. Borrower accepts for itself and in connection with its properties, unconditionally, the non-exclusive jurisdiction of any state or federal court of competent jurisdiction in the Commonwealth of Massachusetts in any action, suit, or proceeding of any kind against it which arises out of or by reason of this Loan Modification Agreement; provided, however, that if for any reason Bank cannot avail itself of the courts of the Commonwealth of Massachusetts, then venue shall lie in Santa Clara County, California. 10. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank (provided, however, in no event shall this Loan Modification Agreement become effective until signed by an officer of Bank in California). -5- This Loan Modification Agreement is executed as a sealed instrument under the laws of the Commonwealth of Massachusetts as of the date first written above. BORROWER: BANK: BLUESTONE SOFTWARE, INC. SILICON VALLEY BANK, doing business as SILICON VALLEY EAST By: /s/ P. Kevin Kilroy By: /s/ Michael J. Tramack ---------------------------------- ----------------------------------- Name: P. Kevin Kilroy Name: Michael J. Tramack -------------------------------- --------------------------------- Title: President Title: Assistant Vice President ------------------------------- -------------------------------- SILICON VALLEY BANK By: /s/ Michael Jordan ----------------------------------- Name: Michael Jordan --------------------------------- Title: Assistant Vice President -------------------------------- (signed in Santa Clara County, California) -6- EX-10.24 24 EXHIBIT 10.24 Exhibit 10.24 NEGATIVE PLEDGE AGREEMENT This Negative Pledge Agreement is made as of August 16, 1998, by and between BLUESTONE SOFTWARE, INC., a Delaware corporation with a chief executive office located at 1000 Briggs Road, Mount Laurel, New Jersey 08054-4101 ("Borrower") and SILICON VALLEY BANK, a California-chartered bank, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at Wellesley Office Park, 40 William Street, Suite 350, Wellesley, Massachusetts 02481, doing business under the name "Silicon Valley East" ("Bank"). In connection with the Loan and Security Agreement and the other Loan Documents, as defined in the Loan and Security Agreement, executed between Borrower and Bank dated December 8, 1997, as amended by a First Loan Modification Agreement executed herewith (the "Loan Documents"), Borrower agrees as follows: 1. Except for the granting of licenses by Borrower in the ordinary course of business, Borrower shall not sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber any of Borrower's Intellectual Property (as defined below). 2. Borrower has not, and shall not, enter into a negative pledge agreement, or similar agreement, affecting the rights of the Intellectual Property with any other party. 3. It shall be an event of default under the Loan Documents (as defined in the Loan and Security Agreement) between Borrower and Bank if there is a breach of any term of this Negative Pledge Agreement. 4. As used herein, (a) "Intellectual Property" means: (i) Any and all Copyrights; (ii) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; (iii) Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; (iv) All Mask Works or similar rights available for the protection of semiconductor chips; (v) All Patents; (vi) Any Trademarks; (vii) Any and all claims for damages by way of past, present and future infringements of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; (viii) All licenses or other rights to use any of the Copyrights, Patents, Trademarks, or Mask Works and all license fees and royalties arising from such use to the extent permitted by such license or rights; and (ix) All amendments, extensions, renewals and extensions of any of the Copyrights, Trademarks, Patents, or Mask Works; and (x) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. (b) "Copyrights" means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held. (c) "Mask Works" means all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; (d) "Patents" means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. (e) "Trademarks" means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks. 5. Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Documents. 6. The laws of the Commonwealth of Massachusetts shall apply to this Agreement. BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS, BORROWER ACCEPTS JURISDICTION OF THE COURTS AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA. 2 7. This Agreement shall become effective only when it shall have been executed by Borrower and Bank (provided, however, in no event shall this Agreement become effective until signed by an officer of Bank in California). BORROWER: BLUESTONE SOFTWARE, INC. By: /s/ E.J. Ballezzi ----------------------------------- Name: E.J. Ballezzi --------------------------------- Title: Chief Financial Officer -------------------------------- BANK: SILICON VALLEY BANK D/B/A SILICON VALLEY EAST By: /s/ Pamela Aldsworth ----------------------------------- Name: Pamela Aldsworth --------------------------------- Title: Vice President -------------------------------- SILICON VALLEY BANK By: /s/ Michelle D. Giannini ----------------------------------- Name: Michelle D. Giannini --------------------------------- Title: Assistant Vice President -------------------------------- (Signed in Santa Clara, California) 3 EX-10.25 25 EXHIBIT 10.25 Exhibit 10.25 BLUESTONE SOFTWARE, INC. OFFICER'S CERTIFICATE The undersigned officer of Bluestone Software, Inc., a Delaware corporation (the "Company"), hereby certifies to Silicon Valley Bank (the "Bank"), in accordance with the Antidilution Agreement dated as of November 24, 1997 between the Company and the Bank, and the Warrant to purchase Common Stock, par value $.001 of the Company, issued by the Company to the Bank as of November 24, 1997, as follows: 1. As of December 31, 1998, the conversion ratio of Series B Preferred Stock of the Company was adjusted such that 8,782,695 shares of Series B Preferred Stock of the Company with an original purchase price of $1.296 per share is convertible into 18,382,695 shares of Common Stock. The effective purchase price for the Common Stock issuable to Series B Preferred Stockholders was reduced from $1.296 per share to $.62 per share. 2. On January 21, 1999, the Company entered into a Convertible Subordinated Secured Note and Warrant Purchase Agreement, pursuant to which, among other things, the Company agreed to issue Warrants to purchase 1,612,903 shares Common Stock of the Company with an exercise price of $.62 per share. 3. As a result of the foregoing, the exercise price of the Warrant granted to the Bank is reduced from $.95 per share to $.80 per share and the shares issuable under said warrant are increased from 26,316 shares of Common Stock to 31,250 shares of Common Stock. The calculation is set forth on ATTACHMENT A hereto. The undersigned has executed this Certificate on this 16th day of February, 1999. BLUESTONE SOFTWARE, INC. By: /s/ P. Kevin Kilroy --------------------------- Name: P. Kevin Kilroy Title: President THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Corporation: Bluestone Software, Inc., a Delaware corporation Number of Shares: 26,316 Class of Stock: common, $.001 par value (the "Common Stock") Initial Exercise Price: $0.95 per share Issue Date: November 24, 1997 Expiration Date: November 24, 2004 THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, SILICON VALLEY BANK ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of Common Stock (the "Shares") of Bluestone Software, Inc. (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant. ARTICLE 1. EXERCISE. 1.1 METHOD OF EXERCISE. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as APPENDIX 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2 CONVERSION RIGHT. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.4. 1.3 INTENTIONALLY OMITTED 1.4 FAIR MARKET VALUE. If the Shares are traded in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.5 DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.6 REPLACEMENT OF WARRANTS. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.7 REPURCHASE ON SALE, MERGER, OR CONSOLIDATION OF THE COMPANY. 1.7.1. "ACQUISITION". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.7.2. ASSUMPTION OF WARRANT. Upon the closing of any Acquisition the successor entity shall assume the obligations of this Warrant, and this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. ARTICLE 2. ADJUSTMENTS TO THE SHARES. 2.1 STOCK DIVIDENDS, SPLITS, ETC. If the Company declares or pays a dividend on its Common Stock (or the Shares if the Shares are securities other than Common Stock) payable in Common Stock, or other securities, subdivides the outstanding Common Stock into a greater amount of Common Stock (other than a change in par value), or, if the Shares are securities other than Common Stock, subdivides the Shares in a transaction that increases the amount of Common Stock into which the Shares are convertible (other than a change in par value), then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2 RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant (other than a change in par value), Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to Common Stock pursuant to the terms of the Company's Certificate of Incorporation upon the closing of a registered public offering of the Company's Stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 ADJUSTMENTS FOR COMBINATIONS, ETC. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares (other than a change in par value), the Warrant Price shall be proportionately increased. 2.4 ADJUSTMENTS FOR DILUTING ISSUANCES. In the event of the issuance (a "Diluting Issuance") by the Company, after the Issue Date of this Warrant, of Common Stock at a price per share less -2- than the Warrant Price or securities convertible into Common Stock at a conversion price per share less than the Warrant Price, then the number of Shares issuable upon exercise of this Warrant, shall be adjusted as a result of Diluting Issuances in accordance with that certain Antidilution Agreement dated as of the date of this Warrant, by and between Holder and the Company. Under no circumstances shall the aggregate Warrant Price payable by Holder upon exercise of this Warrant increase as a result of any adjustment arising from a Diluting Issuance. 2.5 NO IMPAIRMENT. The Company shall not, by amendment of its Certificate of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be reasonably necessary or appropriate to protect Holder's rights under this Article against impairment. 2.6 FRACTIONAL SHARES. No fractional Shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder amount computed by multiplying the fractional interest by the fair market value of a full Share. 2.7 CERTIFICATE AS TO ADJUSTMENTS. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. 3.1 REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants to the Holder as follows: (a) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. (b) The authorized capital stock of the corporation consists of 23,252,632 shares of capital stock which are divided into 17,726,312 shares of Common Stock and 5,526,316 shares of Series A Convertible Preferred Stock, par value $.001 per share. SCHEDULE 3.1(b) sets forth all of the outstanding shares of Common Stock and outstanding options, warrants, convertible securities, convertible debentures, and rights to acquire, subscribe for, and/or purchase any Common Stock and/or other capital stock of the Company or any securities or debentures convertible into or exchangeable for Common Stock and/or other capital stock of the Company. (c) The Company has reserved for issuance pursuant to this Warrant not less than Twenty Six Thousand Three Hundred Sixteen (26,316) shares of the Common Stock of the Company, and the Company covenants that it shall at all times cause to be reserved and kept available out of its authorized and unissued shares of Common Stock of the Company such number of shares of Common Stock as will be sufficient to permit the exercise in full of this Warrant, -3- 3.2 NOTICE OF CERTAIN EVENTS. If the Company proposes at any time (a) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of Common Stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 10 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of Common Stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 10 days prior written notice of the date when the same will take place (and specifying the date on which the holders of Common Stock will be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 INFORMATION RIGHTS. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or other written communications to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) such other financial statements required under and in accordance with any loan documents between Holder and the Company or if there are no such requirements (or if the subject loan(s) no longer are outstanding), then within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements. Holder acknowledges that the information received by it pursuant to this Section 3.3 may be confidential. Holder agrees by acceptance of this Warrant that it will not use such confidential information in violation of the Securities Exchange Act of 1934, as amended, or reproduce, disclose or disseminate such information to any third person (other than its employees, agents or attorneys). 3.4 REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED. The Company agrees that the Shares or, if the Shares are convertible into Common Stock of the Company, such Common Stock, shall be subject to the registration rights set forth in that certain Registration Rights Agreement, dated as of the date of this Warrant, by and between Holder and the Company. ARTICLE 4. MISCELLANEOUS. 4.1 TERM; NOTICE OF EXPIRATION. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. 4.2 LEGENDS. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. THE TRANSFER OF THIS SECURITY IS SUBJECT TO THE PROVISIONS OF THE WARRANT, DATED -4- NOVEMBER 24, 1997, ISSUED BY THE COMPANY, INCLUDING THE PROVISIONS SET FORTH ON EXHIBIT A THERETO. 4.3 COMPLIANCE WITH SECURITIES LAWS ON TRANSFER. This Warrant and the Shares issuable upon exercise this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to a Permitted Transferee (as defined herein) or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder s notice of proposed sale. 4.4 TRANSFER PROCEDURE. Subject to the provisions of Section 4.3 Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) at any time to Silicon Valley Bancshares, The Silicon Valley Bank Foundation, or any affiliate of Holder (each a "Permitted Transferee"), or, to any other transferee by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Notwithstanding anything to contrary set forth in this Warrant, Holder agrees that it shall make no disposition of this Warrant, and the Shares issued upon exercise of this Warrant, other than a transfer to a Permitted Transferee, unless and until Holder shall have notified the Company of the proposed disposition, provided a written summary of the terms and conditions of the proposed disposition, and complied with the terms of the Company's Right of First Refusal option as set forth in EXHIBIT A hereto. 4.5 NOTICES. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by a reputable overnight delivery service or by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time. 4.6 WAIVER. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7 ATTORNEYS FEES. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. 4.8 NO RIGHTS OF STOCKHOLDERS. Holder shall not be entitled to vote, to receive dividends or subscription rights, or to be deemed the holder of Common Stock or any other securities of the Company that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon Holder, as such, any of the rights of a stockholder of the Company, including without limitation, any right to vote for the election of directors or upon any matter submitted to stockholders, to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, conveyance, or otherwise), to receive notices, or otherwise, until the Warrant shall have been exercised as provided herein. -5- 4.9 GOVERNING LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to its principles regarding conflicts of law. ATTEST: "COMPANY" BLUESTONE SOFTWARE, INC. By: By: /s/ Mel Baiada --------------------------------- ------------------------------- Name: Name: Mel Baiada Title: Title: President -6- EX-10.26 26 EXHIBIT 10.26 Exhibit 10.26 ANTIDILUTION AGREEMENT THIS ANTIDILUTION AGREEMENT is entered into as of November 24, 1997, by and between Silicon Valley Bank ("Purchaser") and Bluestone Software, Inc. (the "Company"). RECITALS A. Concurrently with the execution of this Antidilution Agreement, the Purchaser is purchasing from the Company a Warrant (the "Warrant') pursuant to which Purchaser has the right to acquire from the Company the Shares (as defined in the Warrant). B. By this Antidilution Agreement, the Purchaser and the Company desire to set forth the adjustment in the number of Shares issuable upon exercise of the Warrant as a result of a Diluting Issuance (as defined in the Warrant). C. Capitalized terms used herein shall have the same meaning as set forth in the Warrant. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. DEFINITIONS. As used in this Antidilution Agreement, the following terms have the following respective meanings: (a) "Option" means any right, option, or warrant to subscribe for, purchase, or otherwise acquire common stock or Convertible Securities. (b) "Convertible Securities" means any evidences of indebtedness, shares of stock, or other securities directly or indirectly convertible into or exchangeable for Common Stock. (c) "Issue" means to grant, issue, sell, assume, or fix a record date for determining persons entitled to receive, any security (including Options), whichever of the foregoing is the first to occur. (d) "Additional Common Shares" means all Common Stock (including reissued shares) Issued (or deemed to be issued pursuant to Section 2) after the date of the Warrant. Additional Common Shares does not include, however, any Common Stock Issued in a transaction described in Sections 2.1 and 2.2 of the Warrant; any Common Stock Issued upon conversion or exercise of Options and Convertible Securities outstanding as of the date of the Warrant; the Shares; or Common Stock Issued or reserved for issuance pursuant to a stock option plan which was approved by the Board of Directors of the Company. 2. DEEMED ISSUANCE OF ADDITIONAL COMMON SHARES. The shares of Common Stock ultimately issuable upon exercise of an Option (including the shares of Common Stock ultimately issuable upon conversion or exercise of a Convertible Security issuable pursuant to an Option) are deemed to be Issued when the Option is Issued. The shares of Common Stock ultimately issuable upon conversion or exercise of a Convertible Security (other than a Convertible Security Issued pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible Security. The maximum amount of Common Stock issuable is determined without regard to any future adjustments permitted under the instrument creating the Options or Convertible Securities. 3. ADJUSTMENT OF WARRANT PRICE FOR DILUTING ISSUANCES. 3.1 WEIGHTED AVERAGE ADJUSTMENT. If the Company issues Additional Common Shares after the date of the Warrant and the consideration per Additional Common Share (determined pursuant to Section 4) is less than the Warrant Price in effect immediately before such Issue, the Warrant Price shall be reduced, concurrently with such Issue, to a price (calculated to the nearest hundredth of a cent) determined by multiplying the Warrant Price by a fraction: (a) the numerator of which is the amount of such Common Stock outstanding immediately before such Issue plus the amount of Common Stock that the aggregate consideration received by the Company for the Additional Common Shares would purchase at the Warrant Price in effect immediately before such Issue, and (b) the denominator of which is the amount of Common Stock outstanding immediately before such Issue plus the number of such Additional Common Shares. 3.2 ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant Price, the number of Shares issuable upon exercise of the Warrant shall be increased to equal the quotient obtained by dividing (a) the product resulting from multiplying (i) the number of Shares issuable upon exercise of the Warrant and (ii) the Warrant Price, in each case as in effect immediately before such adjustment, by (b) the adjusted Warrant Price. 3.3 SECURITIES DEEMED OUTSTANDING. For the purpose of this Section 3, all securities issuable upon exercise of any outstanding Convertible Securities or Options, warrants, or other rights to acquire securities of the Company shall be deemed to be outstanding. 4. COMPUTATION OF CONSIDERATION. The consideration received by the Company for the Issue of any Additional Common Shares shall be computed as follows: (a) CASH shall be valued at the amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends. (b) PROPERTY. Property other than cash shall be computed at the fair market value thereof at the time of the Issue as determined in good faith by the Board of Directors of the Company. (c) MIXED CONSIDERATION. The consideration for Additional common Shares Issued together with other property of the Company for consideration that covers both shall be determined in good faith by the Board of Directors. (d) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per Additional Common Share for Options and Convertible Securities shall be determined by dividing: (i) the total amount, if any, received or receivable by the Company for the Issue of the Options or Convertible Securities, plus the minimum amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon exercise of the Options or conversion of the Convertible Securities, by (ii) the maximum amount of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) ultimately issuable upon the exercise of such Options or the conversion of such Convertible Securities. -2- 5. GENERAL. 5.1 GOVERNING LAW. This Antidilution Agreement shall be governed in all respects by the laws of the State of Delaware. 5.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, permitted assigns, heirs, executors and administrators of the parties hereto. 5.3 ENTIRE AGREEMENT. Except as set forth below, this Antidilution Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 5.4 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by overnight delivery by a reputable courier service or by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Purchaser at Purchaser's address as set forth below, or at such other address as Purchaser shall have furnished to the Company in writing, or (b) if to the Company, at the Company's address set forth below, or at such other address as the Company shall have furnished to the Purchaser in writing. 5.5 SEVERABILITY. In case any provision of this Antidilution Agreement shall be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions of this Antidilution Agreement shall not in any way be affected or impaired thereby. 5.6 TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Antidilution Agreement. 5.7 COUNTERPARTS. This Antidilution Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. PURCHASER COMPANY SILICON VALLEY BANK BLUESTONE SOFTWARE, INC. By:/s/ Pamela Aldsworth By:/s/ Mel Baiada --------------------------- ------------------------- Name: Pamela Aldsworth Name: Mel Baiada Title: Vice President Title: President Address: Address: ---------------------- -------------------- ---------------------- -------------------- ---------------------- -------------------- EX-10.27 27 EXHIBIT 10.27 Exhibit 10.27 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT is entered into as of November 24, 1997, by and between Silicon Valley Bank ("Purchaser") and Bluestone Software, Inc. (the "Company"). RECITALS A. Concurrently with the execution of this Agreement, the Purchaser is purchasing from the Company a warrant (the "Warrant") pursuant to which Purchaser has the right to acquire from the Company the Shares (as defined in the Warrant). B. By this Agreement, the Purchaser and the Company desire to set forth the registration rights of the Shares all as provided herein. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. REGISTRATION RIGHTS. The Company covenants and agrees as follows: 1.1 DEFINITIONS. For purposes of this Section 1: (a) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means (i) the Shares (as defined in the Warrant) issued or issuable upon exercise of the Warrant and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, any stock referred to in (i). (c) The terms "Holder" or "Holders" means the Purchaser or qualifying transferees under subsection 1.8 hereof who hold Registrable Securities. (d) The term "SEC" means the Securities and Exchange Commission. 1.2 COMPANY REGISTRATION. (a) REGISTRATION. If at any time or from time to time, the Company shall determine to register any of its securities, for its own account or the account of any of its shareholders, other than a registration on Form S-1 or S-8 relating solely to employee stock option or purchase plans, or a registration on Form S-4 relating solely to an SEC Rule 145 transaction, or a registration on any other form (other than Form S-1, S-2, S-3 or S-18, or their successor forms) or any successor to such forms, which does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities, the Company will: (i) promptly give to each Holder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (ii) include in such registration (and compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 20 days after receipt of such written notice from the Company, by any Holder or Holders, except as set forth in subsection 1.2(b) below. (b) UNDERWRITING. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to subsection 1.2(a)(i). In such event the right of any Holder to registration pursuant to this subsection 1.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other shareholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. (c) PRIORITY ON REGISTRATION. Notwithstanding anything to the contrary contained in this Section 1.2, if Holder is notified in writing that the underwriter has determined that marketing factors require a limitation of the number of shares to be underwritten, then the number of securities to be included in such offering shall be determined in the following order of priority: first, all of the Registrable Securities (as defined in the Investors' Rights Agreement dated as of April 18, 1997, by and among the Company and the signatories listed therein (the AInvestors' Rights Agreement@) ) held by the Investors who are parties to the Investors' Rights Agreement or any amendment thereto, other than the Common Stockholder (as hereinafter defined) or, if less than all, the available number of Registrable Securities (as defined in the Investors' Rights Agreement) apportioned pro rata among such Investors; second, all of the registrable securities owned by Holder and the Common Stockholder, respectively, or, if less than all, the available number of registrable securities apportioned pro rata between Holder and the Common Stockholder; and third, all of the registrable securities owned by other holders, or if less than all, the available number of registrable securities apportioned pro rata among such holders. As used herein a "Common Stockholder@ shall mean Mel Baiada. 1.3 EXPENSES OF REGISTRATION. All expenses incurred in connection with any registration, qualification or compliance pursuant to this Section 1 including without limitation, all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for the Company and expenses of any special audits incidental to or required by such registration, shall be borne by the Company, but excluding underwriting discounts and commissions relating to the Registrable Securities. The Company will not pay the fees and disbursements of counsel for Holder unless Company counsel does not make itself available as counsel for the selling Holders, in which case the Company will pay reasonable counsel fees for one (1) counsel for all selling shareholders of the Company in connection with the registration of the Registrable Securities hereunder. 1.4 REGISTRATION PROCEDURES. In the case of each registration, qualification or compliance effected by the Company pursuant to this Registration Rights Agreement, the Company will keep each Holder participating therein advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to 180 days. -2- (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act or the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 1.5 INDEMNIFICATION. (a) The Company will indemnify each Holder of Registrable Securities and each of its officers, directors and partners, and each person controlling such Holder, with respect to which such registration, qualification or compliance has been effected pursuant to this Rights Agreement, and each underwriter, if any, and each person who controls any underwriter of the Registrable Securities held by or issuable to such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereto) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, or any violation or alleged violation by the Company of the Securities Act, the Securities Exchange Act of 1934, as amended, ("Exchange Act") or any state securities law applicable to the Company or any rule or regulation promulgated under the Securities Act, the Exchange Act or any such state law and relating to action or inaction required of the Company in connection with any such registration, qualification of compliance, and will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, within a reasonable amount of time after incurred for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 1.5(a) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld); and provided further, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or -3- omission based upon written information furnished to the Company by an instrument duly executed by such Holder or underwriter specifically for use therein. (b) Each Holder will, if Registrable Securities held by or issuable to such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company,each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company within the meaning of the Securities Act, and each other such Holder, each of its directors and officers, and each person controlling such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, partners, persons or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder specifically for use therein; provided, however, that the indemnity agreement contained in this subsection 1.5(b) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of such Holder, (which consent shall not be unreasonably withheld); and provided further, that the total amount for which any Holder shall be liable under this subsection 1.5(b) shall not in any event exceed the aggregate proceeds received by such Holder from the sale of Registrable Securities held by such Holder in such registration. (c) Each party entitled to indemnification under this subsection 1.5 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom; provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense; and provided further, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder, unless such failure resulted in prejudice to the Indemnifying Party; and provided further, that an Indemnified Party (together with all other Indemnified Parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the reasonable fees and expenses to be paid by the Indemnifying Party, if representation of such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between such Indemnified Party and any other party represented by such counsel in such proceeding. 1.6 INFORMATION BY HOLDER. Any Holder or Holders of Registrable Securities included in any registration shall promptly furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to herein. 1.7 RULE 144 REPORTING. With a view to making available to Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to: -4- (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, after 90 days after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and (c) so long as a Holder owns any Registrable Securities, to furnish to such Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as the Holder may reasonably request in complying with any rule or regulation of the SEC allowing the Holder to sell any such securities without registration. 1.8 TRANSFER OF REGISTRATION RIGHTS. Holders' rights to cause the Company to register their securities and keep information available, granted to them by the Company under subsections 1.2 and 1.7 may be assigned to a transferee or assignee of a Holder's Registrable Securities not sold to the public, provided, that the Company is given written notice by such Holder at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being assigned and provided further that transferee or assignee agrees in writing to be bound by the provisions of the Warrant, including the provisions set forth on EXHIBIT A thereto. Notwithstanding anything to the contrary in this Section 1.8, Holder may not assign or transfer any of its rights under this Registration Rights Agreement unless such transferee or assignee will own (or have the right to acquire) more than 50% of the Shares (as defined in the Warrant), immediately after such transfer or assignment. 2. GENERAL. 2.1 WAIVERS AND AMENDMENTS; TERMINATION. With the written consent of the record or beneficial holders of at least a majority of the Registrable Securities, the obligations of the Company and the rights of the Holders of the Registrable Securities under this agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), and with the same consent the Company, when authorized by resolution of its Board of Directors, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement; provided, however, that no such modification, amendment or waiver shall reduce the aforesaid percentage of Registrable Securities without the consent of all of the Holders of the Registrable Securities. Upon the effectuation of each such waiver, consent, agreement of amendment or modification, the Company shall promptly give written notice thereof to the record holders of the Registrable Securities who have not previously consented thereto in writing. This Agreement or any provision hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent provided in this subsection 2.1. 2.2 GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of Delaware. 2.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, permitted assigns, heirs, executors and administrators of the parties hereto. -5- 2.4 ENTIRE AGREEMENT. Except as set forth below, this Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 2.5 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by overnight delivery by a reputable courier service, or by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Holder, at such Holder's address as set forth below, or at such other address as such Holder shall have furnished to the Company in writing, or (b) if to the Company, at the Company's address set forth below, or at such other address as the Company shall have furnished to the Holder in writing. 2.6 SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement or any provision of the other Agreement s shall not in any way be affected or impaired thereby. 2.7 TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 2.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. PURCHASER COMPANY SILICON VALLEY BANK BLUESTONE SOFTWARE, INC. By:/s/ Pamela Aldsworth By:/s/ Mel Baiada ----------------------------- ----------------------------- Name: Pamela Aldsworth Name: Mel Baiada Title: Vice President Title: President Address: Address: ------------------------ ------------------------ ------------------------ ------------------------ ------------------------ ------------------------ Witness: Solely with respect to Section 1.2(c): /s/ E. J. Ballezzi /s/ Mel Baiada - --------------------------- ---------------------------------- MEL BAIADA -6- EX-10.28 28 EXHIBIT 10.28 THESE SECURITIES HAVE BEEN ISSUED PURSUANT TO EXEMPTIONS FOR NONPUBLIC OFFERINGS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, THESE SECURITIES MAY NOT BE RESOLD OR OTHERWISE DISPOSED OF UNLESS, IN THE OPINION OF COUNSEL FOR OR SATISFACTORY TO THE ISSUER, REGISTRATION UNDER THE APPLICABLE FEDERAL OR STATE SECURITIES LAWS IS NOT REQUIRED OR COMPLIANCE IS MADE WITH SUCH REGISTRATION REQUIREMENTS. WARRANT TO PURCHASE 481,434 SHARES OF COMMON STOCK OF BLUESTONE SOFTWARE, INC. This is to certify that, FOR VALUE RECEIVED, BT ALEX. BROWN INCORPORATED or its registered assigns pursuant to Section (d) hereof ("Holder"), is entitled to purchase, subject to the provisions of this Warrant, from Bluestone Software, Inc. a Delaware corporation (the "Company"), 481,434 fully paid, validly issued and nonassessable shares of Common Stock, par value $0.001 per share, of the Company ("Common Stock"), at the exercise price of $2.72 per share. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares," and the exercise price of a share of Common Stock as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." (a) EXERCISE OF WARRANT. The Warrant may be exercised at any time, or from time to time, by presentation and surrender hereof to the Company at its principal office, or at the office of its stock transfer agent, if any, with the Purchase Form annexed hereto duly executed (with signature guaranteed if required by the Company or its stock transfer agent) and accompanied by payment of the Exercise Price for the number of Warrant Shares specified in such form and any applicable taxes. The purchase price for any Warrant Shares purchased pursuant to the exercise of this Warrant shall be paid in full upon such exercise in cash or by certified or bank check or pursuant to a cashless exercise procedure whereby the Warrant Shares issued upon exercise of this Warrant will be sold by the Holder or Holder's agent with Holder receiving the difference between the Exercise Price and the sale price, in cash, and the Company receiving the Exercise Price for the Warrant Shares, in cash, or any combination of the foregoing methods of paying the Exercise Price. As soon as practicable after each such exercise of the Warrants, but not later than seven (7) business days from the date of such exercise, the Company shall issue and deliver to the Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of the Holder or the Holder's designee, except in the case of a cashless exercise. If the Warrant should be exercised in part only, the Company shall, upon surrender of the Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable thereunder. In the event of a cash exercise, upon receipt by the 1 Company of the Warrant at its office, or by the stock transfer agent of the Company at its office, in proper form for exercise, together with the exercise price thereof and taxes as aforesaid in cash or certified or bank check and the investment letter described below, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder. In order to assure the availability of an exemption from registration under the federal or applicable state securities laws, the Company may condition the exercise of the Warrant upon the Holder delivering to the Company an investment letter in the form as customarily used by the Company from time to time in connection with the exercise of non-registered options and warrants which are issued by the Company. It is further understood that certificates for the Warrant Shares, if any, to be issued upon exercise of the Warrant may contain a restrictive legend in accordance with Section (j) hereof. (b) RESERVATION OF SHARES. The Company shall at all times reserve for issuance and/or delivery upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance and delivery upon exercise of the Warrants. If the Common Stock is or becomes listed on any national securities exchange or the NASDAQ National Market System, the Company shall also list such shares on such exchange subject to notice of issuance or maintain the listing of its Common Stock on the NASDAQ system, as the case may be. (c) FRACTIONAL SHARES. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the Warrant. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of a share, determined as follows: (1) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the NASDAQ National Market System, the current market value shall be the last reported sale price of the Common Stock on such exchange or system on the last business day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average closing bid and asked prices for such day on such exchange or system; (2) If the Common Stock is not so listed or admitted to unlisted trading privileges, the current market value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc., on the last business day prior to the date of the exercise of this Warrant; or (3) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current market value shall be an amount, not less than the book value thereof as at the end of the most recent fiscal year of the Company ending prior to the date of the exercise of the Warrant, 2 determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. (d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. The Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other Warrants of different denominations entitling the Holder thereof to purchase in the aggregate the same number of shares of Common Stock purchasable hereunder. Subject to Section (j) hereof, the Holder may transfer or assign the Warrant, in whole or in part and from time to time. Upon surrender of this Warrant to the Company at its principal office or at the office of its stock transfer agent, if any, with the Assignment Form annexed hereto duly executed (with signature guaranteed, if required by the Company or its stock transfer agent) and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee or assignees named in such instrument of assignment and this Warrant shall promptly be canceled. This Warrant may be divided by or combined with other Warrants which carry the same rights upon presentation hereof at the principal office of the Company or at the office of its stock transfer agent, if any, together with a written notice specifying the names and denominations in which new Warrants are to be issued and signed by the Holder hereof. The term "Warrant" as used herein includes any Warrants into which this Warrant my be divided or exchanged. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and in the case of loss, theft or destruction, of reasonable satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor, date and amount. Any such new Warrant executed and delivered shall constitute a binding contractual obligation on the part of the Company. (e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in the Warrant and are not enforceable against the Company except to the extent set forth herein. (f) ANTI-DILUTION PROVISIONS. So long as this Warrant shall be outstanding, the Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the happening of certain events as follows: (1) SPECIAL DEFINITIONS. For purposes of this Warrant, the following definitions apply: (a) "Options" shall mean rights, options, or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities (defined below). 3 (b) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than Common Stock and Series A Convertible Preferred Stock, par value $0.001 per share ("Series A Preferred Stock"), Series B Convertible Preferred Stock, par value $0.001 per share ("Series B Preferred Stock"), or Series C Convertible Preferred Stock , par value $0.001 per share ("Series C Preferred Stock" and collectively, with the Series A Preferred Stock and the Series B Preferred Stock, the "Preferred Stock) or other securities convertible into or exchangeable for Common Stock. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or deemed to be issued as provided herein) by the Company after the date hereof, as the case may be, other than shares of Common Stock issued or issuable: (i) upon conversion of shares of Preferred Stock; (ii) to officers, directors, employees or consultants of the Corporation pursuant to stock options granted pursuant to the Corporation's stock option plan on terms approved by the Board of Directors of the Company, but not exceeding 9,429,049 shares of Common Stock (or such greater number approved by the Board) (net of any repurchases of such shares or cancellations or expirations of options), subject to adjustment for all subdivisions and combinations; (iii) as a dividend or distribution on Preferred Stock; (iv) for which adjustment to the conversion prices for the SeriesA Preferred Stock, the Series B Preferred Stock or the Series C Preferred Stock is made pursuant to the Certificate of Incorporation of the Company; (v) upon the conversion of the convertible term note held by Mark Baiada in the principal amount of $500,000, subject to adjustment for all subdivisions and combinations; (vi) to Silicon Valley Bank pursuant to a warrant granted to it but not exceeding 31,250 shares of Common Stock, subject to adjustment for all subdivisions and combinations; or (vii) upon exercise or conversion of warrants and convertible subordinated secured notes to be issued to investors under the Convertible Subordinated Secured Note and Warrant Purchase Agreement by and among the Company and the investors listed therein, or Common Stock 4 issued or issuable upon the conversion of the Series B Preferred Stock or the Series C Preferred Stock or other convertible securities received by the investors upon conversion of the convertible subordinated secured notes. (2) NO ADJUSTMENT OF EXERCISE PRICE. Any provision herein to the contrary notwithstanding, no adjustment in the Exercise Price shall be made in respect of: (i) any future issuance of Options (or upon the issuance of Common Stock upon the exercise of such Options) to employees of the Company under the Amended and Restated Bluestone Software, Inc. 1996 Incentive and Non-Qualified Stock Option Plan; or (ii) the issuance of Additional Shares of Common Stock (as defined herein) unless the consideration per share (determined pursuant to Section (f)(5) herein) for the Additional Shares of Common Stock issued or deemed to be issued by the Company is less than the Exercise Price in effect on the date of, and immediately prior to, such issue. (3) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Company at any time or from time to time after the date hereof shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities then entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein designed to protect against dilution) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, upon the conversion or exercise of such Convertible Securities and Options therefor, and the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, or in case such a record date shall have been fixed, as of the close of business on such record date, provided that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustments in the Exercise Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Company, or decrease or increase in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Exercise Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming 5 effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities (provided, however, that no such adjustment of the Exercise Price shall affect Common Stock previously issued upon the exercise of this Warrant); (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Exercise Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (1) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were the shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Company for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Company upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Company upon such conversion or exchange; and (2) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of such Options, and the consideration received by the Company for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Company for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Company (determined pursuant to Section (f)(5) herein) upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Exercise Price to an amount which exceeds the lower of (a) the Exercise Price on the original adjustment date, or (b) the Exercise Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and 6 (E) in the case of any Options which expire by their terms not more than 30 days after the date of issue thereof, no adjustment of the Exercise Price shall be made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the same manner provided in clause (C) above. (4) ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Company, at any time after the date herein, shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section (f)(5) herein) without consideration or for a consideration per share less than the Exercise Price in effect on the date of and immediately prior to such issue, then and in such event, the Exercise Price under the Warrant shall be reduced concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Exercise Price in effect immediately prior to such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued. For the purpose of the above calculation, the number of shares of Common Stock outstanding immediately prior to such issue shall be calculated as if all Warrants had been exercised and all Convertible Securities had been fully converted into shares of Common Stock immediately prior to such issuance and any outstanding warrants, options or other rights for the purchase of shares of stock or convertible securities had been fully exercised immediately prior to such issuance (and the resulting securities fully converted into shares of Common Stock if so convertible) as of such date, but not including in such calculation any additional shares of Common Stock issuable with respect to this Warrant, Convertible Securities, or outstanding options, warrants or other rights for the purchase of shares of stock or convertible securities, solely as a result of the adjustment of the Exercise Price (or other conversion ratios) resulting from the issuance of the Additional Shares of Common Stock causing the adjustment in question. (5) DETERMINATION OF CONSIDERATION. For purposes of this Warrant, the consideration received by the Company for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property. Such consideration shall: (1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Company, 7 excluding amounts paid or payable for accrued interest or accrued dividends; (2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board; and (3) in the event Additional Shares of Common Stock are issued together with the other shares or securities or other assets of the Company for consideration which covers both types of securities, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, with respect to the Additional Shares of Common Stock as determined in good faith by the Board. (B) Options and Convertible Securities. The consideration per share received by the Company for Additional Shares of Common Stock deemed to have been issued pursuant to Section (f)(5) herein, relating to Options and Convertible Securities shall be determined by dividing: (1) the total amount, if any, received or receivable by the Company as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein designed to protect against dilution) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein designed to protect against the dilution) issuable upon the exercise of such Options or conversion or exchange of such Convertible Securities. (6) ADJUSTMENTS TO EXERCISE PRICE FOR STOCK DIVIDENDS AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that the Company at any time or from time to time after the date herein shall declare or pay, without consideration, any dividend on the Common Stock payable in Common Stock or in 8 any right to acquire Common Stock for no consideration, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock), or in the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then the Exercise Price in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate. In the event that this Company shall declare or pay, without consideration, any dividend on the Common Stock payable in any right to acquire Common Stock for no consideration, then the Company shall be deemed to have made a dividend payable in Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire Common Stock. (7) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If the Common Stock issuable upon the exercise of the Warrants shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise, the Exercise Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted so that the Warrants shall be exercised for, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon the exercise of the Warrant immediately before that change. (8) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least $.05 in such price; provided, however, that any adjustments which by reason of this subsection (f) (8) are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. (9) Whenever the Exercise Price is adjusted, as herein provided, the Company shall promptly cause a notice setting forth the adjusted Exercise Price and adjusted number of Warrant Shares issuable upon exercise of each Warrant to be mailed to the Holder, at its address appearing in the Warrant Register, and shall cause a certified copy thereof to be mailed to its transfer agent, if any. (10) All calculations under this Section (f) shall be made to the nearest cent or to the nearest Warrant Share, as the case may be. 9 (11) In the event that at any time, as a result of an adjustment made pursuant to this Section (f) above, the Holder of this Warrant thereafter shall become entitled to receive any shares of the Company, other than Common Stock, thereafter the number of such other shares so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in subsection (A) above. (12) Irrespective of any adjustments in the Exercise Price or the number or kind of Warrant Shares purchasable upon exercise of this Warrant, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrants initially issuable pursuant to this Warrant. (g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted as required by the provisions of the foregoing Section, the Company shall forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office and with its stock transfer agent, if any, an officer's certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment, including a statement of the number of additional shares of Common Stock, if any, and such other facts as shall be necessary to show the reason for and the manner of computing such adjustment. Each such officer's certificate shall be made available at all reasonable times for inspection by the Holder or any holder of a Warrant executed and/or delivered pursuant to Section (a) or Section (d), and the Company shall, forthwith after each such adjustment, mail, by certified mail, a copy of such certificate to the Holder or any such holder. (h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be outstanding, (i) if the Company shall pay any dividend or make any distribution upon the Common Stock, or (ii) if the Company shall offer to the holders of Common Stock for subscription or purchase by them any shares of any class or any other rights, or (iii) if any capital reorganization of the Company, reclassification of the capital stock of the Company, consolidation or merger of the Company with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Company to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, then in any such case, the Company shall cause to be mailed by certified mail to the Holder or any holder of a Warrant executed and/or delivered pursuant to Section (a) or Section (d), at least 15 days prior to the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock or other securities shall receive cash or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. 10 (i) SECURITIES LAW COMPLIANCE (1) The Holder of the Warrant, by acceptance hereof, acknowledges that the Warrant and the shares of Common Stock to be issued upon exercise hereof or conversion thereof are being acquired solely for the Holder's own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell, transfer, assign or otherwise dispose of this Warrant or any shares of Common Stock to be issued upon exercise hereof or conversion thereof except under circumstances that will not result in a violation of the Act or any state securities laws. Upon exercise of the Warrant, the Holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of Common Stock so purchased are being acquired solely for the Holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. (2) If appropriate, the Warrant and any Warrants issued upon exercise or substitution or upon assignment or transfer pursuant to Section (a) or Section (d), as the case may be, and all shares of Common Stock issued upon exercise hereof or conversion thereof shall be stamped or imprinted with legends setting forth the restrictions on transfer arising under applicable federal and state securities laws. (j) REGISTRATION RIGHTS UNDER THE SECURITIES ACT OF 1933 (1) Commencing on the effective date of the first registration statement for a public offering of securities of the Company, the Company shall advise the Holder of the Warrant or of the Warrant Shares or any then Holder of Warrants or Warrant Shares (such persons being collectively referred to herein as "Holders") by prompt written notice prior to the filing of any registration statement or post-effective amendment thereto ("Registration Statement") under the Securities Act of 1933, as amended (the "Act"), covering an underwritten public offering of equity securities of the Company solely for cash in excess of $1,000,000 (other than a Registration Statement initiated by a holder on Form S-3, a registration relating solely to the sale of securities to participants in a Company stock option, stock purchase or similar plan or a SEC Rule 145 transaction, a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities (as defined in the Second Restated Investors' Rights Agreement dated May 25, 1999, between the Company and the investors signatory thereto) or a registration in which the only Common Stock being registered in Common Stock issuable upon conversion of debt securities that are also being registered) and shall register in any such Registration Statement the number of Warrant Shares that the Holder shall notify the Company it desires to register and shall include in any such Registration Statement such 11 information as may be required to permit a public offering of such Warrant Shares by the Company's underwriter(s). The Company shall supply prospectuses and other documents as the Holder may reasonably request in order to facilitate the public sale or other disposition of the Warrant Shares. The Company shall bear the entire cost and expense of a registration of securities initiated by it under this Section (j)(1). The Holder shall, however, bear the fees of its own counsel and any transfer taxes and underwriting discounts or commissions applicable to the Warrant Shares sold by it. The Company may include other securities in any such registration statement. The Company shall do any and all other acts and things which may be necessary or desirable to enable the Holder to consummate the public sale or other disposition of the Warrant Shares, and furnish indemnification in the manner as set forth in Paragraph (2) (a) of this Section (j), but shall not be required to qualify as a foreign corporation to qualify the Warrant Shares for sale under the securities laws of any state. The Holder shall furnish information and indemnification as set forth in Paragraph (2) (b) of this Section (j). All decisions as to whether and when to proceed with any Registration Statement shall be made solely by the Company. Notwithstanding the foregoing paragraph, in the event that there is an underwritten offering of the Company's securities offered pursuant to said registration statement pursuant to the immediately preceding Paragraph, the underwriter(s) shall have the right to refuse to permit any Warrant Shares, or to limit the amount of Warrant Shares, to be sold by the Holder to such underwriter(s) as such underwriter(s) may determine in its discretion, and the Holder shall refrain from selling such remainder of its Warrant Shares covered by such registration statement for a period not exceeding 180 days following the effective date and shall also refrain at any time when notified by the Company that an amendment or supplement to the prospectus is required. The Company shall not be obligated to keep any Registration Statement effective for a total of more than 120 days or until the distribution contemplated in the Registration Statement has been completed, whichever occurs first. 2(a) Whenever pursuant to this Section (j) a Registration Statement relating to the Warrant Shares is filed under the Act, amended or supplemented, the Company will indemnify and hold harmless each Holder of Warrant Shares covered by such Registration Statement, amendment or supplement (such Holder being hereinafter called the "Distributing Holder"), and each person, if any who controls (within the meaning of the Act) the Distributing Holder, against any losses, claims, damages or liabilities, joint or several, to which the Distributing Holder or any such controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such Registration Statement or any preliminary prospectus or final prospectus constituting a part thereof or any amendment or supplement thereto, or 12 arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse the Distributing Holder and each such controlling person for any legal or other expenses reasonably incurred by the Distributing Holder and each controlling person for any legal or other expenses reasonable incurred by the Distributing Holder or such controlling person or underwriter in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said Registration Statement, preliminary prospectus, final prospectus or amendment or supplement, in reliance upon and in conformity with written information furnished by the Distributing Holder or underwriter for use in the preparation thereof. (b) The Distributing Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed said Registration Statement and such amendments and supplements thereto, each person, if any, who controls the Company (within the meaning of the Act) and the Company's underwriter(s) and each person, if any, who controls such underwriter(s) (within the meaning of the Act) against any losses, claims, damages or liabilities to which the Company or any such director, officer, underwriter or controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said Registration Statement, preliminary prospectus, final prospectus, or amendment or supplement, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in said Registration Statement, preliminary prospectus, final prospectus or amendment or supplement, in reliance upon and in conformity with written information furnished by such Distributing Holder for use in the preparation thereof; and will reimburse the Company or underwriter or any such director, officer or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under this Paragraph 2 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party, give the indemnifying party notice of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Paragraph 2. 13 (d) In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, the extent that it may wish, jointly with any other indemnifying party similarly notified to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Paragraph 2 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. (e) The Company's agreements with respect to Warrant Shares in this Section (j) shall continue in effect regardless of the exercise of the Warrant; provided, however, that the Holder's rights under this Section (j) may not be assigned without the prior written consent of the Company. (k) RIGHT TO CONVERT WARRANT INTO COMMON STOCK. (1) RIGHT TO CONVERT. The Holder shall have the right to require the Company to convert this Warrant provided in this Section (1), into common stock (the "Net Conversion Right"). Upon exercise of the Net Conversion Right, the Company shall deliver to the Holder (without payment by the Holder of any Exercise Price or of any other cash or consideration) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the value of this Warrant at the time the Conversion Right is exercised (determined by subtracting the aggregate Exercise Price in effect immediately prior to the exercise of the Conversion Right from the aggregate fair market value of the shares of Common Stock issuable upon exercise of this Warrant immediately prior to the exercise of the Conversion Right) by (y) the fair market value of one share of Common Stock immediately prior to the exercise of the Conversion Right. (2) METHOD OF EXERCISE. The Net Conversion Right may be exercised by the Holder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the Holder thereby intends to exercise the Net Conversion Right. Certificates for the shares of Common Stock issuable upon exercise of the Net Conversion Right shall be delivered to the Holder within five (5) days following the Company's receipt of this Warrant together with the aforesaid written statement. (3) DETERMINATION OF FAIR MARKET VALUE. For purposes of this Section (f), fair market value of a share of Common Stock as of a particular date (the "Determination Date") shall be determined in accordance with Section (c) of this Warrant. 14 (l) AMENDMENTS. Neither the Warrant nor any term hereof may be changed, waived, discharged or terminated without the prior written consent of the Holder. (m) NO IMPAIRMENT. The Company will not avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may be necessary or appropriate in order to protect the rights of any Holder. (n) GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Delaware. (o) NOTICES. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, addressed (a) if to the Holder, to BT Alex. Incorporated, One South Street, Baltimore, Maryland 21202, Attention: Donald D. Notman, Jr., or (b) if to the Company, to Bluestone Software, Inc., 1000 Briggs Road, Mount Laurel, New Jersey 08054, Attention: President, or at such other address as to the Company shall have furnished to the Holder in writing. 15 IN WITNESS WHEREOF, Bluestone Software, Inc. has caused this Warrant to be executed by its officer thereunto duly authorized. Dated: _________________ BLUESTONE SOFTWARE, INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- 16 EX-10.29 29 EXHIBIT 10.29 Exhibit 10.29 BLUESTONE SOFTWARE, INC. SERIES A PREFERRED STOCK PURCHASE AGREEMENT April 18, 1997 TABLE OF CONTENTS
Page 1. Purchase and Sale of Stock......................................................................1 1.1 Sale and Issuance of Series A Preferred Stock..........................................1 1.2 Closing................................................................................1 2. Representations and Warranties of the Company...................................................2 2.1 Organization, Good Standing and Qualification..........................................2 2.2 Capitalization and Voting Rights.......................................................2 2.3 Subsidiaries...........................................................................3 2.4 Authorization..........................................................................3 2.5 Valid Issuance of Preferred and Common Stock...........................................3 2.6 Governmental Consents..................................................................3 2.7 Offering...............................................................................4 2.8 Litigation.............................................................................4 2.9 Employee Agreements....................................................................4 2.10 Patents and Trademarks.................................................................4 2.11 Compliance with Other Instruments......................................................5 2.12 Agreements; Action.....................................................................5 2.13 Related-Party Transactions.............................................................6 2.14 Financial Plan.........................................................................7 2.15 Permits................................................................................7 2.16 Environmental and Safety Laws..........................................................7 2.17 Manufacturing and Marketing Rights.....................................................7 2.18 Disclosure.............................................................................7 2.19 Registration Rights....................................................................8 2.20 Title to Property and Assets...........................................................8 2.21 Financial Statements...................................................................8 2.22 Changes................................................................................8 2.23 Employee Benefit Plans.................................................................9 2.24 Tax Matters...........................................................................11 2.25 Insurance.............................................................................12 2.26 Books and Records.....................................................................12 3. Representations and Warranties of the Investors................................................12 3.1 Authorization.........................................................................12 3.2 Purchase Entirely for Own Account.....................................................13 3.3 Disclosure of Information.............................................................13 3.4 Investment Experience.................................................................13 3.5 Accredited Investor...................................................................13 3.6 Restricted Securities.................................................................13 3.7 Further Limitations on Disposition....................................................13 3.8 Legends...............................................................................14 3.9 Certain Tax Matters...................................................................14
i 4. Conditions of Investor's Obligations at Closing................................................15 4.1 Representations and Warranties........................................................15 4.2 Performance...........................................................................15 4.3 Compliance Certificate................................................................15 4.4 Qualifications........................................................................15 4.5 Proceedings and Documents.............................................................15 4.6 Employee Agreements...................................................................15 4.7 Opinion of Company Counsel............................................................15 4.8 Tax Opinion of Company Counsel........................................................16 4.9 Investors' Rights Agreement...........................................................16 4.10 Right of First Refusal and Co-Sale Agreement..........................................16 4.11 Voting Agreement......................................................................16 4.12 Due Diligence.........................................................................16 4.13 Restated Certificate of Incorporation.................................................16 4.14 Key Person Life Insurance.............................................................16 4.15 Related Agreements....................................................................16 4.16 Consummation of the Spin-off. .......................................................17 5. Conditions of the Company's Obligations at Closing.............................................17 5.1 Representations and Warranties........................................................17 5.2 Payment of Purchase Price.............................................................17 5.3 Qualifications........................................................................17 5.4 Right of First Refusal and Co-Sale Agreement..........................................17 5.5 Voting Agreement......................................................................17 6. Indemnification................................................................................17 7. Miscellaneous..................................................................................19 7.1 Survival of Warranties................................................................19 7.2 Successors and Assigns................................................................19 7.3 Governing Law.........................................................................19 7.4 Counterparts..........................................................................19 7.5 Titles and Subtitles..................................................................19 7.6 Notices...............................................................................20 7.7 Finder's Fee..........................................................................20 7.8 Expenses..............................................................................20 7.9 Amendments and Waivers................................................................20 7.10 Severability..........................................................................20 7.11 Aggregation of Stock..................................................................21 7.12 Entire Agreement......................................................................21 7.13 Definition of Investor................................................................21
ii SCHEDULE A Schedule of Investors..........................................................................26 SCHEDULE B Disclosure Letter..............................................................................27 EXHIBIT A Restated Certificate of Incorporation..........................................................28 EXHIBIT B Form of Employee Agreement.....................................................................29 EXHIBIT C Opinion of Company Counsel.....................................................................30 EXHIBIT D Tax Opinion of Company Counsel.................................................................31 EXHIBIT E Investors' Rights Agreement....................................................................32 EXHIBIT F Right of First Refusal and Co-Sale Agreement...................................................33 EXHIBIT G Voting Agreement...............................................................................34
iii BLUESTONE SOFTWARE, INC. STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is made as of the 18th day of April 1997, by and between Bluestone Software, Inc., a Delaware corporation (the "Company"), and the investors listed on Schedule A hereto, each of which is herein referred to as an "Investor." INTENDING TO BE LEGALLY BOUND, and in consideration of the mutual agreements stated below, the parties agree as follows: 1. PURCHASE AND SALE OF STOCK. 1.1 SALE AND ISSUANCE OF SERIES A PREFERRED STOCK (a) The Company shall adopt and file with the Secretary of State of Delaware on or before the Closing (as defined below) the Amended and Restated Certificate of Incorporation in the form attached hereto as EXHIBIT A (the "Restated Certificate"). (b) Subject to the terms and conditions of this Agreement, each Investor agrees, severally, to purchase at the Closing (as hereafter defined), and the Company agrees to sell and issue to each Investor at such Closing, that number of shares of the Company's Series A Convertible Preferred Stock, $.001 par value per share ("Series A Preferred Stock"), set forth opposite each Investor's name on SCHEDULE A hereto, at a price of $0.95 per share. 1.2 CLOSING. The purchase by the Investors and sale by the Company of the shar es of Series A Preferred Stock hereunder (the "Shares") shall take place at the offices of Blank Rome Comisky & McCauley, Four Penn Center Plaza, Philadelphia, Pennsylvania at 10:00 A.M., on April 18, 1997, or at such other time and place as the Company and the Investors, mutually agree upon orally or in writing (which time and place are designated as the "Closing"); provided, however, that if acceptable to the Company and the Investors, the Closing may be effected by facsimile transmission of executed copies of the documents delivered at the Closing and payment of the purchase price specified in Section 1.1 and by sending original copies of the documents delivered at the Closing by reputable overnight delivery service, postage or delivery charges prepaid, for delivery to the parties at their addresses stated on the signature page of this Agreement by the third business day following the Closing. At the Closing the Company shall deliver to each Investor a certificate representing the Shares that such Investor is purchasing against payment of the purchase price therefor by check, wire transfer, or any combination thereof (or in the case of Mel Baiada ("Baiada"), by cancellation of indebtedness owed by the Company to Ba iada) in an amount equal to the purchase price referred to on SCHEDULE A attached hereto. Any Investor purchasing Shares pursuant to this Agreement shall become a party to this Agreement, the Investors' Rights Agreement, the First Refusal and Co-Sale Agreement and the Voting Agreement (each as defined below and collectively with this Agreement, the "Transaction Agreements"), all dated as of the date hereof. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY . Knowing that each Investor is relying thereon, the Company hereby represents and warrants to each Investor that, except as set forth in the Disclosure Letter attached hereto as SCHEDULE B (the "Disclosure Letter") furnished to each Investor and special counsel for the Investors, specifically identifying the relevant subparagraph hereof: 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties. 2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the Company will consist immediately after the Closing, of: (i) PREFERRED STOCK. 5,526,316 preferred stock (the "Preferred Stock"), all of which have been designated Series A Preferred Stock and will be sold pursuant to this Agreement. The rights, privileges and preferences of the Series A Preferred Stock will be as stated in the Company's Restated Certificate. (ii) COMMON STOCK. 17,726,316 shares of common stock, $.001 par value per share ("Common Stock"), of which (a) 5,526,316 shares have been reserved for issuance upon conversion of the Shares (the "Conversion Shares"), (b) 700,000 shares have been reserved for issuance upon conversion of the convertible term note held by Mark Baiada in the principal amount of $500,000 (the "Mark Baiada Conversion Shares"), (c) 813,250 shares have been reserved for issuance upon the exercise of outstanding options (the "1996 Plan Options") granted to certain employees of the Company pursuant to the Company's Amended and Restated 1996 Incentive and Non-Qualified Stock Option Plan (the "1996 Plan"), (d) 300,000 shares have been reserved for issuance upon the exercise of outstanding options to be granted to Bob Bickel on or after the Closing (the "Bickel Options"), (e) 1,386,750 shares have been reserved for issuance upon the exercise of options to be granted in the future to certain employees of the Company under the 1996 Plan, and (f) 9,000,000 shares are currently issued and outstanding. (iii) The outstanding shares of Common Stock are all duly and validly authorized and issued, fully paid and nonassessable, and were issued in accordance with the registration or qualification provisions of the Securities Act of 1933, as amended (the "Act"), and any relevant state securities laws or pursuant to valid exemptions therefrom. (iv) Except for (a) the conversion privileges of the Preferred Stock issued or to be issued under this Agreement, (b) the rights provided in the registration rights provisions of the Investors' Rights Agreement, (c) any other rights created under the Transaction Agreements, and (d) as of the Closing (I) 700,000 shares of Common Stock reserved for issuance upon conversion of the convertible term note held by Mark Baiada in the principal amount of $500,000, (II) 300,000 shares of Common Stock reserved for issuance upon exercise of the Bickel Options, and (III) 2 813,250 shares of Common Stock reserved for issuance upon exercise of the 1996 Plan Options, there are not outstanding any options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. The Company has reserved an additional 1,386,750 shares of its Common Stock for purchase upon exercise of options to be granted in the future to certain employees under the 1996 Plan. Except for the Transaction Agreements, the Company is not a party or subject to any agreement or understanding, and, to the best of the Company's knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents by a director of the Company or the voting or giving of written consents by a director or stockholder with respect to any security. 2.3 SUBSIDIARIES. The Company does not presently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. The Company is not a participant in any joint venture, partnership, or similar arrangement. 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of the Transaction Agreements, the performance of all obligations of the Company hereunder and thereunder, and the authorization, issuance (or reservation for issuance), sale and delivery of the Shares being sold hereunder and the Conversion Shares, has been taken or will be taken prior to the Closing. The Transaction Agreements constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK. The Shares, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under the Transaction Agreements and under applicable state and federal securities laws. The Conversion Shares have been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Restated Certificate, will be duly and validly issued, fully paid, and nonassessable and will be free of restrictions on transfer other than restrictions on transfer under the Transaction Agreements and under applicable state and federal securities laws. 2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement (except such additional steps as may be necessary to qualify the offer and sale of the Shares under applicable state securities laws, which such steps have been taken or shall be timely taken by the Company). 3 2.7 OFFERING. Subject in part to the truth and accuracy of each Investor's representations set forth in Section 3 of this Agreement, the offer, sale and issuance of the Shares as contemplated by this Agreement are exempt from the registration requirements of the Act, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.8 LITIGATION. There is no action, suit, proceeding or investigation pending or currently threatened against the Company that questions the validity of the Transaction Agreements or the right of the Company to enter into such agreements, or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions, suits, proceedings or investigations pending or threatened (or any basis therefor known to the Company) involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or that the Company intends to initiate. 2.9 EMPLOYEE AGREEMENTS. [INTENTIONALLY OMITTED]. 2.10 PATENTS AND TRADEMARKS. The Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, information, proprietary rights and processes ("Intellectual Property") necessary for its business as now conducted and as proposed to be conducted without any conflict with or infringement of the rights of others. The Disclosure Letter contains a complete list of all patents and patent applications of the Company. There are no outstanding options, licenses, or agreements of any kind relating to any of the Company's Intellectual Property, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the Intellectual Property of any other person or entity. The Company has not received any communications alleging that the Company has violated or, by conducting its business as proposed to be conducted, would violate any of the Intellectual Property of any other person or entity. The Company is not aware that any of the Company's employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of the Transaction Agreements nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed to be conducted, will, to the best of the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company does not believe that it is or will be necessary to utilize any inventions of any of the Company's employees (or people it currently intends to hire) made prior to their employment by the Company. 4 2.11 COMPLIANCE WITH OTHER INSTRUMENTS. (a) The Company is not in violation or default of any provision of its Restated Certificate or Bylaws, or of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound, or, to the best of its knowledge, of any provision of any federal or state statute, rule or regulation applicable to the Company. The execution, delivery and performance of the Transaction Agreements, and the consummation of the transactions contemplated hereby and thereby, will not result in any such violation or be in conflict with or constitute, with or without the passage of time and/or giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event that results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to the Company, its business or operations or any of its assets or properties. (b) The Company has avoided every condition, and has not performed any act, the occurrence of which would result in the Company's loss of any material right granted under any license, distribution or other agreement. 2.12 AGREEMENTS; ACTION. (a) Except for agreements explicitly contemplated hereby and by the Transaction Agreements, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors or affiliates, or any affiliate thereof. (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it is bound that may involve (i) obligations (contingent or otherwise) of, or payments to the Company in excess of, $25,000, or (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company, or (iii) provisions restricting or affecting the development, manufacture or distribution of the Company's products or services, or (iv) indemnification by the Company with respect to infringements of proprietary rights. (c) Since the date of the Latest Balance Sheet (as defined below), the Company (i) has not declared or paid any dividends or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) except for (A) the convertible term note in the principal amount of $500,000 payable to Mark Baiada (the "Mark Baiada Term Note"), (B) the term note in the principal amount of $250,000 payable to Mel Baiada (the "Mel Baiada Term Note"), (C) the term loan in the original principal amount of $235,000 payable to PNC Bank (the "PNC Bank Term Loan"), (D) the $1,000,000 revolving line of credit with PNC Bank (the "PNC Bank Credit Line") and (E) the $150,000 convertible line of credit note with PNC Bank (the "PNC Bank Convertible Line of Credit Note"), does not currently have outstanding any indebtedness for money borrowed or any other liabilities individually in excess of $25,000 or, in the case of indebtedness and/or liabilities individually less than $25,000, in excess of $75,000 in the aggregate, or (iii) has not made any loans or advances to any person, other than ordinary advances for travel 5 expenses, has not sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (e) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Restated Certificate or Bylaws that materially adversely affects its business as now conducted or as proposed to be conducted, its properties or its financial condition. (f) The Company has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company or a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company. 2.13 RELATED-PARTY TRANSACTIONS. No employee, officer, or director of the Company or member of his or her immediate family is indebted to the Company, nor is the Company, except for its obligations under the Mark Baiada Term Notes and the Mel Baiada Term Note, indebted (or committed to make loans or extend or guarantee credit) to any of them. To the best of the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers, or directors of the Company and members of their immediate families may own stock in publicly traded companies that may compete with the Company. No member of the immediate family of any officer or director of the Company is directly or indirectly interested in any material contract with the Company. 2.14 FINANCIAL PLAN. The financial plan attached to the Disclosure Letter (the "Financial Plan") has been prepared in good faith by the Company and does not contain any untrue statement of a material fact nor does it omit to state a material fact necessary to make the statements made therein not misleading, except that with respect to projections contained in the Financial Plan, the Company represents only that such projections were prepared in good faith by the Company and that the Company reasonably believes there is a reasonable basis for such projections. 2.15 PERMITS. The Company has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of 6 the Company, and the Company believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted in the Business Plan. The Company is not in default in any material respect under any of such franchises, permits, licenses, or other similar authority. 2.16 ENVIRONMENTAL AND SAFETY LAWS. To the best of the Company's knowledge, the Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to the best of its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 2.17 MANUFACTURING AND MARKETING RIGHTS. The Company has not granted rights to manufacture, produce, assemble, license, market, or sell its products to any other person and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. 2.18 DISCLOSURE. The Company has fully provided each Investor with all the information that such Investor has requested for deciding whether to purchase the Series A Preferred Stock and all information that the Company believes is reasonably necessary to enable such Investor to make such decision. Neither the Transaction Agreements nor any other written statements or certificates made or delivered in connection herewith or therewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. There is no fact within the knowledge of the Company, or any of the Company's officers which has not been disclosed herein or in writing by them to the Investors and which materially adversely affects, or in the future in their opinion may, insofar as they can now foresee, materially adversely affect the business, properties, assets or condition, financial or otherwise, of the Company. Other than as stated in the Disclosure Letter, without limiting the foregoing, the Company has no knowledge or belief that there exists, or there is, pending or planned, any patent, invention, device, application or principle or any statute, rule, law, regulation, standard or condition which would materially adversely affect the condition, financial or otherwise, or the operations of the Company. 2.19 REGISTRATION RIGHTS. Except as provided in the Investors' Rights Agreement, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 2.20 TITLE TO PROPERTY AND ASSETS. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except (i) as reflected in the Financial Statements (as defined below), (ii) for liens for current taxes not yet delinquent, (iii) for liens imposed by law and incurred in the ordinary course of business for obligations not past due to carriers, warehousemen, laborers, materialmen and the like, (iv) for liens in respect of pledges or deposits under workers' compensation laws or similar legislation, (v) for minor defects in title, none of which, individually or in the aggregate, materially interferes with the use of such property, or (vi) for such encumbrances and liens that arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and 7 assets it leases, the Company is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 2.21 FINANCIAL STATEMENTS. The Company has delivered to each Investor consolidated audited financial statements (balance sheet, operating statement and statement of cash flows) of Bluestone Consulting, Inc., a New Jersey Corporation (the "Predecessor Corporation") as of and for each of the fiscal years ended December 31, 1996 and 1995 (the "Audited Financial Statements"), and consolidated unaudited financial statements (balance sheet, operating statement and statement of cash flows) of the Predecessor Corporation as of February 28, 1997 and for the two months then ended (the "Unaudited Financial Statements" together with the Audited Financial Statements, the "Financial Statements"). The Financial Statements fairly present the financial condition and operating results of the Predecessor Corporation as of the dates, and for the periods, indicated therein, subject to normal year-end adjustments. The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated and with each other, except that the Unaudited Financial Statements may not contain all footnotes required by generally accepted accounting principles. Except as set forth in the Financial Statements, the Predecessor Corporation has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to February 28, 1997, and (ii) obligations under contracts and commitments incurred in the ordinary course of business, which, individually or in the aggregate, are not material to the financial condition or operating results of the Predecessor Corporation. Except as disclosed in the Financial Statements, the Predecessor Corporation is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 2.22 CHANGES. Since February 28, 1997, the date of the latest balance sheet included in the Financial Statements (the "Latest Balance Sheet"), there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not been, in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted); (c) any waiver by the Company of a valuable right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that is not material to the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted); 8 (e) any material change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject; (f) any resignation or termination of employment of any key officer of the Company, and the Company, to the best of its knowledge, does not know of the impending resignation or termination of employment of any such officer; (g) any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (h) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; or (i) to the best of the Company's knowledge, any other event or condition of any character that might materially and adversely affect the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted). 2.23 EMPLOYEE BENEFIT PLANS. Except as set forth in the Disclosure Letter, the Company has not established, maintained or contributed to any Employee Benefit Plans as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Company has not proposed any Employee Benefit Plans which the Company will establish, maintain, or to which the Company will contribute, and the Company has not proposed any changes to any Employee Benefit Plans now in effect (all of the preceding referred to collectively hereinafter as the "Company's Employee Benefit Plans"). True and correct copies and descriptions, to the extent that they exist, of all of the Company's Employee Benefit Plans have been previously provided to the Investors. If permitted and/or required by applicable Law, the Company has properly submitted all of the Company's Employee Benefit Plans in good faith to meet the applicable requirements of ERISA and/or the Code (as hereinafter defined) to the IRS for its approval within the time prescribed therefor under applicable federal regulations. Favorable letters of determination of such tax-qualified status from the IRS have been previously provided to the Investors. With respect to the Company's Employee Benefit Plans, the Company will have made, on or prior to the Closing, all payments required to be made by it on or prior to the Closing and will have accrued (in accordance with generally accepted accounting principles consistently applied) as of the Closing all payments due but not yet payable as of the Closing. The Company has previously provided to the Investors a true and correct copy of the most current Form 5500 and any other form or filing required to be submitted to any governmental agency with regard to any of the Company's Employee Benefit Plans. All of the Company's Employee Benefit Plans are, and have been, operated in full compliance with their provisions and with all applicable Laws including, without limitation, ERISA and the Code and the regulations and rulings thereunder. The Company and all fiduciaries of the Company's Employee Benefit Plans have complied with the provisions of the Company's Employee Benefit Plans and with all applicable Laws including, without limitation, ERISA and the Code and the regulations and rulings thereunder. There has been no termination or partial termination (including any termination 9 or partial termination attributable to this sale) of any of the Company's Employee Benefit Plans. The Company has never established, maintained or had the obligation to contribute to a defined benefit plan (as defined in the Code or ERISA), an Employee Benefit Plan that is subject to the minimum funding standards of the Code or ERISA, or a multiemployer (as defined in the Code or ERISA). Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute or otherwise) becoming due from the Company under any of the Company's Employee Benefit Plans, (ii) increase any benefits otherwise payable under any of the Company's Employee Benefit Plans, or (iii) result in the acceleration of the time of payment or vesting of any such benefits to any extent. There are no pending actions, claims or lawsuits which have been asserted or instituted against any of the Company's Employee Benefit Plans, the assets of any of the trusts under such plans, the plan sponsor, the plan administrator or against any fiduciary of any of the Company's Employee Benefit Plans (other than routine benefit claims) nor does the Company have knowledge of facts which could form the basis for any such action, claim or lawsuit. There are no investigations or audits of any of the Company's Employee Benefit Plans, any trusts under such plans, the plan sponsor, the plan administrator or any fiduciary of any of the Company's Employee Benefit Plans which have been threatened or instituted nor does the Company have knowledge of facts which could form the basis for any such investigation or audit. Except as disclosed in the Disclosure Letter, no event has occurred or will occur which will result in liability to the Company in connection with any Employee Benefit Plan established, maintained, or contributed to (currently or previously) by the Company or by any other entity which, together with the Company, constitute elements of either (i) a controlled group of corporations (within the meaning of Section 414(b) of the Code), (ii) a group of trades or businesses under common control (within the meaning of Sections 414(c) of the Code or 4001 of ERISA), (iii) an affiliated service group (within the meaning of Section 414(m) of the Code), or (iv) another arrangement covered by Section 414(o) of the Code. For purposes of this Agreement, "Employee Benefit Plan" means (i) any employee benefit plan, as defined in Section 3(3) of ERISA, and (ii) any other plan, trust agreement or arrangement for any bonus, severance, hospitalization, vacation, incentive or deferred compensation, pension or profit-sharing, retirement, payroll savings, stock option, equity compensation, group insurance, death benefit, fringe benefit, welfare or any other employee benefit plan or fringe benefit arrangement of any nature whatsoever, including those benefitting retirees or former employees. 2.24 TAX MATTERS. (a) The Company has filed all Tax Returns (as defined below) which it was required to file under applicable laws and regulations; all such Tax Returns are complete and correct in all respects and have been prepared in compliance with all applicable laws and regulations; the Company has paid all Taxes (as defined below) due and owing by it with respect to any period ending on or before the Closing (whether or not such Taxes are required to be shown on a Tax Return) and have withheld and paid over to the appropriate taxing authority all Taxes which it is required to withhold from amounts paid or owing to any employee, stockholder, creditor or other third party with respect to any period ending on or before the Closing; the Company has not waived any statute of limitations with respect to any Taxes or agreed to any extension of time with respect to any Tax Return; the accrual for Taxes on the Latest Balance Sheet would be adequate to pay all 10 Tax liabilities of the Company if its current tax year were treated as ending on the date of the Latest Balance Sheet; since the date of the Latest Balance Sheet, the Company has not incurred any liability for Taxes other than in the ordinary course of business; the assessment of any additional Taxes for periods for which Tax Returns have been filed by the Company shall not exceed the recorded liability therefor on the Latest Balance Sheet; the federal income Tax Returns of the Company have been audited or closed for all tax years through 1992; no foreign, federal, state or local tax audits or administrative or judicial proceedings are pending or being conducted with respect to the Company, no information related to Tax matters has been requested by any foreign, federal, state or local taxing authority and no written notice indicating an intent to open an audit or other review has been received by the Company from any foreign, federal, state or local taxing authority; and there are no material unresolved questions or claims concerning the Company's Tax liability; (b) The Company has not made an election under Section 341(f) of the Internal Revenue Code of 1986, as amended (the "Code"). The Company is not liable for the Taxes of another person under (i) Treas. Reg. Section 1.1502-6 (or comparable provisions of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or indemnity, or (iv) otherwise. The Company is not a party to any tax sharing agreement. The Company has disclosed on their federal income Tax Returns any position taken for which substantial authority (within the meaning of Section 6662(d)(2)(B)(i) of the Code) did not exist at the time the return was filed. The Company has not made any payments, is obligated to make payments or is a third party to an agreement that could obligate it to make any payments that would not be deductible under Section 280G of the Code; (c) As of the Closing, the Company is a qualified small business within the meaning of Section 1202(c) of the Code. During the period beginning one year prior to the Closing Date through the Closing, the Company has not made a significant redemption of its stock within the meaning of Section 1202(c)(3)(B) of the Code; (d) The Company has made a valid election under Section 1362(a) of the Code to be treated as an "S corporation" within the meaning of Section 1361 of the Code, which election has been effective for all tax periods from the date of the Company's formation to the Closing Date; (e) The formation of Bluestone Consulting, Inc., a Delaware corporation ("Bluestone") by the Company and the distribution of its stock to the shareholders (the "Spin-off") did not and will not result in any Tax to the Company, and for purposes of subsection 2.24(a) above, such formation and distribution shall not be considered a transaction occurring in the ordinary course of business; and (f) For purposes of this Agreement, the term "Tax" or "Taxes" means federal, state, county, local, foreign or other income, gross receipts, ad valorem, franchise, profits, sales or use, transfer, registration, excise, utility, environmental, communications, real or personal property, capital stock, license, payroll, wage or other withholding, employment, social security, severance, stamp, occupation, alternative or add-on minimum, estimated and other taxes of any kind whatsoever (including, without limitation, deficiencies, penalties, additions to tax, and interest attributable thereto) whether disputed or not. The term "Tax Return" means any return, information 11 report or filing with respect to Taxes, including any schedules attached thereto and including any amendment thereof. 2.25 INSURANCE. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed. 2.26 BOOKS AND RECORDS. The minute books and stock record books of the Company provided to the Investors contain (i) minutes of all meetings of the stockholders, board of directors and any committee of the board of directors, (ii) written statements of all actions taken by the stockholders, board of directors and any committee of the board of directors without a meeting, and (iii) records of the issuance, transfer and cancellation of all shares of capital stock and other securities, in each case since the time of incorporation. Such minute books and stock record books reflect all transactions referred to there in accurately and completely. 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor hereby severally represents and warrants that: 3.1 AUTHORIZATION. Such Investor has full power and authority to enter into the Transaction Agreements, and each such agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with such Investor in reliance upon such Investor's representation to the Company, which by such Investor's execution of this Agreement such Investor hereby confirms, that the Shares to be received by such Investor and the Conversion Shares (collectively, the "Securities") will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof except in accordance with the Securities Act of 1933, as amended (the "Act"), and that such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, such Investor further represents that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. 3.3 DISCLOSURE OF INFORMATION. Such Investor believes it has received all the information it considers necessary or appropriate for deciding whether to purchase the Shares. Such Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and the business, properties, prospects and financial condition of the Company. The foregoing, however, does not 12 limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Investors to rely thereon. 3.4 INVESTMENT EXPERIENCE. Such Investor is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Shares. If other than an individual, Investor also represents it has not been organized for the purpose of acquiring the Shares. 3.5 ACCREDITED INVESTOR. Such Investor is an "accredited investor" within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. 3.6 RESTRICTED SECURITIES. Such Investor understands that the Shares and Conversion Shares are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and therefore may not be sold, transferred or otherwise disposed of without registration under the Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Shares or the Conversion Shares or an available exemption from registration under the Act, the Shares or the Conversion Shares must be held indefinitely. In this connection, such Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 3.7 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, such Investor further agrees not to make any disposition of all or any portion of the Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 and the Investors' Rights Agreement provided and to the extent this Section and such agreement are then applicable, and: (a) There is then in effect a Registration Statement under the Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or (b)(i) Such Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, such Investor shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (c) Notwithstanding the provisions of paragraphs (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for a transfer by an Investor that is a partnership to a partner of such partnership or a retired partner of such partnership who retires 13 after the date hereof, or to the estate of any such partner or retired partner or the transfer by gift, will or intestate succession of any partner to his or her spouse or to the siblings, lineal descendants or ancestors of such partner or his or her spouse, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if he or she were an original Investor hereunder. 3.8 LEGENDS. It is understood that the certificates evidencing the Securities may bear one or all of the following legends: (a) "These securities have not been registered under the Securities Act of 1933, as amended, or any state securities laws. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act and such state securities laws or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." 3.9 CERTAIN TAX MATTERS. (a) Such investor has no present plan or intention, individually or together with other investors, to cause the company to, liquidate, merge with another entity, or sell or otherwise dispose of the assets of the company other than in the ordinary course if business or to cause the company to cease carrying on the business of the company. (b) Such investor acknowledges that the transactions contemplated by the contribution and distribution agreement are intended to qualify as transactions described in sections 368(a)(1)(d) and 355 of the code and such investor has no present plan or intention to take any action or position inconsistent therewith or with the consummation of such transactions as contemplated in the contribution and distribution agreement. 4. CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING. The obligations of each Investor under subsection 1.1(b) of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective against any Investor who does not consent in writing thereto: 4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 4.2 PERFORMANCE. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 4.3 COMPLIANCE CERTIFICATE. The President of the Company shall deliver to each Investor at the Closing a certificate stating that the conditions specified in Sections 4.1 and 4.2 have 14 been fulfilled and stating that there shall have been no adverse change in the business, affairs, prospects, operations, properties, assets or condition of the Company since the date of the Financial Statements. 4.4 QUALIFICATIONS. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state (except for certain post-Closing Blue Sky filings required under applicable state securities laws) that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall be duly obtained and effective as of the Closing. 4.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Investors' special counsel, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 4.6 EMPLOYEE AGREEMENTS. [INTENTIONALLY OMITTED]. 4.7 OPINION OF COMPANY COUNSEL. Each Investor shall have received from counsel for the Company, an opinion, dated as of the Closing, in the form and content satisfactory to the Investors and attached hereto as EXHIBIT C. 4.8 TAX OPINION OF COMPANY COUNSEL. Each Investor shall have received from counsel of the Company, a tax opinion, dated as of the Closing, in form and content satisfactory to the Investors and attached hereto as EXHIBIT D, that the Spin-off qualifies as a tax free reorganization within the meaning of Section 368(a)(1)(D) and Section 355 of the Code and that, except as otherwise provided in the Disclosure Letter, which such disclosures shall be satisfactory to each of the Investors, no federal income tax will be imposed on the Company by reason of the Spin-off. 4.9 INVESTORS' RIGHTS AGREEMENT. The Company and each Investor shall have entered into an investors' rights agreement in the form attached hereto as EXHIBIT E (the "Investors' Rights Agreement"). 4.10 RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT. The Company and certain key members of the Company's management and those individuals who hold more than two percent (2.0%) of the outstanding Common Stock of the Company as of the Closing (on a fully as-converted basis, as if all shares of Series A Preferred Stock and all convertible securities had been fully converted into shares of Common Stock) shall have entered into a right of first refusal and co-sale agreement in the form satisfactory to the Investors and attached hereto as EXHIBIT F (the "Right of First Refusal and Co-Sale Agreement"). 4.11 VOTING AGREEMENT. The Company and each of Baiada and Mark Baiada, shall have entered into a voting agreement in the form attached hereto as EXHIBIT G (the "Voting Agreement"). 15 4.12 DUE DILIGENCE. All matters investigated by the Investors in the course of their due diligence shall be satisfactory to each of the Investors, special counsel for Investors and Ernst & Young, L.P., accountants for the Investors. 4.13 RESTATED CERTIFICATE OF INCORPORATION. The Restated Certificate in the form satisfactory to the Investors and attached hereto as EXHIBIT A shall have been adopted by the Company and filed with the Secretary of State of Delaware. 4.14 KEY PERSON LIFE INSURANCE. The Company shall have obtained from financially sound and reputable insurers, term life insurance on the life of Baiada in the amount of $2,000,000, and on each of the lives of Bob Bickel and Mark Nigro in the amount of $500,000. Such policies shall name the Company as loss payee and shall not be cancelable by the Company without prior approval of at least a majority of the shares of Series A Preferred Stock then outstanding. 4.15 RELATED AGREEMENTS. Each Investor shall have received from the Company, the following agreements in form and content satisfactory to each of the Investors: (i) BANK LENDING AGREEMENTS. Any and all lending agreements by and between the Company and its primary lender for working capital, capital equipment leases and software leases; (ii) SHAREHOLDER LENDING AGREEMENTS. Any and all lending agreements by and between the Company and the shareholders of Bluestone; and (iii) SERVICES AGREEMENT. Any and all agreements by and between the Company and Bluestone regarding the provision of consulting services by Bluestone to the Company. 4.16 CONSUMMATION OF THE SPIN-OFF. The Closing of the transactions contemplated by the Contribution and Distribution Agreement dated April 17, 1997, by and between Bluestone and the Company shall have been consummated. 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to each Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by that Investor: 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Investors contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2 PAYMENT OF PURCHASE PRICE. The Investors shall have delivered the purchase price specified in Section 1.1. 16 5.3 QUALIFICATIONS. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state (except for certain post-Closing Blue Sky filings required under applicable state securities laws) that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall be duly obtained and effective as of the Closing. 5.4 RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT. The Investors shall have entered into the Right of First Refusal and Co-Sale Agreement. 5.5 VOTING AGREEMENT. The Investors shall have entered into the Voting Agreement. 6. INDEMNIFICATION. (a) In addition to all rights and remedies available to the Investors at law or in equity, the Company shall indemnify, defend and hold harmless each of the Investors and any parent, subsidiary, associate, affiliate, partner, shareholder, director, officer, shareholder or agent of each such Investor, and each subsequent holder of Series A Preferred Stock and their respective affiliates, stockholders, officers, directors, employees, agents, representatives, successors and permitted assigns (all of the foregoing are collectively referred to as the "Indemnified Parties") from and against and pay on behalf of or reimburse such party as and when incurred all losses (including, without limitation, diminutions in value), liabilities, demands, claims, actions or causes of action, costs, damages, judgments, debts, settlements, assessments, deficiencies, taxes, penalties, fines or expenses, whether or not arising out of any claims by or on behalf of any third party, including interest, penalties, reasonable attorneys' fees and expenses and all reasonable amounts paid in investigation, defense or settlement of any of the foregoing (collectively, "Losses") which any such party may suffer, sustain or become subject to, as a result of, in connection with, or relating to or by virtue of: (i) any material misrepresentations or material breach of warranty on the part of the Company under Section 2; (ii) without duplication of subsection 6(a)(i), any material misrepresentation in or material omission from any of the representations or warranties contained in any certificate, document or instrument or the Disclosure Letter delivered to the Investors by or on behalf of the Company in connection herewith; (iii) any material nonfulfillment or breach of any covenant or agreement on the part of the Company under this Agreement or under any certificate, document or instrument delivered in connection therewith; or (iv) any action, demand, proceeding, investigation or claim by any third party (including, without limitation, governmental agencies) against or affecting the Company and/or its affiliates or subsidiaries which, if successful, would give rise to or evidence the existence of or 17 relate to a material breach of (A) any of the representations or warranties at the time made or (B) covenants of the Company. (b) Notwithstanding the foregoing, and subject to the following sentence, upon judicial determination, which is final and no longer appealable, that the act or omission giving rise to the indemnification hereinabove provided resulted primarily out of or was based primarily upon the Indemnified Party's gross negligence, fraud or willful misconduct (unless such action was based upon the Indemnified Party's reliance in good faith upon any of the representations, warranties, covenants or promises made by the Company herein), the Company shall not be responsible for any Losses sought to be indemnified in connection therewith, and the Company shall be entitled to recover from the Indemnified Party all amounts previously paid in full or partial satisfaction of such indemnity, together with all costs and expenses of the Company reasonably incurred in effecting such recovery, if any. (c) All indemnification rights hereunder shall survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereunder indefinitely, regardless of any investigation, inquiry or examination made for or on behalf of, or any knowledge of any of the Investors and/or any of the other Indemnified Parties or the acceptance by either Investor of any certificate or opinion. (d) If for any reason the indemnity provided for in this Section 6 is unavailable to any Indemnified Party or is insufficient to hold each such Indemnified Party harmless from all such Losses arising with respect to the transactions contemplated hereunder, then the Company and the Indemnified Party shall each contribute to the amount paid or payable by such Loss in such proportion as is appropriate to reflect not only the relative benefits received by the Company on the one hand, and such Indemnified Party on the other, but also the relative fault of the Company on the one hand, and the Indemnified Party on the other, as well as any relevant equitable considerations. In addition, the Company agrees to reimburse any Indemnified Party upon demand for all reasonable expenses (including legal counsel fees) incurred by such Indemnified Party or any such other person in connection with investigating, preparing or defending any such action or claim. The indemnity, contribution and expense reimbursement obligations that the Company has under this Section 6 shall be in addition to any liability that the Company may otherwise have. The Company further agrees that the indemnification and reimbursement commitments set forth in this Agreement shall apply whether or not the Indemnified Party is a formal party to any such lawsuits, claims or other proceedings. (e) Any indemnification of either Investor or any other Indemnified Party by the Company pursuant to this Section 6 shall be effected by wire transfer of immediately available funds from the Company to an account designated by such Investor or such other Indemnified Party within 15 days after the determination thereof. 7. MISCELLANEOUS. 7.1 SURVIVAL OF WARRANTIES. The warranties, representations and covenants of the Company and Investors contained in or made pursuant to this Agreement shall survive the execution, 18 delivery and performance of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investors or the Company. 7.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any Securities). Nothing in this Agreement express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 7.3 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the Commonwealth of Pennsylvania without giving effect to conflict of law principles. 7.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, and it shall not be necessary in making proof of this Agreement to produce or account for more than one counterpart hereof. 7.5 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7.6 NOTICES. Unless otherwise provided, all notices, consents or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given (i) when delivered personally, (ii) three business days after being mailed by first class mail, postage prepaid, or (iii) one business day after being sent by a reputable overnight delivery service, postage or delivery charges prepaid, to the parties at their respective addresses stated on the signature page of this Agreement. Notices may also be given by prepaid telegram or facsimile and shall be effective on the date transmitted if confirmed within 24 hours thereafter by a signed original sent in the manner provided in the preceding sentence. Any party may change its address for notice and the address to which copies must be sent by giving notice of the new addresses to the other parties in accordance with this Section 7.6, except that any such change of address notice shall not be effective unless and until received. 7.7 FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Each Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which such Investor or any of its officers, partners, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Investor from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 7.8 EXPENSES. Subject to the provisions of Section 6, whether or not the Closing is effected, the Company shall pay all costs and expenses that it incurs with respect to the 19 negotiation, execution, delivery and performance of this Agreement. If the Closing is effected, the Company shall, at the Closing, reimburse the reasonable fees and out-of-pocket expenses of special counsel for the Investors and auditors for the Investors. Investors will make all reasonable efforts to ensure that such fees (exclusive of such out-of-pocket expenses) do not exceed $60,000. If any action at law or in equity is necessary to enforce or interpret the terms of the Transaction Agreements, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 7.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Common Stock issued or issuable upon conversion of the Shares. Any amendment or waiver effected in accordance with this Section 7.9 shall be binding upon each holder of any such securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. 7.10 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 7.11 AGGREGATION OF STOCK. All Shares held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 7.12 ENTIRE AGREEMENT. This Agreement and the other Transaction Agreements referred to herein constitute the entire agreement with respect to the subject matter hereof among the parties, and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. 7.13 DEFINITION OF INVESTOR. The term "Investor" as it is used in Sections 2, 4 (except for subsections 4.9 and 4.11) and 6 of this Agreement only shall not include Baiada. 20 IN WITNESS WHEREOF, the parties have executed this Stock Purchase Agreement as of the date first above written. BLUESTONE SOFTWARE, INC. By:/s/ Mel Baiada ------------------------- Name: Mel Baiada Title: President Address: 1000 Briggs Road Mt. Laurel, NJ 08054 Telephone No.: 609-727-4600 Facsimile No.: 609-778-8125 INVESTORS: THE P/A FUND, L.P. By: APA PENNSYLVANIA PARTNERS II, L.P., its General Partner By: /s/ William C. Hulley ------------------------- Name: William C. Hulley Title: General Partner Address: 518 Broad Street Sewickley, PA 15143 Telephone No.: 412-749-9454 Facsimile No.: 412-749-9459 21 PATRICOF PRIVATE INVESTMENT CLUB, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By: /s/ Gregory M. Case -------------------------------------- Name: Gregory M. Case Title: Vice President Address: 100 Matsonford Road Bldg 5, Suite 470 Radnor, Pennsylvania 19087 Telephone No.: 610-687-3030 Facsimile No.: 610-687-8520 APA EXCELSIOR IV, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By: /s/ Gregory M. Case -------------------------------------- Name: Gregory M. Case Title: Vice President Address: 100 Matsonford Road Bldg 5, Suite 470 Radnor, Pennsylvania 19087 Telephone No.: 610-687-3030 Facsimile No.: 610-687-8520 22 APA EXCELSIOR IV/OFFSHORE, L.P. By: PATRICOF & CO. VENTURES, INC., its Investment Advisor By: /s/ Gregory M. Case -------------------------------------- Name: Gregory M. Case Title: Vice President Address: 100 Matsonford Road Bldg 5, Suite 470 Radnor, Pennsylvania 19087 Telephone No.: 610-687-3030 Facsimile No.: 610-687-8520 /s/ Mel Baiada ------------------------------------------ MEL BAIADA Address: 1000 Briggs Road Mt. Laurel, NJ 08054 Telephone No.: 609-727-4600 Facsimile No.: 609-778-8125 /s/ Eugene Levy ------------------------------------------ EUGENE LEVY Address: 90 Riverside Drive, Apt. 5E New York, New York 10024 Telephone No.: 212-753-6300 Facsimile No.: 212-319-6155 23 EX-10.30 30 EXHIBIT 10.30 Exhibit 10.30 BLUESTONE SOFTWARE, INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT April 22, 1998 TABLE OF CONTENTS Page 1. Purchase and Sale of Stock........................................................................1 1.1 Sale and Issuance of Series B Preferred Stock..............................................1 1.2 Closing....................................................................................1 2. Representations and Warranties of the Company.....................................................2 2.1 Organization, Good Standing and Qualification..............................................2 2.2 Capitalization and Voting Rights...........................................................2 2.3 Subsidiaries...............................................................................3 2.4 Authorization..............................................................................3 2.5 Valid Issuance of Preferred and Common Stock...............................................3 2.6 Governmental Consents......................................................................4 2.7 Offering...................................................................................4 2.8 Litigation.................................................................................4 2.9 Patents and Trademarks.....................................................................4 2.10 Compliance with Other Instruments..........................................................5 2.11 Agreements; Action.........................................................................5 2.12 Related-Party Transactions.................................................................6 2.13 Financial Plan.............................................................................7 2.14 Permits....................................................................................7 2.15 Environmental and Safety Laws..............................................................7 2.16 Manufacturing and Marketing Rights.........................................................7 2.17 Disclosure.................................................................................7 2.18 Registration Rights........................................................................7 2.19 Title to Property and Assets...............................................................8 2.20 Financial Statements.......................................................................8 2.21 Changes....................................................................................8 2.22 Employee Benefit Plans.....................................................................9 2.23 Tax Matters................................................................................10 2.24 Insurance..................................................................................12 2.25 Books and Records..........................................................................12 2.26 Use of Proceeds............................................................................12 2.27 Labor Matters..............................................................................12 3. Representations and Warranties of the Investors...................................................12 3.1 Authorization..............................................................................13 3.2 Purchase Entirely for Own Account..........................................................13 3.3 Disclosure of Information..................................................................13 3.4 Investment Experience......................................................................13 3.5 Accredited Investor........................................................................13 3.6 Restricted Securities......................................................................13 3.7 Further Limitations on Disposition.........................................................14 3.8 Legends....................................................................................14 4. Conditions of Investor's Obligations at Closing...................................................14 4.1 Representations and Warranties.............................................................15 4.2 Performance................................................................................15 4.3 Compliance Certificate.....................................................................15 4.4 Qualifications.............................................................................15 4.5 Proceedings and Documents..................................................................15 4.6 Opinion of Company Counsel.................................................................15 4.7 Investors' Rights Agreement................................................................15 4.8 Right of First Refusal and Co-Sale Agreement...............................................15 4.9 Voting Agreement...........................................................................15 4.10 Due Diligence..............................................................................16 4.11 Restated Certificate of Incorporation......................................................16 4.12 Related Agreements.........................................................................16 4.13 Waiver of Default..........................................................................16 5. Conditions of the Company's Obligations at Closing................................................16 5.1 Representations and Warranties.............................................................16 5.2 Payment of Purchase Price..................................................................16 5.3 Qualifications.............................................................................16 5.4 Right of First Refusal and Co-Sale Agreement...............................................16 5.5 Voting Agreement...........................................................................17 6. Indemnification...................................................................................17 7. Miscellaneous.....................................................................................18 7.1 Survival of Warranties.....................................................................18 7.2 Successors and Assigns.....................................................................18 7.3 Governing Law..............................................................................18 7.4 Counterparts...............................................................................19 7.5 Titles and Subtitles.......................................................................19 7.6 Notices....................................................................................19 7.7 Finder's Fee...............................................................................19 7.8 Expenses...................................................................................19 7.9 Amendments and Waivers.....................................................................19 7.10 Severability...............................................................................20 7.11 Aggregation of Stock.......................................................................20 7.12 Entire Agreement...........................................................................20 SCHEDULE A Schedule of Investors.....................................................................24 SCHEDULE B Disclosure Letter.........................................................................25 EXHIBIT A Second Amended Restated Certificate of Incorporation.......................................26 EXHIBIT B Opinion of Company Counsel.................................................................27 EXHIBIT C Restated Investors- Rights Agreement.......................................................28 EXHIBIT D Restated Right of First Refusal and Co-Sale Agreement......................................29 EXHIBIT E Restated Voting Agreement..................................................................30
-ii- BLUESTONE SOFTWARE, INC. STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is made as of the 22nd day of April 1998, by and between Bluestone Software, Inc., a Delaware corporation (the "Company"), and the investors listed on Schedule A hereto, each of which is herein referred to as an "Investor." INTENDING TO BE LEGALLY BOUND, and in consideration of the mutual agreements stated below, the parties agree as follows: 1. PURCHASE AND SALE OF STOCK. 1.1 SALE AND ISSUANCE OF SERIES B PREFERRED STOCK. (a) The Company shall adopt and file with the Secretary of State of Delaware on or before the Closing (as defined below) the Second Amended and Restated Certificate of Incorporation in the form attached hereto as EXHIBIT A (the "Restated Certificate"). (b) Subject to the terms and conditions of this Agreement, each Investor agrees, severally, to purchase at the Closing (as hereafter defined), and the Company agrees to sell and issue to each Investor at such Closing, that number of shares of the Company's Series B Convertible Preferred Stock, $.001 par value per share ("Series B Preferred Stock"), set forth opposite each Investor's name on SCHEDULE A hereto, at a price of $1.296 per share. 1.2 CLOSING. The purchase by the Investors and sale by the Company of the shares of Series B Preferred Stock hereunder (the "Shares") shall take place at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York at 12:00 P.M., on April 22, 1998, or at such other time and place as the Company and the Investors, mutually agree upon orally or in writing (which time and place are designated as the "Closing"); provided, however, that if acceptable to the Company and the Investors, the Closing may be effected by facsimile transmission of executed copies of the documents delivered at the Closing and payment of the purchase price specified in Section 1.1 and by sending original copies of the documents delivered at the Closing by reputable overnight delivery service, postage or delivery charges prepaid, for delivery to the parties at their addresses stated on the signature page of this Agreement by the third business day following the Closing. At the Closing the Company shall deliver to each Investor a certificate representing the Shares that such Investor is purchasing against payment of the purchase price therefor by check, wire transfer, or, in the case of the Investors other than General Electric Capital Corporation, by delivery of 10% Convertible Subordinated Secured Notes in an aggregate principal amount and accrued interest thereon equal to the stated value of the Shares purchased therewith, dated March 2, 1998, or any combination thereof in an amount equal to the purchase price referred to on SCHEDULE A attached hereto. Any Investor purchasing Shares pursuant to this Agreement shall become a party to this Agreement, the Restated -1- Investors' Rights Agreement, the Restated First Refusal and Co-Sale Agreement, and the Restated Voting Agreement (each as defined below and collectively with this Agreement, the "New Transaction Agreements"), all dated as of the date hereof. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Knowing that each Investor is relying thereon, the Company hereby represents and warrants to each Investor that, except as set forth in the Disclosure Letter attached hereto as SCHEDULE B (the "Disclosure Letter") furnished to each Investor and special counsel for the Investors, specifically identifying the relevant subparagraph hereof: 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties. 2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the Company will consist immediately after the Closing, of: (i) PREFERRED STOCK. (a) 5,526,316 shares of Series A Convertible Preferred Stock, $.001 par value per share ("Series A Preferred Stock"), all of which are outstanding; and (b) 8,782,695 shares of Series B Preferred Stock, which will be sold pursuant to this Agreement. The rights, privileges and preferences of the Series B Preferred Stock will be as stated in the Company's Restated Certificate. The Series A Preferred Stock and Series B Preferred Stock are collectively herein referred to as "Preferred Stock". (ii) COMMON STOCK. 36,135,327 shares of common stock, $.001 par value per share ("Common Stock"), of which (a) 18,382,695 shares have been reserved for issuance upon conversion of the shares of Series B Preferred Stock and 5,526,316 shares have been reserved for issuance upon conversion of the shares of Series A Preferred Stock (together, the "Conversion Shares"), (b) 700,000 shares have been reserved for issuance upon conversion of the convertible term note held by Mark Baiada in the principal amount of $500,000 (the "Mark Baiada Conversion Shares"), (c) 813,250 shares have been reserved for issuance upon the exercise of outstanding options (the "1996 Plan Options") granted to certain employees of the Company pursuant to the Company's Amended and Restated 1996 Incentive and Non-Qualified Stock Option Plan (the "1996 Plan"), (d) 300,000 shares have been reserved for issuance upon the exercise of outstanding options granted to Bob Bickel (the "Bickel Options"), (e) 1,386,750 shares have been reserved for issuance upon the exercise of options to be granted in the future to certain employees of the Company under the 1996 Plan, (f) 26,316 shares have been reserved for issuance upon the exercise of warrants granted to Silicon Valley Bank (the "Silicon Valley Bank Warrants") and (g) 9,000,000 shares are currently issued and outstanding. (iii) The outstanding shares of Common Stock are all duly and validly authorized and issued, fully paid and nonassessable, and were issued in accordance with the registration or qualification provisions of the Securities Act of 1933, as amended (the "Act"), and any relevant state securities laws or pursuant to valid exemptions therefrom. -2- (iv) Except for (a) the conversion privileges of the Preferred Stock, (b) the rights provided in the registration rights provisions of the Restated Investors' Rights Agreement, (c) any other rights created under the New Transaction Agreements, and (d) as of the Closing (I) 700,000 shares of Common Stock reserved for issuance upon conversion of the convertible term note held by Mark Baiada in the principal amount of $500,000, (II) 300,000 shares of Common Stock reserved for issuance upon exercise of the Bickel Options, (III) 813,250 shares of Common Stock reserved for issuance upon exercise of the 1996 Plan Options, and (IV) 25,000 shares reserved for issuance upon exercise of the Silicon Valley Bank Warrants, there are not outstanding any options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. The Company has reserved an additional 1,386,750 shares of its Common Stock for purchase upon exercise of options to be granted in the future to certain employees under the 1996 Plan. Except for the New Transaction Agreements, the Company is not a party or subject to any agreement or understanding, and, to the best of the Company's knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents by a director of the Company or the voting or giving of written consents by a director or stockholder with respect to any security. 2.3 SUBSIDIARIES. The Company does not presently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. The Company is not a participant in any joint venture, partnership, or similar arrangement. 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of the New Transaction Agreements, the performance of all obligations of the Company hereunder and thereunder, and the authorization, issuance (or reservation for issuance), sale and delivery of the Shares being sold hereunder and the Conversion Shares, has been taken or will be taken prior to the Closing. The New Transaction Agreements constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Restated Investors' Rights Agreement, as amended, may be limited by applicable federal or state securities laws. 2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK. The Shares, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under the New Transaction Agreements and under applicable state and federal securities laws. The Conversion Shares have been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Restated Certificate, will be duly and validly issued, fully paid, and nonassessable and will be free of restrictions on transfer other than restrictions on transfer under the New Transaction Agreements and under applicable state and federal securities laws. -3- 2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement (except such additional steps as may be necessary to qualify the offer and sale of the Shares under applicable state securities laws, which such steps have been taken or shall be timely taken by the Company). 2.7 OFFERING. Subject in part to the truth and accuracy of each Investor's representations set forth in Section 3 of this Agreement, the offer, sale and issuance of the Shares as contemplated by this Agreement are exempt from the registration requirements of the Act, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.8 LITIGATION. There is no action, suit, proceeding or investigation pending or currently threatened against the Company that questions the validity of the New Transaction Agreements or the right of the Company to enter into such agreements, or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions, suits, proceedings or investigations pending or threatened (or any basis therefor known to the Company) involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or that the Company intends to initiate. 2.9 PATENTS AND TRADEMARKS. The Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, information, proprietary rights and processes ("Intellectual Property") necessary for its business as now conducted and as proposed to be conducted without any conflict with or infringement of the rights of others. The Disclosure Letter contains a complete list of all patents and patent applications of the Company. There are no outstanding options, licenses, or agreements of any kind relating to any of the Company's Intellectual Property, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the Intellectual Property of any other person or entity. The Company has not received any communications alleging that the Company has violated or, by conducting its business as proposed to be conducted, would violate any of the Intellectual Property of any other person or entity. The Company is not aware that any of the Company's employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of the New Transaction Agreements nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed to be conducted, will, to the best of the -4- Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company does not believe that it is or will be necessary to utilize any inventions of any of the Company's employees (or people it currently intends to hire) made prior to their employment by the Company. 2.10 COMPLIANCE WITH OTHER INSTRUMENTS. (a) The Company is not in violation or default of any provision of its Restated Certificate or Bylaws, or of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound, or, to the best of its knowledge, of any provision of any federal or state statute, rule or regulation applicable to the Company. Except as set forth in the Disclosure Letter, the execution, delivery and performance of the New Transaction Agreements, and the consummation of the transactions contemplated hereby and thereby, will not result in any such violation or be in conflict with or constitute, with or without the passage of time and/or giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event that results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to the Company, its business or operations or any of its assets or properties. (b) The Company has avoided every condition, and has not performed any act, the occurrence of which would result in the Company's loss of any material right granted under any license, distribution or other agreement. 2.11 AGREEMENTS; ACTION. (a) Except for agreements explicitly contemplated hereby and by the New Transaction Agreements, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors or affiliates, or any affiliate thereof. (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it is bound that may involve (i) obligations (contingent or otherwise) of, or payments to the Company in excess of, $25,000, or (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company, or (iii) provisions restricting or affecting the development, manufacture or distribution of the Company's products or services, or (iv) indemnification by the Company with respect to infringements of proprietary rights. (c) Since the date of the Latest Balance Sheet (as defined below), the Company (i) has not declared or paid any dividends or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) except for (A) the convertible term note in the principal amount of $500,000 payable to Mark Baiada (the "Mark Baiada Term Note"), (B) the term loan in the original principal amount of $235,000 payable to Silicon Valley Bank (the "Silicon Valley Bank Term Loan"), (C) the $1,000,000 revolving line of credit with Silicon Valley Bank (the "Silicon Valley Bank Credit Line"), and (D) the $150,000 convertible line of credit note with Silicon Valley Bank (the "Silicon Valley Bank Convertible Line of Credit -5- Note"), does not currently have outstanding any indebtedness for money borrowed or any other liabilities individually in excess of $25,000 or, in the case of indebtedness and/or liabilities individually less than $25,000, in excess of $75,000 in the aggregate, and (iii) has not made any loans or advances to any person, other than ordinary advances for travel expenses, has not sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (e) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Restated Certificate or Bylaws that materially adversely affects its business as now conducted or as proposed to be conducted, its properties or its financial condition. (f) The Company has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company or a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company. (g) Any agreements, understandings, instruments or contracts with the parties to contracts listed in Schedule 2.11 of the Disclosure Letter which were entered into prior to the date of such contracts listed in Schedule 2.11 of the Disclosure Letter are no longer in force or effect. 2.12 RELATED-PARTY TRANSACTIONS. No employee, officer, or director of the Company or member of his or her immediate family or affiliate of any of the foregoing is indebted to the Company, nor is the Company, except for its obligations under the Mark Baiada Term Notes, indebted (or committed to make loans or extend or guarantee credit) to any of them. To the best of the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers, or directors of the Company and members of their immediate families may own stock in publicly traded companies that may compete with the Company. No member of the immediate family of any officer or director of the Company is directly or indirectly interested in any material contract with the Company. -6- 2.13 FINANCIAL PLAN. The financial plan attached to the Disclosure Letter (the "Financial Plan") has been prepared in good faith by the Company and does not contain any untrue statement of a material fact nor does it omit to state a material fact necessary to make the statements made therein not misleading, except that with respect to projections contained in the Financial Plan, the Company represents only that such projections were prepared in good faith by the Company and that the Company reasonably believes there is a reasonable basis for such projections. 2.14 PERMITS. The Company has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company, and the Company believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted in the Financial Plan. The Company is not in default in any material respect under any of such franchises, permits, licenses, or other similar authority. 2.15 ENVIRONMENTAL AND SAFETY LAWS. To the best of the Company's knowledge, the Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to the best of its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 2.16 MANUFACTURING AND MARKETING RIGHTS. The Company has not granted rights to manufacture, produce, assemble, license, market, or sell its products to any other person and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. 2.17 DISCLOSURE. The Company has fully provided each Investor with all the information that such Investor has requested for deciding whether to purchase the Series B Preferred Stock and all information that the Company believes is reasonably necessary to enable such Investor to make such decision. Neither the New Transaction Agreements nor any other written statements or certificates made or delivered in connection herewith or therewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. There is no fact within the knowledge of the Company, or any of the Company's officers which has not been disclosed herein or in writing by them to the Investors and which materially adversely affects, or in the future in their opinion may, insofar as they can now foresee, materially adversely affect the business, properties, assets or condition, financial or otherwise, of the Company. Other than as stated in the Disclosure Letter, without limiting the foregoing, the Company has no knowledge or belief that there exists, or there is, pending or planned, any patent, invention, device, application or principle or any statute, rule, law, regulation, standard or condition which would materially adversely affect the condition, financial or otherwise, or the operations of the Company. 2.18 REGISTRATION RIGHTS. Except as provided in the Restated Investors' Rights Agreement, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. -7- 2.19 TITLE TO PROPERTY AND ASSETS. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except (i) as reflected in the Financial Statements (as defined below), (ii) for liens for current taxes not yet delinquent, (iii) for liens imposed by law and incurred in the ordinary course of business for obligations not past due to carriers, warehousemen, laborers, materialmen and the like, (iv) for liens in respect of pledges or deposits under workers' compensation laws or similar legislation, (v) for minor defects in title, none of which, individually or in the aggregate, materially interferes with the use of such property, or (vi) for such encumbrances and liens that arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 2.20 FINANCIAL STATEMENTS. The Company has delivered to each Investor consolidated audited financial statements (balance sheet, operating statement and statement of cash flows) of the Company as of and for the fiscal year ended December 31, 1997 and those of Bluestone Consulting, Inc., a New Jersey corporation (the "Predecessor Corporation") as of and for each of the fiscal years ended December 31, 1996 and 1995 (the "Audited Financial Statements"), and consolidated unaudited financial statements (balance sheet, operating statement and statement of cash flows) of the Company as of February 28, 1998 and for the two months then ended (the "Unaudited Financial Statements" together with the Audited Financial Statements, the "Financial Statements"). The Financial Statements fairly present the financial condition and operating results of the Company and the Predecessor Corporation as of the dates, and for the periods, indicated therein, subject to normal year-end adjustments. The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated and with each other, except that the Unaudited Financial Statements may not contain all footnotes required by generally accepted accounting principles. Except as set forth in the Financial Statements, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to December 31, 1997, and (ii) obligations under contracts and commitments incurred in the ordinary course of business, which, individually or in the aggregate, are not material to the financial condition or operating results of the Company. Except as disclosed in the Financial Statements, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 2.21 CHANGES. Except as disclosed in the Disclosure Letter, since December 31, 1997, the date of the latest audited balance sheet included in the Financial Statements (the "Latest Balance Sheet"), there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not been, in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted); -8- (c) any waiver by the Company of a valuable right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that is not material to the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted); (e) any material change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject; (f) any resignation or termination of employment of any key officer of the Company, and the Company, to the best of its knowledge, does not know of the impending resignation or termination of employment of any such officer; (g) any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (h) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; or (i) to the best of the Company's knowledge, any other event or condition of any character that might materially and adversely affect the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted). 2.22 EMPLOYEE BENEFIT PLANS. Except as set forth in the Disclosure Letter, the Company has not established, maintained, contributed or been required to contribute to any Employee Benefit Plans as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Company has not proposed any Employee Benefit Plans which the Company will establish, maintain, or to which the Company will contribute or be required to contribute, and the Company has not proposed any changes to any Employee Benefit Plans now in effect (all of the preceding referred to collectively hereinafter as the "Company's Employee Benefit Plans"). True and correct copies and descriptions, to the extent that they exist, of all of the Company's Employee Benefit Plans have been previously provided to the Investors. Each of the Company's Employee Benefit Plans, which is intended to be qualified under Section 401(a) of the Code is so qualified. Favorable letters of determination of such tax-qualified status from the IRS have been previously provided to the Investors. With respect to the Company's Employee Benefit Plans, the Company will have made, on or prior to the Closing, all payments required to be made by it on or prior to the Closing and will have accrued (in accordance with generally accepted accounting principles consistently applied and the requirements of ERISA) as of the Closing all payments due but not yet payable as of the Closing. The Company has previously provided to the Investors a true and correct copy of the most current Form 5500 and any other form or filing required to be submitted to any governmental agency with regard to any of -9- the Company's Employee Benefit Plans. All of the Company's Employee Benefit Plans are, and have been, operated in full compliance with their provisions and with all applicable Laws including, without limitation, ERISA and the Code and the regulations and rulings thereunder. The Company and all fiduciaries of the Company's Employee Benefit Plans have complied with the provisions of the Company's Employee Benefit Plans and with all applicable Laws including, without limitation, ERISA and the Code and the regulations and rulings thereunder. There has been no termination or partial termination (including any termination or partial termination attributable to this sale) of any of the Company's Employee Benefit Plans. The Company has never established, maintained or had the obligation to contribute to a defined benefit plan (as defined in the Code or ERISA), an Employee Benefit Plan that is subject to the minimum funding standards of the Code or ERISA, or a multiemployer (as defined in the Code or ERISA). Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute or otherwise) becoming due from the Company under any of the Company's Employee Benefit Plans, (ii) increase any benefits otherwise payable under any of the Company's Employee Benefit Plans, or (iii) result in the acceleration of the time of payment or vesting of any such benefits to any extent. None of the Company's Employee Benefit Plans provides benefits after retirement or termination of employment, except to the extent required under applicable law. There are no pending actions, claims or lawsuits which have been asserted or instituted against any of the Company's Employee Benefit Plans, the assets of any of the trusts under such plans, the plan sponsor, the plan administrator or against any fiduciary of any of the Company's Employee Benefit Plans (other than routine benefit claims) nor does the Company have knowledge of facts which could form the basis for any such action, claim or lawsuit. There are no investigations or audits of any of the Company's Employee Benefit Plans, any trusts under such plans, the plan sponsor, the plan administrator or any fiduciary of any of the Company's Employee Benefit Plans which have been threatened or instituted nor does the Company have knowledge of facts which could form the basis for any such investigation or audit. No event has occurred or will occur which will result in liability to the Company in connection with any Employee Benefit Plan established, maintained, or contributed to (currently or previously) by the Company or by any other entity which, together with the Company, constitute elements of either (i) a controlled group of corporations (within the meaning of Section 414(b) of the Code), (ii) a group of trades or businesses under common control (within the meaning of Sections 414(c) of the Code or 4001 of ERISA), (iii) an affiliated service group (within the meaning of Section 414(m) of the Code), or (iv) another arrangement covered by Section 414(o) of the Code. For purposes of this Agreement, "Employee Benefit Plan" means (i) any employee benefit plan, as defined in Section 3(3) of ERISA, and (ii) any other plan, trust agreement or arrangement for any bonus, severance, hospitalization, vacation, incentive or deferred compensation, pension or profit-sharing, retirement, payroll savings, stock option, equity compensation, group insurance, death benefit, fringe benefit, welfare or any other employee benefit plan or fringe benefit arrangement of any nature whatsoever, including those benefiting retirees or former employees. 2.23 TAX MATTERS. (a) The Company has filed all Tax Returns (as defined below) which it was required to file under applicable laws and regulations; all such Tax Returns are complete and correct in all respects and have been prepared in compliance with all applicable laws and -10- regulations; the Company has paid all Taxes (as defined below) due and owing by it with respect to any period ending on or before the Closing (whether or not such Taxes are required to be shown on a Tax Return) and have withheld and paid over to the appropriate taxing authority all Taxes which it is required to withhold from amounts paid or owing to any employee, stockholder, creditor or other third party with respect to any period ending on or before the Closing; the Company has not waived any statute of limitations with respect to any Taxes or agreed to any extension of time with respect to any Tax Return; the accrual for Taxes on the Latest Balance Sheet would be adequate to pay all Tax liabilities of the Company if its current tax year were treated as ending on the date of the Latest Balance Sheet; since the date of the Latest Balance Sheet, the Company has not incurred any liability for Taxes other than in the ordinary course of business; the assessment of any additional Taxes for periods for which Tax Returns have been filed by the Company shall not exceed the recorded liability therefor on the Latest Balance Sheet; the federal income Tax Returns of the Company have been audited or closed for all tax years through 1992; no foreign, federal, state or local tax audits or administrative or judicial proceedings are pending or being conducted with respect to the Company, no information related to Tax matters has been requested by any foreign, federal, state or local taxing authority and no written notice indicating an intent to open an audit or other review has been received by the Company from any foreign, federal, state or local taxing authority; and there are no material unresolved questions or claims concerning the Company's Tax liability; (b) The Company has not made an election under Section 341(f) of the Internal Revenue Code of 1986, as amended (the "Code"). The Company is not liable for the Taxes of another person under (i) Treas. Reg. Section 1.1502-6 (or comparable provisions of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or indemnity, or (iv) otherwise. The Company is not a party to any tax sharing agreement. The Company has disclosed on their federal income Tax Returns any position taken for which substantial authority (within the meaning of Section 6662(d)(2)(B)(i) of the Code) did not exist at the time the return was filed. The Company has not made any payments, is obligated to make payments or is a third party to an agreement that could obligate it to make any payments that would not be deductible under Section 280G of the Code; (c) As of the Closing, the Company is a qualified small business within the meaning of Section 1202(c) of the Code. During the period beginning one year prior to the Closing Date through the Closing, the Company has not made a significant redemption of its stock within the meaning of Section 1202(c)(3)(B) of the Code; (d) The Company has made a valid election under Section 1362(a) of the Code to be treated as an "S corporation" within the meaning of Section 1361 of the Code, which election has been effective for all tax periods from the date of the Company's formation to the date of the issuance of the Series A Preferred Stock; (e) The formation of Bluestone Consulting, Inc., a Delaware corporation ("BCI") by the Company and the distribution of its stock to the stockholders (the "Spin-off") did not and will not result in any Tax to the Company, and for purposes of subsection 2.23(a) above, such formation and distribution shall not be considered a transaction occurring in the ordinary course of business; and -11- (f) For purposes of this Agreement, the term "Tax" or "Taxes" means federal, state, county, local, foreign or other income, gross receipts, ad valorem, franchise, profits, sales or use, transfer, registration, excise, utility, environmental, communications, real or personal property, capital stock, license, payroll, wage or other withholding, employment, social security, severance, stamp, occupation, alternative or add-on minimum, estimated and other taxes of any kind whatsoever (including, without limitation, deficiencies, penalties, additions to tax, and interest attributable thereto) whether disputed or not. The term "Tax Return" means any return, information report or filing with respect to Taxes, including any schedules attached thereto and including any amendment thereof. 2.24 INSURANCE. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed, and key man insurance covering Mel Baiada, Bob Bickel, Mark Nigro, John Capobianco and Kevin Kilroy as specified in the Disclosure Letter. 2.25 BOOKS AND RECORDS. The minute books and stock record books of the Company provided to the Investors contain (i) minutes of all meetings of the stockholders, board of directors and any committee of the board of directors, (ii) written statements of all actions taken by the stockholders, board of directors and any committee of the board of directors without a meeting, and (iii) records of the issuance, transfer and cancellation of all shares of capital stock and other securities, in each case since the time of incorporation. Such minute books and stock record books reflect all transactions referred to there in accurately and completely. 2.26 USE OF PROCEEDS. The Company will use the proceeds of the sale of the Series B Preferred Stock for the purpose of sales and marketing expenditures and other operating expenses. 2.27 LABOR MATTERS. The Company is not a party to any collective bargaining agreement covering employees of the Company's business, nor does any labor union or collective bargaining agent represent any of the employees of the Company's business. Except as set forth in the Disclosure Letter, there is no labor strike, slow-down or stoppage pending or, to the Company's knowledge, threatened by the employees of the Company's business. 2.28 "YEAR 2000". The Company's computer system and software (including all software and applications developed for or sold to any customer or client) are able to accurately process date data, including but not limited to, calculating, comparing and sequencing from, into and between the twentieth century (through year 1999), the year 2000 and the twenty-first century, including leap year calculations. To the best knowledge of the Company, it is not aware of any inability on the part of any service provider to timely remedy such service provider's own deficiencies in respect of the year 2000 problem. 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor hereby severally represents and warrants that: -12- 3.1 AUTHORIZATION. Such Investor has full power and authority to enter into the Transaction Agreements, and each such agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with such Investor in reliance upon such Investor's representation to the Company, which by such Investor's execution of this Agreement such Investor hereby confirms, that the Shares to be received by such Investor and the Conversion Shares (collectively, the "Securities") will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof except in accordance with the Act, and that such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, such Investor further represents that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. 3.3 DISCLOSURE OF INFORMATION. Such Investor believes it has received all the information it considers necessary or appropriate for deciding whether to purchase the Shares. Such Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and the business, properties, prospects and financial condition of the Company. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Investors to rely thereon. 3.4 INVESTMENT EXPERIENCE. Such Investor is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Shares. Investor also represents it has not been organized for the purpose of acquiring the Shares. 3.5 ACCREDITED INVESTOR. Such Investor is an "accredited investor" within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. 3.6 RESTRICTED SECURITIES. Such Investor understands that the Shares and Conversion Shares are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and therefore may not be sold, transferred or otherwise disposed of without registration under the Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Shares or the Conversion Shares or an available exemption from registration under the Act, the Shares or the Conversion Shares must be held indefinitely. In this connection, such -13- Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 3.7 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, such Investor further agrees not to make any disposition of all or any portion of the Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 and the Investors' Rights Agreement provided and to the extent this Section and such agreement are then applicable, and: (a) There is then in effect a Registration Statement under the Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or (b)(i) Such Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, such Investor shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (c) Notwithstanding the provisions of paragraphs (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for a transfer by an Investor that is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner or the transfer by gift, will or intestate succession of any partner to his or her spouse or to the siblings, lineal descendants or ancestors of such partner or his or her spouse, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if he or she were an original Investor hereunder. 3.8 LEGENDS. It is understood that the certificates evidencing the Securities may bear one or all of the following legends: "These securities have not been registered under the Securities Act of 1933, as amended, or any state securities laws. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act and such state securities laws or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." 4. CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING. The obligations of each Investor under subsection 1.1(b) of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective against any Investor who does not consent in writing thereto: -14- 4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 4.2 PERFORMANCE. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 4.3 COMPLIANCE CERTIFICATE. The President of the Company shall deliver to each Investor at the Closing a certificate stating that the conditions specified in Sections 4.1 and 4.2 have been fulfilled and stating that there shall have been no adverse change in the business, affairs, prospects, operations, properties, assets or condition of the Company since the date of the Financial Statements. 4.4 QUALIFICATIONS. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state (except for certain post-Closing Blue Sky filings required under applicable state securities laws) that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall be duly obtained and effective as of the Closing. 4.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Investors' special counsel, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 4.6 OPINION OF COMPANY COUNSEL. Each Investor shall have received from counsel for the Company, an opinion, dated as of the Closing, in the form and content satisfactory to the Investors and attached hereto as EXHIBIT B. 4.7 RESTATED INVESTORS' RIGHTS AGREEMENT. The Company and each Investor shall have entered into an investors' rights agreement in the form attached hereto as EXHIBIT C (the "Restated Investors' Rights Agreement"). 4.8 RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT AND SERIES B PREFERRED STOCK. The Company and certain key members of the Company's management and those individuals who hold more than two percent (2.0%) of the outstanding Common Stock of the Company as of the Closing (on a fully as-converted basis, as if all shares of Series A Preferred Stock and Series B Preferred Stock and all convertible securities had been fully converted into shares of Common Stock) shall have entered into a restated right of first refusal and co-sale agreement in the form satisfactory to the Investors and attached hereto as EXHIBIT D (the "Restated Right of First Refusal and Co-Sale Agreement"). 4.9 RESTATED VOTING AGREEMENT. The Company and each of Baiada and Mark Baiada, shall have entered into a restated voting agreement in the form attached hereto as EXHIBIT E (the "Restated Voting Agreement"). -15- 4.10 DUE DILIGENCE. All matters investigated by the Investors in the course of their due diligence shall be satisfactory to each of the Investors, special counsels for Investors and the respective accountants for the Investors. 4.11 RESTATED CERTIFICATE OF INCORPORATION. The Restated Certificate in the form satisfactory to the Investors and attached hereto as EXHIBIT A shall ave been adopted by the Company and filed with the Secretary of State of Delaware. 4.12 RELATED AGREEMENTS. Each Investor shall have received from the Company, the following agreements in form and content satisfactory to each of the Investors: (i) BANK LENDING AGREEMENTS. Any and all lending agreements by and between the Company and its primary lender for working capital, capital equipment leases and software leases; (ii) SHAREHOLDER LENDING AGREEMENTS. Any and all lending agreements by and between the Company and the shareholders of BCI; and (iii) SERVICES AGREEMENT. Any and all agreements by and between the Company and BCI regarding the provision of consulting services by BCI to the Company. 4.13 WAIVER OF DEFAULT. The Company shall have obtained a written waiver, in form and content satisfactory to each of the Investors, from Silicon Valley Bank of any defaults under any loan agreement between the Company and Silicon Valley Bank. 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to each Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by that Investor: 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Investors contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2 PAYMENT OF PURCHASE PRICE. The Investors shall have delivered the purchase price specified in Section 1.1 and the notes specified in Section 1.2 shall have been delivered and canceled. 5.3 QUALIFICATIONS. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state (except for certain post-Closing Blue Sky filings required under applicable state securities laws) that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall be duly obtained and effective as of the Closing. 5.4 RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT. The Investors shall have entered into the Restated Right of First Refusal and Co-Sale Agreement dated the date hereof. -16- 5.5 RESTATED VOTING AGREEMENT. The Investors shall have entered into the Restated Voting Agreement dated the date hereof. 6. INDEMNIFICATION. (a) In addition to all rights and remedies available to the Investors at law or in equity, the Company shall indemnify, defend and hold harmless each of the Investors and any parent, subsidiary, associate, affiliate, partner, shareholder, director, officer, shareholder or agent of each such Investor, and each subsequent holder of Series B Preferred Stock and their respective affiliates, stockholders, officers, directors, employees, agents, representatives, successors and permitted assigns (all of the foregoing are collectively referred to as the "Indemnified Parties") from and against and pay on behalf of or reimburse such party as and when incurred all losses (including, without limitation, diminutions in value), liabilities, demands, claims, actions or causes of action, costs, damages, judgments, debts, settlements, assessments, deficiencies, taxes, penalties, fines or expenses, whether or not arising out of any claims by or on behalf of any third party, including interest, penalties, reasonable attorneys' fees and expenses and all reasonable amounts paid in investigation, defense or settlement of any of the foregoing (collectively, "Losses") which any such party may suffer, sustain or become subject to, as a result of, in connection with, or relating to or by virtue of: (i) any material misrepresentations or material breach of warranty on the part of the Company under Section 2; (ii) without duplication of subsection 6(a)(i), any material misrepresentation in or material omission from any of the representations or warranties contained in any certificate, document or instrument or the Disclosure Letter delivered to the Investors by or on behalf of the Company in connection herewith; (iii) any material nonfulfillment or breach of any covenant or agreement on the part of the Company under this Agreement or under any certificate, document or instrument delivered in connection therewith; or (iv) any action, demand, proceeding, investigation or claim by any third party (including, without limitation, governmental agencies) against or affecting the Company and/or its affiliates or subsidiaries which, if successful, would give rise to or evidence the existence of or relate to a material breach of (A) any of the representations or warranties at the time made or (B) covenants of the Company. (b) Notwithstanding the foregoing, and subject to the following sentence, upon judicial determination, which is final and no longer appealable, that the act or omission giving rise to the indemnification hereinabove provided resulted primarily out of or was based primarily upon the Indemnified Party's gross negligence, fraud or willful misconduct (unless such action was based upon the Indemnified Party's reliance in good faith upon any of the representations, warranties, covenants or promises made by the Company herein), the Company shall not be responsible for any Losses sought to be indemnified in connection therewith, and the Company shall be entitled to recover from the Indemnified Party all amounts previously paid in -17- full or partial satisfaction of such indemnity, together with all costs and expenses of the Company reasonably incurred in effecting such recovery, if any. (c) All indemnification rights hereunder shall survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereunder indefinitely, regardless of any investigation, inquiry or examination made for or on behalf of, or any knowledge of any of the Investors and/or any of the other Indemnified Parties or the acceptance by either Investor of any certificate or opinion. (d) If for any reason the indemnity provided for in this Section 6 is unavailable to any Indemnified Party or is insufficient to hold each such Indemnified Party harmless from all such Losses arising with respect to the transactions contemplated hereunder, then the Company and the Indemnified Party shall each contribute to the amount paid or payable by such Loss in such proportion as is appropriate to reflect not only the relative benefits received by the Company on the one hand, and such Indemnified Party on the other, but also the relative fault of the Company on the one hand, and the Indemnified Party on the other, as well as any relevant equitable considerations. In addition, the Company agrees to reimburse any Indemnified Party upon demand for all reasonable expenses (including legal counsel fees) incurred by such Indemnified Party or any such other person in connection with investigating, preparing or defending any such action or claim. The indemnity, contribution and expense reimbursement obligations that the Company has under this Section 6 shall be in addition to any liability that the Company may otherwise have. The Company further agrees that the indemnification and reimbursement commitments set forth in this Agreement shall apply whether or not the Indemnified Party is a formal party to any such lawsuits, claims or other proceedings. (e) Any indemnification of either Investor or any other Indemnified Party by the Company pursuant to this Section 6 shall be effected by wire transfer of immediately available funds from the Company to an account designated by such Investor or such other Indemnified Party within 15 days after the determination thereof. 7. MISCELLANEOUS. 7.1 SURVIVAL OF WARRANTIES. The warranties, representations and covenants of the Company and Investors contained in or made pursuant to this Agreement shall survive the execution, delivery and performance of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investors or the Company. 7.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any Securities). Nothing in this Agreement express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 7.3 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Delaware without giving effect to conflict of law principles. -18- EACH OF THE PARTIES HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF THIS AGREEMENT OR ANY OF THE NEW TRANSACTION AGREEMENTS. 7.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, and it shall not be necessary in making proof of this Agreement to produce or account for more than one counterpart hereof. 7.5 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7.6 NOTICES. Unless otherwise provided, all notices, consents or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given (i) when delivered personally, (ii) three business days after being mailed by first class mail, postage prepaid, or (iii) one business day after being sent by a reputable overnight delivery service, postage or delivery charges prepaid, to the parties at their respective addresses stated on the signature page of this Agreement. Notices may also be given by prepaid telegram or facsimile and shall be effective on the date transmitted if confirmed within 24 hours thereafter by a signed original sent in the manner provided in the preceding sentence. Any party may change its address for notice and the address to which copies must be sent by giving notice of the new addresses to the other parties in accordance with this Section 7.6, except that any such change of address notice shall not be effective unless and until received. 7.7 FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Each Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which such Investor or any of its officers, partners, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Investor from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 7.8 EXPENSES. Subject to the provisions of Section 6, whether or not the Closing is effected, the Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. If the Closing is effected, the Company shall, at the Closing, reimburse the reasonable fees and out-of-pocket expenses of special counsel for General Electric Capital Corporation not to exceed $35,000 and of special counsel for Patricof Ventures and Adams Capital not to exceed $6,000. If any action at law or in equity is necessary to enforce or interpret the terms of the New Transaction Agreements, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 7.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a -19- particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of 75% of the Common Stock issued or issuable upon conversion of the Shares. Any amendment or waiver effected in accordance with this Section 7.9 shall be binding upon each holder of any such securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. 7.10 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 7.11 AGGREGATION OF STOCK. All Shares held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 7.12 ENTIRE AGREEMENT. This Agreement and the other New Transaction Agreements referred to herein constitute the entire agreement with respect to the subject matter hereof among the parties, and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. IN WITNESS WHEREOF, the parties have executed this Stock Purchase Agreement as of the date first above written. BLUESTONE SOFTWARE, INC. By:/s/ Mel Baiada ------------------------------ Name: Mel Baiada Title: President Address: 1000 Briggs Road Mt. Laurel, NJ 08054 Telephone No.: 609-727-4600 Facsimile No.: 609-778-8125 -20- INVESTORS: GENERAL ELECTRIC CAPITAL CORPORATION By:/s/ Anton Simunovic -------------------------------- Name: Anton Simunovic Title: Vice President Address: 260 Long Ridge Road Stamford, CT 06927 Telephone No.: (203) 961-2887 Facsimile No.: (203) 357-4565 THE P/A FUND, L.P. By: APA PENNSYLVANIA PARTNERS II, L.P., its General Partner By:/s/ William C. Hulley -------------------------------- Name: William C. Hulley Title: General Partner Address: 518 Broad Street Sewickley, PA 15143 Telephone No.: 412-749-9454 Facsimile No.: 412-749-9459 PATRICOF PRIVATE INVESTMENT CLUB, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By:/s/ Gregory M. Case -------------------------------- Name: Gregory M. Case Title: Vice President Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 -21- APA EXCELSIOR IV, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By:/s/ Gregory M. Case -------------------------------- Name: Gregory M. Case Title: Vice President Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 COUTTS & CO. (CAYMAN) LTD., CUST. FOR APA EXCELSIOR IV/OFFSHORE, L.P. By: PATRICOF & CO. VENTURES, INC., its Investment Advisor By:/s/ Gregory M. Case -------------------------------- Name: Gregory M. Case Title: Managing Director Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 -22- /s/ Eugene Levy ------------------------------------- EUGENE LEVY Address: 90 Riverside Drive, Apt. 5E New York, New York 10024 Telephone No.: 212-753-6300 Facsimile No.: 212-319-6155 -23- EX-10.31 31 EXHIBIT 10.31 Exhibit 10.31 BLUESTONE SOFTWARE, INC. CONVERTIBLE SUBORDINATED SECURED NOTE AND WARRANT PURCHASE AGREEMENT JANUARY 21, 1999 CONVERTIBLE SUBORDINATED SECURED NOTE AND WARRANT PURCHASE AGREEMENT THIS AGREEMENT is made as of the 21st day of January, 1999, by and between Bluestone Software, Inc., a Delaware corporation (the "Company"), and the investors listed on SCHEDULE A hereto, each of which is herein referred to as an "Investor." INTENDING TO BE LEGALLY BOUND, and in consideration of the mutual agreements stated below, the parties agree as follows: 1. PURCHASE AND SALE OF CONVERTIBLE SUBORDINATED SECURED NOTES AND WARRANTS. 1.1 SALE AND ISSUANCE OF CONVERTIBLE SUBORDINATED NOTES AND WARRANTS. Subject to the terms and conditions of this Agreement, each Investor agrees, severally, to purchase at a Closing or Closings (as hereinafter defined), and the Company agrees to sell and issue to such Investor at such Closing(s): (1) convertible subordinated secured notes of the Company in the form attached hereto as EXHIBIT A (individually, a "Note" and collectively, the "Notes") in an aggregate principal amount up to the amount set forth opposite such Investor's name on SCHEDULE A; and (2) related warrants in the form attached hereto as EXHIBIT B (individually, a "Warrant" and collectively, the "Warrants") to purchase up to that number of shares of the Company's Common Stock, par value $.001 per share ("Common Stock"), set forth opposite such Investor's name on SCHEDULE A. The purchase price for each Note purchased and sold hereunder shall be 99.9% of the principal amount thereof, and the purchase price for each related Warrant purchased and sold hereunder shall be .1% of the principal amount of such Note. 1.2 PURCHASE AND SALE PROCEDURES. At any time and from time to time after the date hereof and prior to May 30, 1999, the Company may request (a "Company Request") that the Investors purchase from the Company all or a portion of the total aggregate principal amount of Notes (the "Requested Investment Amount") and related Warrants that the Investors have agreed to purchase pursuant to Section 1.1. In order to be effective, any such Company Request shall be in writing, signed by the President and Chief Financial Officer of the Company and delivered to the Investors c/o each of Anton Simunovic, Vice President, General Electric Capital Corporation, 260 Long Ridge Road, Stamford, CT 06927 and Gregory M. Case, Vice President, Patricof & Co. Ventures, Inc., 455 South Gulph Road, King of Prussia, PA 19406 (or such other representative of the Investors as shall be selected from time to time by the written consent of all of the Investors and as to which the Investors shall have notified the Company). Subject to the terms and conditions of this Agreement, upon receipt of an effective Company Request, each Investor, severally, shall purchase, and the Company shall sell and issue to such Investor, (i) a Note in the principal amount equal to the product of (A) the Requested Investment Amount, multiplied by (B) a fraction, the numerator of which is the aggregate principal amount of Notes set forth opposite such Investors' name on SCHEDULE A and the denominator of which is the total of the aggregate principal amount of Notes set forth opposite all of the Investor's names on SCHEDULE A (an "Investor's Allocable Note Amount"), and (ii) a Warrant to purchase a number of shares of Common Stock equal to the quotient of (A) the product of the principal amount of the Note being purchased and sold pursuant to clause (i), multiplied by .20, divided by (B) .62 (an "Investor's Allocable Warrants"). 1.3 CLOSINGS. Each purchase and sale of the Notes and related Warrants contemplated hereunder shall take place at the offices of Blank Rome Comisky & McCauley LLP, One Logan Square, Philadelphia, Pennsylvania at 10:00 a.m. on the third business day following the Investor's receipt of an effective Company Request, or at such other time and place as the Company and the Investors mutually agree upon orally or in writing (each time and place shall be designated as a "Closing); provided, however, that if acceptable to the Company and the Investors, a Closing may be effected by facsimile transmission of executed copies of the documents delivered at the Closing and payment of the purchase price specified in Section 1.1 and by sending original copies of the documents delivered at the Closing by reputable overnight delivery service, postage or delivery charges prepaid, for delivery to the parties at their addresses stated on the signature page of this Agreement by the third business day following the Closing. At each Closing, the Company shall deliver to or for the benefit of each Investor: (i) a Note, substantially in the form of EXHIBIT A, in the principal amount equal to such Investor's Allocable Note Amount; and (ii) certificates representing Warrants to purchase that number of shares of the Company's Common Stock equal to the Investor's Allocable Warrants, against payment of the purchase price therefor by check or wire transfer of immediately available funds. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Knowing that each Investor is relying thereon, the Company hereby represents, warrants to, and agrees with, each Investor that, except as set forth on a Disclosure Letter attached hereto as Schedule B (the "Disclosure Letter") furnished to each Investor and special counsels for the Investors, specifically identifying the relevant subparagraph hereof, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties. 2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the Company will consist immediately prior to the Closing, of: (i) PREFERRED STOCK. (a) 5,526,316 shares of Series A Convertible Preferred Stock, $.001 par value per share ("Series A Preferred Stock"), all of which are outstanding and (b) 8,782,695 shares of Series B Preferred Stock ("Series B Preferred Stock"), all of which are outstanding. The rights, privileges and preferences of the Series A Preferred Stock and Series B Preferred Stock are as stated in the Company's Second Amended and Restated Certificate of Incorporation (the "Restated Certificate"). The Series A Preferred Stock and Series B Preferred Stock are collectively herein referred to as "Preferred Stock". (ii) COMMON STOCK. 38,135,327 shares of common stock, $.001 par value per share ("Common Stock"), of which (a) 18,382,695 shares have been reserved for issuance upon conversion of the shares of Series B Preferred Stock and 5,526,316 shares have been reserved for issuance upon conversion of the shares of Series A Preferred Stock (together, the "Conversion Shares"), (b) 700,000 shares have been reserved for issuance upon conversion of the convertible term note held by Mark Baiada in the principal amount of $500,000 (the "Mark Baiada Conversion Shares"), (c) 3,561,523 shares have been reserved for issuance upon the exercise of outstanding options (the "1996 Plan Options") granted to certain employees of the Company pursuant to the Company's Amended and Restated 1996 Incentive and Non-Qualified Stock Option Plan (the "1996 Plan"), (d) 300,000 shares have been reserved for issuance upon the exercise of outstanding options granted to Bob Bickel (the "Bickel Options"), (e) 630,352 shares have been reserved for issuance upon the exercise of options to be granted in the future to certain employees of the Company under the 1996 Plan, (f) 26,316 shares have been reserved for issuance upon the exercise of warrants granted to Silicon Valley Bank (the "Silicon Valley Bank Warrants"), and (g) 9,008,125 shares are currently issued and outstanding. (iii) The outstanding shares of Preferred Stock and Common Stock are all duly and validly authorized and issued, fully paid and nonassessable, and were issued in accordance with the registration or qualification provisions of the Securities Act of 1933, as amended (the "Act") and any relevant state securities laws or pursuant to valid exemptions therefrom. (iv) Except for (a) the conversion privileges of the Preferred Stock, (b) the rights provided in the registration rights provisions of the Restated Investors' Rights Agreement (the "Restated Investors' Rights Agreement") dated as of April 23, 1998 by and between, among others, the Company and each of the Investors and the Company's Restated Certificate, (c) any other rights created under this Agreement, the Restated Investors' Rights Agreement, the Restated First Refusal and Co-Sale Agreement ("Restated First Refusal and Co-Sale Agreement") dated as of April 23, 1998 by and between, among others, the Company and each of the Investors and the Restated Voting Agreement ("Restated Voting Agreement") dated as of April 23, 1998 by and between, among others, the Company and each of the Investors, the Notes and the Warrants, and (d) as of the Closing (I) 700,000 shares of Common Stock reserved for issuance upon conversion of the convertible term note held by Mark Baiada in the principal amount of $500,000, (II) 300,000 shares of Common Stock reserved for issuance upon exercise of the Bickel Options, (III) 3,561,523 shares of Common Stock reserved for issuance upon the exercise of the 1996 Plan Options, and (IV) 26,316 shares reserved for issuance upon exercise of the Silicon Valley Bank Warrants, there are not outstanding any options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. The Company has reserved an additional 630,352 shares of its Common Stock for purchase upon exercise of options to be granted in the future to certain employees under the 1996 Plan. Except for the Series A and B Preferred Stock, the Company is not a party or subject to any agreement or understanding, and, to the best of the Company's knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents by a director of the Company or the voting or giving of written consents by a director or stockholder with respect to any security. 2.3 SUBSIDIARIES. The Company does not presently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. The Company is not a participant in any joint venture, partnership, or similar arrangement. 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization and execution and delivery of this Agreement, the Notes and the Warrants and the performance of all obligations of the Company hereunder and thereunder, has been taken or will be taken prior to the Closing. This Agreement, the Notes and the Warrants constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and to the extent the indemnification provisions contained in the Restated Certificate may be limited by applicable federal or state securities laws. 2.5 VALID ISSUANCE OF EQUITY SECURITIES. The Series B Preferred issuable upon conversion of the Notes purchased by the Investors hereunder and the Common Stock issuable upon conversion of such Series B Preferred Stock, will be duly and validly reserved for issuance, and upon issuance in accordance with the terms of the Notes, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and the Notes and under applicable state and federal securities laws. The Common Stock issuable upon exercise of the Warrants have been duly and validly reserved for issuance and, upon issuance will be duly and validly issued, fully paid, and nonassessable and will be free of restrictions on transfer other than restrictions on transfer under this Agreement, the Notes and the Warrants and under applicable state and federal securities laws. 2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement (except such additional steps as may be necessary to qualify the offer and sale of the Notes and Warrants under applicable state securities laws, which such steps have been taken or shall be timely taken by the Company). 2.7 OFFERING. Subject in part to the truth and accuracy of each Investor's representations set forth in Section 3 of this Agreement the offer, sale and issuance of the Notes and the Warrants as contemplated by this Agreement are exempt from the registration requirements of the Act, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.8 LITIGATION. Except as set forth in the Disclosure Schedule, there is no action, suit, proceeding or investigation pending or currently threatened against the Company that questions the validity of this Agreement, the Notes or the Warrants or the right of the Company to enter into such agreements, or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions, suits, proceedings or investigations pending or threatened (or any basis therefor known to the Company) involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. Except as set forth in the Disclosure Schedule, the Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. Except as set forth in the Disclosure Schedule, there is no action, suit, proceeding or investigation by the Company currently pending or that the Company intends to initiate. 2.9 PATENTS AND TRADEMARKS. The Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, information, proprietary rights and processes ("Intellectual Property") necessary for its business as now conducted and as proposed to be conducted without any conflict with or infringement of the rights of others. The Disclosure Letter contains a complete list of all patents and patent applications of the Company. There are no outstanding options, licenses, or agreements of any kind relating to the Company's Intellectual Property, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the Intellectual Property of any other person or entity. The Company has not received any communications alleging that the Company has violated or, by conducting its business as proposed to be conducted, would violate any of the Intellectual Property of any other person or entity. The Company is not aware that any of the Company's employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, the Notes or the Warrants nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed to be conducted, will, to the best of the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company does not believe it is or will be necessary to utilize any inventions of any of its employees (or people it currently intends to hire) made prior to their employment by the Company. 2.10 COMPLIANCE WITH OTHER INSTRUMENTS. (a) The Company is not in violation or default of any provision of its Restated Certificate or Bylaws, or of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound, or, to the best of its knowledge, of any provision of any federal or state statute, rule or regulation applicable to the Company. Except as set forth in the Disclosure Letter, the execution, delivery and performance of this Agreement, the Notes and the Warrants, and the consummation of the transactions contemplated hereby and thereby, will not result in any such violation or be in conflict with or constitute, with or without the passage of time and/or giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event that results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to the Company, its business or operations or any of its assets or properties. (b) The Company has avoided every condition, and has not performed any act, the occurrence of which would result in the Company's loss of any material right granted under any license, distribution or other agreement. 2.11 AGREEMENTS; ACTION (a) Except for agreements explicitly contemplated hereby and by the Notes and the Warrants, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof. (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it is bound that may involve (i) obligations (contingent or otherwise) of, or payments to the Company in excess of, $25,000, or (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company, or (iii) provisions restricting or affecting the development, manufacture or distribution of the Company's products or services, or (iv) indemnification by the Company with respect to infringements of proprietary rights. (c) Since the date of the Latest Balance Sheet (as defined below), the Company (i) has not declared or paid any dividends or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) except for (A) the convertible term note in the principal amount of $500,000 payable to Mark Baiada (the "Mark Baiada Term Note"), (B) the $1,750,000 working capital line of credit with Silicon Valley Bank (the "Silicon Valley Working Capital Line of Credit"), (C) the $2,000,000 equipment line of credit with Silicon Valley Bank (the "Silicon Valley Equipment Line of Credit"), (D) the promissory note dated as of April 17, 1997 in the principal amount of $500,000 payable to BCI (as defined herein) the "BCI Note"), and (E) the notes in the principal amount of $55,897 and $75,000, respectively, payable to Colonial Pacific Leasing (the "Colonial Pacific Leasing Notes"), does not currently have outstanding any indebtedness for money borrowed or any other liabilities individually in excess of $25,000 or, in the case of indebtedness and/or liabilities individually less than $25,000, in excess of $75,000 in the aggregate, (iii) has not made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) has not sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (e) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Restated Certificate or Bylaws that materially adversely affects its business as now conducted or as proposed to be conducted, its properties or its financial condition. (f) Any agreements, understandings, instruments or contracts with the parties to contracts listed in Schedule 2.11 of the Disclosure Letter which were entered into prior to the date of such contracts listed in Schedule 2.11 of the Disclosure Letter are no longer in force or effect. 2.12 RELATED-PARTY TRANSACTIONS. Except as set forth in Schedule 2.12 of the Disclosure Letter, no employee, officer, or director of the Company or member of his or her immediate family is indebted to the Company, nor is the Company, except for its obligations under the Mark Baiada Term Note and the BCI Note, indebted (or committed to make loans or extend or guarantee credit) to any of them. To the best of the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers, or directors of the Company and members of their immediate families may own stock in publicly traded companies that may compete with the Company. No member of the immediate family of any officer or director of the Company is directly or indirectly interested in any material contract with the Company. 2.13 FINANCIAL PLAN. The Financial Plan, as defined in Section 5.15 herein,will be prepared in good faith by the Company and will not contain any untrue statement of a material fact nor will it omit to state a material fact necessary to make the statements made therein not misleading, except that with respect to projections contained in the Financial Plan, the Company will represent only that such projections were prepared in good faith by the Company and that the Company reasonably believes there is a reasonable basis for such projections. 2.14 PERMITS. The Company has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company, and the Company believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted in the Financial Plan. The Company is not in default in any material respect under any of such franchises, permits, licenses, or other similar authority. 2.15 ENVIRONMENTAL AND SAFETY LAWS. To the best of the Company's knowledge, the Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to the best of its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 2.16 MANUFACTURING AND MARKETING RIGHTS The Company has not granted rights to manufacture, produce, assemble, license, market, or sell its products to any other person and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. 2.17 DISCLOSURE. The Company has fully provided each Investor with all the information that such Investor has requested for deciding whether to purchase the Notes and the Warrants. Neither this Agreement, the Notes or the Warrants nor any other written statements or certificates made or delivered in connection herewith or therewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. There is no fact within the knowledge of the Company, or any of the Company's officers which has not been disclosed herein or in writing by them to the Investors and which materially adversely affects, or in the future in their opinion may, insofar as they can now foresee, materially adversely affect the business, properties, assets or condition, financial or otherwise, of the Company. Other than as stated in the Disclosure Letter, without limiting the foregoing, the Company has no knowledge or belief that there exists, or there is, pending or planned, any patent, invention, device, application or principle or any statute, rule, law, regulation, standard or condition which would materially adversely affect the condition, financial or otherwise, or the operations of the Company. 2.18 REGISTRATION RIGHTS. Except as provided in the registration rights provisions of the Restated Investors' Rights Agreement and the Company's Restated Certificate, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 2.19 TITLE TO PROPERTY AND ASSETS. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except (i) as reflected on Schedule 2.1(f) of the Security Agreement dated as of the date hereof between the Investors and the Company, (ii) for liens for current taxes not yet delinquent, (iii) for liens imposed by law and incurred in the ordinary course of business for obligations not past due to carriers, warehousemen, laborers, materialmen and the like, (iv) for liens in respect of pledges or deposits under workers' compensation laws or similar legislation, (v) for minor defects in title, none of which, individually or in the aggregate, materially interferes with the use of such property or (vi) for such encumbrances and liens that arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 2.20 FINANCIAL STATEMENTS. The Company has delivered to each Investor consolidated audited financial statements (balance sheet, operating statement and statement of cash flows) of the Company as of and for the fiscal year ended December 31, 1997 and those of Bluestone Consulting, Inc., a New Jersey corporation (the "Predecessor Corporation") as of and for each of the fiscal years ended December 31, 1996 and 1995 (the "Audited Financial Statements"), and consolidated unaudited financial statements (balance sheet, operating statement and statement of cash flows) of the Company as of November 30, 1998 and for the eleven (11) months then ended (the "Unaudited Financial Statements" together with the Audited Financial Statements, the "Financial Statements"). The Financial Statements fairly present the financial condition and operating results of the Company and the Predecessor Corporation as of the dates, and for the periods, indicated therein, subject to normal year-end audit adjustments. The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated and with each other, except that the Unaudited Financial Statements may not contain all footnotes required by generally accepted accounting principles. Except as set forth in the Financial Statements, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to December 31, 1997, and (ii) obligations under contracts and commitments incurred in the ordinary course of business, which, individually or in the aggregate, are not material to the financial condition or operating results of the Company. Except as disclosed in the Financial Statements, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 2.21 CHANGES. Except as disclosed in the Disclosure Schedule, since December 31, 1997, the date of the latest audited balance sheet included in the Financial Statements (the "Latest Balance Sheet"), there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not been, in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted); (c) any waiver by the Company of a valuable right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that is not material to the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted); (e) any material change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject; (f) any resignation or termination of employment of any key officer of the Company; and the Company, to the best of its knowledge, does not know of the impending resignation or termination of employment of any such officer; (g) any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (h) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; or (i) to the best of the Company's knowledge, any other event or condition of any character that might materially and adversely affect the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted). 2.22 EMPLOYEE BENEFIT PLANS. Except as set forth in the Disclosure Letter, the Company has not established, maintained or contributed to any Employee Benefit Plans as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Company has not proposed any Employee Benefit Plans which the Company will establish, maintain, or to which the Company will contribute or be required to contribute, and the Company has not proposed any changes to any Employee Benefit Plans now in effect (all of the preceding referred to collectively hereinafter as the "Company's Employee Benefit Plans"). True and correct copies and descriptions, to the extent that they exist, of all of the Company's Employee Benefit Plans have been previously provided to the Investors. Each of the Company's Employee Benefit Plans, which is intended to be qualified under Section 401(a) of the Code is so qualified. Favorable letters of determination of such tax-qualified status from the IRS have been previously provided to the Investors. With respect to the Company's Employee Benefit Plans, the Company will have made, on or prior to the Closing, all payments required to be made by it on or prior to the Closing and will have accrued (in accordance with generally accepted accounting principles consistently applied and the requirements of ERISA) as of the Closing all payments due but not yet payable as of the Closing. The Company has previously provided to the Investors a true and correct copy of the most current Form 5500 and any other form or filing required to be submitted to any governmental agency with regard to any of the Company's Employee Benefit Plans. All of the Company's Employee Benefit Plans are, and have been, operated in full compliance with their provisions and with all applicable Laws including, without limitation, ERISA and the Code and the regulations and rulings thereunder. The Company and all fiduciaries of the Company's Employee Benefit Plans have complied with the provisions of the Company's Employee Benefit Plans and with all applicable Laws including, without limitation, ERISA and the Code and the regulations and rulings thereunder. There has been no termination or partial termination (including any termination or partial termination attributable to this sale) of any of the Company's Employee Benefit Plans. The Company has never established, maintained or had the obligation to contribute to a defined benefit plan (as defined in the Code or ERISA), an Employee Benefit Plan that is subject to the minimum funding standards of the Code or ERISA, or a multiemployer (as defined in the Code or ERISA). Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute or otherwise) becoming due from the Company under any of the Company's Employee Benefit Plans, (ii) increase any benefits otherwise payable under any of the Company's Employee Benefit Plans, or (iii) result in the acceleration of the time of payment or vesting of any such benefits to any extent. There are no pending actions, claims or lawsuits which have been asserted or instituted against any of the Company's Employee Benefit Plans, the assets of any of the trusts under such plans, the plan sponsor, the plan administrator or against any fiduciary of any of the Company's Employee Benefit Plans (other than routine benefit claims) nor does the Company have knowledge of facts which could form the basis for any such action, claim or lawsuit. There are no investigations or audits of any of the Company's Employee Benefit Plans, any trusts under such plans, the plan sponsor, the plan administrator or any fiduciary of any of the Company's Employee Benefit Plans which have been threatened or instituted nor does the Company have knowledge of facts which could form the basis for any such investigation or audit. No event has occurred or will occur which will result in liability to the Company in connection with any Employee Benefit Plan established, maintained, or contributed to (currently or previously) by the Company or by any other entity which, together with the Company, constitute elements of either (i) a controlled group of corporations (within the meaning of Section 414(b) of the Code), (ii) a group of trades or businesses under common control (within the meaning of Sections 414(c) of the Code or 4001 of ERISA), (iii) an affiliated service group (within the meaning of Section 414(m) of the Code) or (iv) another arrangement covered by Section 414(o) of the Code. For purposes of this Agreement, "Employee Benefit Plan" means (i) any employee benefit plan, as defined in Section 3(3) of ERISA and (ii) any other plan, trust agreement or arrangement for any bonus, severance, hospitalization, vacation, incentive or deferred compensation, pension or profit-sharing, retirement, payroll savings, stock option, equity compensation, group insurance, death benefit, fringe benefit, welfare or any other employee benefit plan or fringe benefit arrangement of any nature whatsoever, including those benefiting retirees or former employees. 2.23 TAX MATTERS. (a) Except as set forth on Schedule 2.23 of the Disclosure Letter, the Company has filed all Tax Returns (as defined below) which it was required to file under applicable laws and regulations; all such Tax Returns are complete and correct in all respects and have been prepared in compliance with all applicable laws and regulations; the Company has paid all Taxes (as defined below) due and owing by it with respect to any period ending on or before the Closing (whether or not such Taxes are required to be shown on a Tax Return) and have withheld and paid over to the appropriate taxing authority all Taxes which it is required to withhold from amounts paid or owing to any employee, stockholder, creditor or other third party with respect to any period ending on or before the Closing; the Company has not waived any statute of limitations with respect to any Taxes or agreed to any extension of time with respect to any Tax Return; the accrual for Taxes on the Latest Balance Sheet would be adequate to pay all Tax liabilities of the Company if its current tax year were treated as ending on the date of the Latest Balance Sheet; since the date of the Latest Balance Sheet, the Company has not incurred any liability for Taxes other than in the ordinary course of business; the assessment of any additional Taxes for periods for which Tax Returns have been filed by the Company shall not exceed the recorded liability therefor on the Latest Balance Sheet; the federal income Tax Returns of the Company have been audited or closed for all tax years through 1992; except as set forth on Schedule 2.23 of the Disclosure Letter no foreign, federal, state or local tax audits or administrative or judicial proceedings are pending or being conducted with respect to the Company, no information related to Tax matters has been requested by any foreign, federal, state or local taxing authority and no written notice indicating an intent to open an audit or other review has been received by the Company from any foreign, federal, state or local taxing authority; and there are no material unresolved questions or claims concerning the Company's Tax liability; (b) The Company has not made an election under Section 341(f) of the Internal Revenue Code of 1986, as amended (the "Code"). The Company is not liable for the Taxes of another person under (i) Treas. Reg. Section 1.1502-6 (or comparable provisions of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or indemnity or (iv) otherwise. The Company is not a party to any tax sharing agreement. The Company has disclosed on their federal income Tax Returns any position taken for which substantial authority (within the meaning of Section 6662(d)(2)(B)(i) of the Code) did not exist at the time the return was filed. The Company has not made any payments, is obligated to make payments or is a third party to an agreement that could obligate it to make any payments that would not be deductible under Section 280G of the Code; (c) As of the Closing, the Company is a qualified small business within the meaning of Section 1202(c) of the Code. During the period beginning one year prior to the Closing Date through the Closing, the Company has not made a significant redemption of its stock within the meaning of Section 1202(c)(3)(B) of the Code; (d) The Company has made a valid election under Section 1362(a) of the Code to be treated as an "S corporation" within the meaning of Section 1361 of the Code, which election has been effective for all tax periods from the date of the Company's formation to the issuance of the Series A Preferred Stock; (e) The formation of Bluestone Consulting, Inc., a Delaware corporation ("BCI") by the Company and the distribution of its stock to the shareholders (the "Spin-off") did not and will not result in any Tax to the Company, and for purposes of subsection 2.23(a) above, such formation and distribution shall not be considered a transaction occurring in the ordinary course of business; and (f) For purposes of this Agreement, the term "Tax" or "Taxes" means federal, state, county, local, foreign or other income, gross receipts, ad valorem, franchise, profits, sales or use, transfer, registration, excise, utility, environmental, communications, real or personal property, capital stock, license, payroll, wage or other withholding, employment, social security, severance, stamp, occupation, alternative or add-on minimum, estimated and other taxes of any kind whatsoever (including, without limitation, deficiencies, penalties, additions to tax, and interest attributable thereto) whether disputed or not. The term "Tax Return" means any return, information report or filing with respect to Taxes, including any schedules attached thereto and including any amendment thereof. 2.24 INSURANCE. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed, and key man insurance covering Mel Baiada, Bob Bickel, Mark Nigro and John Capobianco as specified in the Disclosure Letter. The Company will obtain key man insurance in the amount of $1,000,000 covering Kevin Kilroy within forty-five (45) days after the date of this Agreement. 2.25 BOOKS AND RECORDS. The minute books and stock record books of the Company provided to the Investors contain (i) minutes of all meetings of the stockholders, board of directors and any committee of the board of directors, (ii) written statements of all actions taken by the Stockholders, board of directors and any committee of the board of directors without a meeting, and (iii) records of the issuance, transfer and cancellation of all shares of capital stock and other securities, in each case since the time of incorporation. Such minute books and stock record books reflect all transactions referred to therein accurately and completely. 2.26 USE OF PROCEEDS. The net proceeds received by the Company from the sale of the Notes shall be used by the Company for general corporate and working capital purposes. 2.27 LABOR MATTERS. The Company is not a party to any collective bargaining agreement covering employees of the Company's business, nor does any labor union or collective bargaining agent represent any of the employees of the Company's business. Except as set forth in the Disclosure Letter, there is no labor strike, slow-down or stoppage pending or, to the Company's knowledge, threatened by the employees of the Company's business. 2.28 "YEAR 2000". The Company's computer system and software (including all software and applications developed for or sold to any customer or client) are able to accurately process date data, including but not limited to, calculating, comparing and sequencing from, into and between the twentieth century (through year 1999), the year 2000 and the twenty-first century, including leap year calculations. To the best knowledge of the Company, it is not aware of any inability on the part of any service provider to timely remedy such service provider's own deficiencies in respect of the year 2000 problem. 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor hereby represents and warrants that: 3.1 AUTHORIZATION. Each Investor has full power and authority to enter into the this Agreement, the Notes and the Warrants, and each such Agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in Restated Certificate may be limited by applicable federal or state securities laws. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with such Investor in reliance upon such Investor's representation to the Company, which by such Investor's execution of this Agreement such Investor hereby confirms, that the Notes and the Warrants to be received by such Investor and the Common Stock issuable upon exercise of the Warrants together with the New Equity Securities (as defined in the Notes) and Common Stock issuable upon conversion or exercise of the Notes (collectively, the "Securities") will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof except in accordance with the Act, and that such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, such Investor further represents that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. 3.3 DISCLOSURE OF INFORMATION. Such Investor believes it has received all the information it considers necessary or appropriate for deciding whether to purchase the Notes and the Warrants. Such Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Notes and the Warrants and the business, properties, prospects and financial condition of the Company. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Investors to rely thereon. 3.4 INVESTMENT EXPERIENCE. Such Investor is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Notes and the Warrants. If other than an individual, Investor also represents it has not been organized for the purpose of acquiring the Notes and the Warrants. 3.5 ACCREDITED INVESTOR. Such Investor is an "accredited investor" within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. 3.6 RESTRICTED SECURITIES. Such Investor understands that the Securities it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and therefore may not be sold, transferred or otherwise disposed of without registration under the Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Securities or an available exemption from registration under the Act, the Securities must be held indefinitely. In this connection, such Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 3.7 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, such Investor further agrees not to make any disposition of all or any portion of the Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 to the extent this Section is then applicable, and: (a) There is then in effect a Registration Statement under the Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or (b)(i) Such Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, such Investor shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company that such disposition will not require registration of such shares under the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (c) Notwithstanding the provisions of paragraphs (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for a transfer by an Investor that is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner or the transfer by gift, will or intestate succession of any partner to his or her spouse or to the siblings, lineal descendants or ancestors of such partner or his or her spouse, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if he or she were an original Investor hereunder. 3.8 LEGENDS. It is understood that the certificates evidencing the Securities may bear one or all of the following legends: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT AND SUCH STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT." 4. CONDITIONS OF THE INVESTOR'S EXECUTION OF THIS AGREEMENT. On or before the execution of this Agreement by the Investors, the Company shall have fulfilled the following conditions: 4.1 OPINION OF COMPANY COUNSEL. Each Investor shall have received from counsel for the Company, an opinion, dated as of the date hereof, in the form and content satisfactory to each of the Investors and attached hereto as Exhibit C. 4.2 SECRETARY'S CERTIFICATE. The Investors shall have received a certificate, dated the date hereof, of the Secretary of the Company to the effect (i) that attached thereto is a true and complete copy of the Certificate of Incorporation and the By-laws of the Company in each case as in effect on the date thereof, (ii) that attached thereto is a true and complete copy of all resolutions adopted by the Board of Directors of the Company authorizing the execution, delivery and performance of this Agreement, the Notes and the Warrants, (iii) the attached thereto is a good standing certificate or telegram dated within ten business days prior to the date hereof and (iv) that set forth in such certificate is a list of incumbent officers and specimen signatures. 4.3 RELATED AGREEMENTS. Each Investor shall have received from the Company, unless otherwise previously provided, the following agreements in form and content satisfactory to each of the Investors: (i) BANK LENDING AGREEMENTS. Any and all lending agreements by and between the Company and its primary lender for working capital, capital equipment leases and software leases; (ii) SHAREHOLDER LENDING AGREEMENTS. Any and all lending agreements by and between the Company and the shareholders of BCI; and (iii) SERVICES AGREEMENTS. Any and all agreements by and between the Company and BCI regarding the provision of consulting services by BCI to the Company. 4.4 SECURITY AGREEMENT. Each Investor shall have received a security agreement (the "Security Agreement") executed by the Company, in the form and content satisfactory to each of the Investors and attached hereto as EXHIBIT D. 4.5 EMPLOYMENT AGREEMENT. Each Investor shall have received copies of an employment agreement (the "Employment Agreement"), executed by the Company and Mel Baiada in the form and content satisfactory to each of the Investors and attached hereto as EXHIBIT E. 4.6 WAIVER OF DEFAULT. Each of the Investors shall have received copies of a written waiver, in form and content satisfactory to each of the Investors, from Silicon Valley Bank waiving any and all defaults by the Company under the loan agreement between the Company and Silicon Valley Bank. 4.7 1999 FINANCIAL PLAN. Each Investor shall have received from the Company, a copy of the Company's 1999 Financial Plan (the "Financial Plan") in form and content satisfactory to each of the Investors. 4.8 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated hereunder and all documents incident thereto shall be reasonably satisfactory in form and substance to Investors' special counsels, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 4.9 CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION. Each Investor shall have received a copy of an amendment to the Company's Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware, increasing the Company's authorized shares of Common Stock to 53,000,000 shares and its authorized shares of Series B Preferred Stock to 12,640,720 shares, all as set forth on EXHIBIT F . 4.10 AMENDMENT TO INVESTORS' RIGHTS AGREEMENT. Each Investor shall have received an amendment, executed by the Company, to that certain Investors' Rights Agreement dated as of April 23, 1998, between the Company and certain investors, amending the definition of "Registrable Securities" to include shares of Common Stock issued or issuable pursuant to or in connection with the Notes and Warrants, substantially in the form as EXHIBIT G. 4.11 DUE DILIGENCE. All matters investigated by the Investors in the course of their due diligence shall be satisfactory to each of the Investors, special counsels for Investors and the respective accountants for the Investors. 5. CONDITIONS OF INVESTORS' OBLIGATIONS AT CLOSING. The obligations of each Investor under subsection 1.1 of this Agreement are subject to the fulfillment on or before each Closing of each of the following conditions, the waiver of which shall not be effective against any Investor who does not consent in writing thereto: 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 2 shall be true on and as of such Closing. 5.2 PERFORMANCE. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before such Closing. 5.3 COMPLIANCE CERTIFICATE. The President of the Company shall deliver to each Investor at the Closing a certificate stating that the conditions specified in Sections 5.1 and 5.2 have been fulfilled and stating that there shall have been no adverse change in the business, affairs, prospects, operations, properties, assets or condition of the Company since the date of the Financial Statements. 5.4 QUALIFICATIONS. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state (except for certain post-Closing Federal or Blue Sky filings required under applicable securities laws) that are required in connection with the lawful issuance and sale of the Securities pursuant to this Agreement shall be duly obtained and effective as of such Closing. 5.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at such Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Investors' special counsels, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 5.6 NOTES. The Company shall have executed and delivered the Notes to be issued at such Closing. 5.7 WARRANTS. The Company shall have executed and delivered the Warrants to be issued at the Closing. 6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to each Investor under this Agreement are subject to the fulfillment on or before each Closing of each of the following conditions by that Investor: 6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Investors contained in Section 3 shall be true on and as of the Closing. 6.2 PAYMENT OF PURCHASE PRICE. The Investors shall have delivered the purchase price specified in Section 1.1. 6.3 QUALIFICATIONS. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state (except for certain post-Closing Blue Sky filings required under applicable state securities laws) that are required in connection with the lawful issuance and sale of the Securities pursuant to this Agreement shall be duly obtained and effective as of such Closing. 7. STATE SECURITIES LAWS. The Company will provide applicable notices and legends as may be required by applicable state securities laws. 8. INDEMNIFICATION. (a) In addition to all rights and remedies available to the Investors at law or in equity, the Company shall indemnify, defend and hold harmless each of the Investors and any parent, subsidiary, associate, affiliate, partner, shareholder, director, officer, shareholder or agent of each such Investor, and each subsequent holder of the Notes, Warrants or Securities and their respective affiliates, stockholders, officers, directors, employees, agents, representatives, successors and permitted assigns (all of the foregoing are collectively referred to as the "Indemnified Parties") from and against and pay on behalf of or reimburse such party as and when incurred all losses (including, without limitation, diminutions in value), liabilities, demands, claims, actions or causes of action, costs, damages, judgments, debts, settlements, assessments, deficiencies, taxes, penalties, fines or expenses, whether or not arising out of any claims by or on behalf of any third party, including interest, penalties, reasonable attorneys' fees and expenses and all reasonable amounts paid in investigation, defense or settlement of any of the foregoing (collectively, "Losses") which any such party may suffer, sustain or become subject to, as a result of, in connection with, or relating to or by virtue of: (i) any material misrepresentations or material breach of warranty on the part of the Company under Section 2; (ii) without duplication of subsection 8(a)(i), any material misrepresentation in or material omission from any of the representations or warranties contained in any certificate, document or instrument or the Disclosure Letter delivered to the Investors by or on behalf of the Company in connection herewith; (iii) any material nonfulfillment or breach of any covenant or agreement on the part of the Company under this Agreement or under any certificate, document or instrument delivered in connection therewith; or (iv) any action, demand, proceeding, investigation or claim by any third party (including, without limitation, governmental agencies) against or affecting the Company and/or its affiliates or subsidiaries which, if successful, would give rise to or evidence the existence of or relate to a material breach of (A) any of the representations or warranties at the time made or (B) covenants of the Company. In determining each Investor's right to indemnification under this Section 8 for material misrepresentations in connection with a representation that expressly includes a materiality standard or material breach of a representation, warranty, covenant or other agreement that expressly includes a standard of materiality, such materiality standard shall not be given independent effect. In determining any diminution in value in the Investor's investment under this Section 8, any diminution in value resulting from payments by the Company pursuant to clauses (i), (ii), (iii) or (iv) shall be taken into account; provided however, that the diminution in value resulting from each such payment shall only be taken into account one time. (b) Notwithstanding the foregoing, and subject to the following sentence, upon judicial determination, which is final and no longer appealable, that the act or omission giving rise to the indemnification hereinabove provided resulted primarily out of or was based primarily upon the Indemnified Party's gross negligence, fraud or willful misconduct (unless such action was based upon the Indemnified Party's reliance in good faith upon any of the representations, warranties, covenants or promises made by the Company herein), the Company shall not be responsible for any Losses sought to be indemnified in connection therewith, and the Company shall be entitled to recover from the Indemnified Party all amounts previously paid in full or partial satisfaction of such indemnity, together with all costs and expenses of the Company reasonably incurred in effecting such recovery, if any. (c) All indemnification rights hereunder shall survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereunder indefinitely, regardless of any investigation, inquiry or examination made for or on behalf of, or any knowledge of any of the Investors and/or any of the other Indemnified Parties or the acceptance by either Investor of any certificate or opinion. (d) If for any reason the indemnity provided for in this Section 8 is unavailable to any Indemnified Party or is insufficient to hold each such Indemnified Party harmless from all such Losses arising with respect to the transactions contemplated hereunder, then the Company and the Indemnified Party shall each contribute to the amount paid or payable by such Loss in such proportion as is appropriate to reflect not only the relative benefits received by the Company on the one hand, and such Indemnified Party on the other, but also the relative fault of the Company on the one hand, and the Indemnified Party on the other, as well as any relevant equitable considerations. In addition, the Company agrees to reimburse any Indemnified Party upon demand for all reasonable expenses (including legal counsel fees) incurred by such Indemnified Party or any such other person in connection with investigating, preparing or defending any such action or claim. The indemnity, contribution and expense reimbursement obligations that the Company has under this Section 7 shall be in addition to any liability that the Company may otherwise have. The Company further agrees that the indemnification and reimbursement commitments set forth in this Agreement shall apply whether or not the Indemnified Party is a formal party to any such lawsuits, claims or other proceedings. (e) Any indemnification of either Investor or any other Indemnified Party by the Company pursuant to this Section 8 shall be effected by wire transfer of immediately available funds from the Company to an account designated by such Investor or such other Indemnified Party within 15 days after the determination thereof. 9. MISCELLANEOUS 9.1 SURVIVAL OF WARRANTIES. The warranties, representations and covenants of the Company and Investors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closings and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investors or the Company. 9.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any Securities). Nothing in this Agreement express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 9.3 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Delaware without giving effect to conflict of law principles. EACH OF THE PARTIES HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRIAL BY JURY IN ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF THIS AGREEMENT, THE NOTES OR THE WARRANTS. 9.4 CONSENT TO JURISDICTION. The Company irrevocably consents to the jurisdiction of the state courts of Delaware and the United States District Court for the District of Delaware in any and all actions and proceedings whether arising hereunder or under any other agreement or undertaking and irrevocably agrees to service of process to the address of the company set forth herein by certified mail, return receipt requested. 9.5 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, and it shall not be necessary in making proof of this Agreement to produce or account for more than one counterpart hereof. 9.6 TITLES AND SUBTITLES The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 9.7 NOTICES. Unless otherwise provided, all notices, consents or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given (i) when delivered personally, (ii) three business days after being mailed by first class mail, postage prepaid, or (iii) one business day after being sent by a reputable overnight delivery service, postage or delivery charges prepaid, to the parties at their respective addresses stated on the signature page of this Agreement. Notices may also be given by prepaid telegram or facsimile and shall be effective on the date transmitted if confirmed within 24 hours thereafter by a signed original sent in the manner provided in the preceding sentence. Any party may change its address for notice and the address to which copies must be sent by giving notice of the new addresses to the other parties in accordance with this Section 9.7, except that any such change of address notice shall not be effective unless and until received. 9.8 FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Each Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which such Investor or any of its officers, partners, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Investor from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 9.9 EXPENSES. Subject to the provisions of Section 8, whether or not the Closing is effected, the Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement and shall reimburse the reasonable fees and out-of-pocket expenses of special counsel for General Electric Capital Corporation not to exceed $10,000 and of special counsel for Patricof Ventures and Adams Capital not to exceed $20,000. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement or the Transaction Agreements, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 9.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of 75% of the aggregate principal amount of Notes being issued hereunder. Any amendment or waiver effected in accordance with this Section 9.10 shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. 9.11 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 9.12 AGGREGATION OF SECURITIES. All Securities held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 9.13 ENTIRE AGREEMENT. This Agreement and the documents referred to herein constitute the entire agreement with respect to the subject matter hereof among the parties, and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. * * * (SIGNATURES APPEAR ON NEXT PAGE.) IN WITNESS WHEREOF, the parties have executed this Note and Warrant Purchase Agreement, intending to be legally bound hereby, as of the date first above written. BLUESTONE SOFTWARE, INC. By: /s/ P. Kevin Kilroy ----------------------------------------- Name: P. Kevin Kilroy Title: President Address: 1000 Briggs Road Mt. Laurel, NJ 08054 Telephone No.: 609-727-4600 Facsimile No.: 609-778-8125 INVESTORS: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Anton Simunovic ----------------------------------------- Name: Anton Simunovic Title: Vice President Address: 260 Long Ridge Road Stamford, CT 06927 Telephone No.: 203-961-2887 Facsimile No.: 203-357-4565 [SIGNATURE PAGE TO THE CONVERTIBLE SUBORDINATED SECURED NOTE AND WARRANT PURCHASE AGREEMENT] THE P/A FUND, L.P. By: FOSTIN CAPITAL PARTNERS II, L.P. its General Partner By: /s/ William C. Hulley ----------------------------------------- Name: William C. Hulley Title: General Partner Address: 518 Broad Street Sewickley, PA 15143 Telephone No.: 412-749-9455 Facsimile No.: 412-338-8453 PATRICOF PRIVATE INVESTMENT CLUB, L.P. By: APA EXCELSIOR IV PARTNERS, L.P. its General Partner By: PATRICOF & CO. MANAGERS, INC. its General Partner By: /s/ Gregory M. Case ----------------------------------------- Name: Gregory M. Case Title: Vice President Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 [SIGNATURE PAGE TO THE CONVERTIBLE SUBORDINATED SECURED NOTE AND WARRANT PURCHASE AGREEMENT] APA EXCELSIOR IV, L.P. By: APA EXCELSIOR IV PARTNERS, L.P. its General Partner By: PATRICOF & CO. MANAGERS, INC. its General Partner By: /s/ Gregory M. Case ----------------------------------------- Name: Gregory M. Case Title: Vice President Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 COUTTS & CO. (CAYMAN) LTD., CUST. FOR APA EXCELSIOR IV/OFFSHORE, L.P. By: PATRICOF & CO. VENTURES, INC. its Investment Advisor By: /s/ Gregory M. Case ----------------------------------------- Name: Gregory M. Case Title: Managing Director Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 [SIGNATURE PAGE TO THE CONVERTIBLE SUBORDINATED SECURED NOTE AND WARRANT PURCHASE AGREEMENT] EX-10.32 32 EXHIBIT 10.32 Exhibit 10.32 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THIS WARRANT AND SUCH SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF REGISTRATION UNDER SAID ACT AND ALL OTHER APPLICABLE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. No. CS-__ Warrant to Purchase up to ________ Shares of Common Stock (subject to adjustment) Date: ___________, 1999 WARRANT TO PURCHASE COMMON STOCK OF BLUESTONE SOFTWARE, INC. (Void after __________, 2009) This certifies that, for value received ______________________________, or registered assigns ("Holder") is entitled, subject to the terms and conditions set forth below, to purchase from Bluestone Software, Inc., a Delaware corporation (the "Company"), _________ shares of common stock, (or such other number of shares of Common Stock as may be determined in accordance with Section 2 hereof), $.001 par value, of the Company (the "Common Stock") upon surrender hereof, at the principal office of the Company referred to below, with the notice of exercise form attached hereto duly executed, and simultaneous payment therefor in lawful money of the United States or otherwise as hereinafter provided, at the Exercise Price as set forth in Section 2 below. The number, character and Exercise Price of such shares of Common Stock are subject to adjustment as provided below. This Warrant is issued pursuant to the Note and Warrant Purchase Agreement (as amended, modified or otherwise supplemented from time to time, the "Purchase Agreement") dated as of January 21, 1999 by and between, among others, the Company and the investors named therein. The Holder of this Warrant is subject to certain restrictions set forth in the Purchase Agreement and shall be entitled to certain rights and privileges set forth in the Purchase Agreement. This Warrant is one of the Warrants referred to as the "Warrants" in the Purchase Agreement. 1. TERM OF WARRANT. Subject to the terms and conditions set forth herein, this Warrant shall be exercisable, in whole or in part, at any time, or from time to time during the term ("Term") commencing at 9:00 a.m., Philadelphia, Pennsylvania time, on the date hereof and ending at 5:00 p.m., Philadelphia, Pennsylvania time, on _________, 2009, and shall be void thereafter. 2. EXERCISE PRICE AND NUMBER OF SHARES. The Exercise Price (per share of Common Stock) at which this Warrant may be exercised shall be $.62. The Exercise Price and the number of shares are subject to adjustment from time to time pursuant to Section 11 hereof. 3. EXERCISE OF WARRANT. (a) MANNER OF EXERCISE. The purchase rights represented by this Warrant are exercisable by the Holder in whole or in part, at any time, or from time to time, during the term hereof as described in Section 1 above, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company), upon payment (i) in cash or by check acceptable to the Company, (ii) by cancellation by the Holder of indebtedness of the Company to the Holder, or (iii) by a combination of (i) and (ii), of the purchase price of the shares to be purchased. (b) TIME OF EXERCISE. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As promptly as practicable on or after such date and in any event within 10 days thereafter, the Company at its expense, will issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of shares issuable upon such exercise. In the event that this Warrant is exercised in part, the Company at its expense, shall execute and deliver a new Warrant of like tenor exercisable for the number of shares for which this Warrant may then be exercised. (c) NET ISSUE EXERCISE. Notwithstanding any provisions herein to the contrary, if the fair market value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Notice of Exercise and notice of such election in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: -2- Y (A-B) X = --------- A X = the number of shares of Common Stock to be issued to the Holder Y = the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation) A = the fair market value of one share of the Company's Common Stock (at the date of such calculation) B = Exercise Price (as adjusted to the date of such calculation) For purposes of the above calculation, fair market value of one share of Common Stock shall be determined as set forth in Section 11 hereof. Notwithstanding the foregoing, in the event the Warrant is exercised in connection with the Company's initial public offering of Common Stock, the fair market value per share shall be the per share offering price to the public of the Company's initial public offering. 4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction. 5. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor and amount. Any such new Warrant shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall at any time be enforceable by anyone. 6. RIGHTS OF SHAREHOLDERS. Subject to Sections 9 and 11 of this Warrant, the Holder shall not be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, or change of stock to no par value, consolidation, -3- merger, conveyance, or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Warrant shall have been exercised as provided herein. 7. TRANSFER OF WARRANT. (a) WARRANT REGISTER. The Company will maintain a register (the "Warrant Register") containing the names and addresses of the Holder or Holders. Any Holder of this Warrant or any portion thereof may change his address as shown on the Warrant Register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be delivered or given by mail to such Holder as shown on the Warrant Register and at the address shown on the Warrant Register. Until this Warrant is transferred on the Warrant Register of the Company, the Company may treat the Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. (b) WARRANT AGENT. The Company may, by written notice to the Holder, appoint an agent for the purpose of maintaining the Warrant Register referred to in Section 7(a) above, issuing the Common Stock or other securities then issuable upon the exercise of this Warrant, exchanging this Warrant, replacing this Warrant, or any or all of the foregoing. Thereafter, any such registration, issuance, exchange, or replacement, as the case may be, shall be made at the office of such agent. (c) TRANSFERABILITY AND NONNEGOTIABILITY OF WARRANT. This Warrant may not be transferred or assigned in whole or in part without compliance with all applicable federal and state securities laws by the transferor and the transferee (including the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, if such are requested by the Company). Subject to the provisions of this Warrant with respect to compliance with the Securities Act of 1933, as amended (the "Act") and subject to Section 3 of the Purchase Agreement, title to this Warrant may be transferred by endorsement (by the Holder executing the Assignment Form annexed hereto) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery. (d) EXCHANGE OF WARRANT UPON A TRANSFER. On surrender of this Warrant for exchange, properly endorsed on the Assignment Form and subject to the provisions of this Warrant with respect to compliance with the Act and with the limitations on assignments and transfers contained in this Section 7 and Section 3 of the Purchase Agreement, the Company at its expense shall issue to or on the order of the Holder a new warrant or warrants of like tenor, in the name of the Holder or as the Holder (on payment by the Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof. (e) RESTRICTIONS ON TRANSFER. The Holder of this Warrant by acceptance hereof agrees that the transfer of this Warrant and the shares of Common Stock issuable upon the exercise of all or any portion of this Warrant (the "Securities") are subject to the provisions of Section 3 of the Purchase Agreement, which include restrictions on transfer of the Securities; and this Warrant and the Securities shall be entitled to all rights and benefits accorded thereto in the -4- Purchase Agreement, and the applicable provisions of the Purchase Agreement are hereby incorporated herein by reference. 8. RESERVATION OF STOCK. The Company covenants that during the term this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant and, from time to time, will take all steps necessary to amend its Restated Certificate to provide sufficient reserves of shares of Common Stock issuable upon exercise of the Warrant. The Company further covenants that all shares that may be issued upon exercise of the rights represented by this Warrant and payment of the Exercise Price, all as set forth herein, will be free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously or otherwise specified herein). The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 9. NOTICES OF CERTAIN EVENTS. (a) In case: (i) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of this Warrant) for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, or (ii) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation, or (iii) of any voluntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Holder or Holders a notice specifying, as the case may be, (A) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (B) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such stock or securities at the time receivable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least 15 days prior to the date therein specified. -5- (b) All such notices, advices and communications shall be deemed to have been received (i) when delivered personally, (ii) three business days after being mailed by first class mail, postage prepaid, or (iii) one business day after being sent by a reputable overnight delivery service, postage or deliver charges prepaid. Notices, advices and communications may also be given by prepaid telegram or facsimile and shall be effective on the date transmitted if confirmed within 24 hours thereafter by a signed original sent in the manner provided in the preceding sentence. 10. AMENDMENTS AND WAIVERS. (a) MANNER OF AMENDMENT. Any term of this Warrant may be amended or waived upon the written consent of the Company and the Holder and further provided that the number of shares of Common Stock subject to the Warrant and the Exercise Price may not be amended, and the right to exercise this Warrant may not be waived, without the written consent of the Holder of this Warrant (it being agreed that an amendment to or waiver under any of the provisions of Section 11 of this Warrant shall not be considered an amendment of the number of shares subject to the Warrant or the Exercise Price). (b) NO CONTINUING WAIVER. No waivers of, or exceptions to, any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, further or continuing waiver of any such term, condition or provision. 11. ADJUSTMENTS. The Exercise Price and the number of shares purchasable hereunder are subject to adjustment from time to time as follows: (a) ISSUANCE OF ADDITIONAL STOCK. (i) In the event the Company shall issue Additional Stock (as such term is defined below) for a consideration per share less than the Fair Market Value (as such term is defined below) but greater than or equal to the prevailing Exercise Price, then the Exercise Price in effect immediately prior to each such issuance shall forthwith be adjusted by multiplying such Exercise Price by the quotient obtained by dividing (a) an amount equal to the sum of (1) the total number of shares of Common Stock outstanding on a fully diluted basis immediately prior to such issuance (including shares deemed to be outstanding as provided in Section 11(a)(vi)), plus (2) the number of shares of Common Stock which the aggregate consideration received by the Company for such securities so issued would purchase at Fair Market Value, by (b) an amount equal to the sum of (1) the total number of shares of Common Stock outstanding on a fully diluted basis immediately prior to such issuance (including shares deemed to be outstanding as provided in Section 11(a)(vii)), plus (2) the number of shares of Common Stock to be issued by the Company for a consideration per share less than the Fair Market Value. For purposes of this Section 11, "Fair Market Value" per share of Common Stock shall be determined as follows: -6- (A) If the security is not registered under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), the value of the security shall be determined in good faith by the Board of Directors of the Company and certified in a board resolution, taking into consideration, INTER ALIA, (i) the most recently completed (but not longer than six months preceding such date) arm's length transaction between the Company and a person other than an affiliate of the Company (ii) if no such transaction shall have occurred on such date or within such six-month period, the value of the security most recently determined as of a date within the six months preceding such date by an Independent Financial Expert or (iii) if neither clause (i) nor (ii) is applicable, the value of the security as mutually agreed by the Company and the Holder; provided, however, that if the Company and such Holder are unable to mutually agree upon such value, the Company shall select an Independent Financial Expert approved by such Holder (whose consent shall not be unreasonably withheld or delayed) who shall determine the value of such security. (B) If the security is registered under the Exchange Act, the average of the daily market prices for each business day during the period commencing 30 business days before such date and ending on the date one day prior to such date or, if the security has been registered under the Exchange Act for less than 30 consecutive business days before such date, then the average of the daily market prices (as hereinafter defined) for all of the business days before such date for which daily market prices are available. If the market price is not determinable for at least 15 business days in such period, the Fair Market Value of the security shall be determined as if the security was not registered under the Exchange Act. (C) The "MARKET PRICE" for any security on each business day means: (A) if such Security is listed or admitted to trading on any securities exchange, the closing price, regular way, on such day on the principal exchange on which such security is traded, or if no sale takes place on such day, the average of the closing bid and asked prices on such day or (B) if such security is not then listed or admitted to trading on any securities exchange, the last reported sale price on such day, or if there is no such last reported sale price on such day, the average of the closing bid and the asked prices on such day, as reported by a reputable quotation source designated by the Company. If there are no such prices on a business day, then the market price shall not be determinable for such business day. (D) "INDEPENDENT FINANCIAL EXPERT" shall mean a nationally recognized Investment banking firm selected by the Company (i) that does not (and whose directors, officers, employees and affiliates do not) have a direct or indirect financial interest in the Company, (ii) that has not been, and, at the time it is called upon to serve as an Independent Financial Expert is not (and none of whose directors, officers, employees or affiliates is) a promoter, director or officer of the Company, (iii) that has not been retained by the Company for any purpose, other than to perform an equity valuation, within the preceding twelve months, and (iv) that, in the reasonable judgment of the Board of Directors of the Company, is otherwise qualified to serve as an independent financial advisor. Any such person may receive customary compensation from and indemnification by the Company for opinions or services it provides as an Independent Financial Expert. -7- (ii) If the Company shall issue any Additional Stock without consideration or for a consideration per share less than the Exercise Price in effect immediately prior to the issuance of such Additional Stock, the Exercise Price in effect immediately prior to each such issuance shall forthwith be adjusted to a price per share equal to the product obtained by multiplying the Exercise Price in effect immediately prior to the issuance of such Additional Stock by a fraction, (i) the numerator of which is equal to the sum of (x) the number of shares of Common Stock deemed outstanding on a fully as-converted basis immediately prior to such issuance (including shares deemed to be outstanding as provided in Section 11(a)(vii)) and (y) the quotient of the aggregate consideration received by the Company upon such issuance, divided by the Exercise Price in effect immediately prior to the issuance of such Additional Stock, and (ii) the denominator of which is the total number of shares of Common Stock deemed outstanding on a fully as-converted basis (including shares deemed outstanding as provided in Section 11(a)(vii)) immediately after (and including) such issuance. (iii) No adjustment of the Exercise Price shall be made in an amount less than one cent per share, provided that any adjustments that are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. No adjustment of such Exercise Price pursuant to Section 11(a)(i) shall have the effect of increasing the Exercise Price above the Exercise Price in effect immediately prior to such adjustment. (iv) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Company for underwriting or otherwise in connection with the issuance and sale thereof. (v) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (vi) In the event Additional Stock is issued together with other shares or securities or other assets of the Company for consideration which covers both, the consideration allocable to the Additional Stock shall be the proportion of such consideration so received, computed as provided in Sections 11(a) (iv) and (v) above, as determined in good faith by the Board of Directors. (vii) In the case of the issuance after January 21, 1999 of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this Section 11(a): -8- (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 11(a)(iv), (v) and (vi)) if any, received by the Company upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. Notwithstanding anything to the contrary herein, no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Company (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections 11(a)(iv), (v) and (vi)). Notwithstanding anything to the contrary herein, no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Company upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Exercise Price, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Exercise Price, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities that remain in effect) actually issued -9- upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to Section 11(a)(vii)(1) and (2) shall be appropriately adjusted to reflect any change, termination, or expiration of the type described in either Section 11(a)(vii)(3) or (4). (viii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 11(a)(vii)) by the Company after January 21, 1999 other than: (1) Common Stock issued pursuant to the events described in Sections 11(b), (c), (d) or (e) hereof; (2) shares of Common Stock, not to exceed 4,500,000 shares, or such greater number which shall be approved by the Company's Board of Directors, (net of any repurchases of such shares or cancellations or expirations of options), issuable to consultants, employees, officers or directors of the Company pursuant to stock options or stock awards granted or to be granted, provided that the grant of such options or awards shall have been approved by the Board of Directors; (3) shares of Common Stock issuable pursuant to warrants outstanding as of January 21, 1999 or any Warrants issued or to be issued pursuant to the Purchase Agreement; (4) shares of Series A or Series B Preferred Stock issued and outstanding as of January 21, 1999 or shares of Series A or Series B Preferred Stock issued in respect of Series A or Series B Preferred Stock, respectively, as a dividend on such stock or issued under the terms of the Restated Certificate, or the Common Stock issued or issuable upon conversion thereof; or (5) shares of Common Stock issued or issuable upon conversion of the convertible term note held by Mark Baiada in the principal amount of $500,000. (B) MERGER, SALE OF ASSETS, ETC. If at any time while this Warrant, or any portion thereof, is outstanding and unexpired there shall be (i) a reorganization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), (ii) a merger or consolidation of the Company with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property whether in the form of securities, cash or otherwise, or (iii) a sale or transfer of the Company's properties and assets as, or substantially as, an entirety to any other person, this Warrant shall thereafter represent the right -10- to acquire the number of shares of stock or other securities which the Holder of this Warrant would have owned immediately after the consummation of such reorganization, merger, consolidation, sale or transfer, if the Holder of this Warrant had exercised this Warrant immediately before the effective date of the reorganization, merger, consolidation, sale or transfer. (c) RECLASSIFICATION, ETC. If the Company, at any time while this Warrant, or any portion thereof, remains outstanding and unexpired by reclassification of securities or otherwise, shall change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change and the Exercise Price therefor shall be appropriately adjusted, all subject to further adjustment as provided in this Section 11. (d) SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time while this Warrant, or any portion thereof, remains outstanding and unexpired shall split, subdivide or combine the securities as to which purchase rights under this Warrant exist, into a different number of securities of the same class, the Exercise Price for such securities shall be proportionately decreased in the case of a split or subdivision or proportionately increased in the case of a combination. (e) ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER SECURITIES. If while this Warrant, or any portion hereof, remains outstanding and unexpired the holders of the securities as to which purchase rights under this Warrant exist at the time shall have received, or, on or after the record date fixed for the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities of the Company by way of dividend, then and in each case, this Warrant shall represent the right to acquire, in addition to the number of shares of the security receivable upon exercise of this Warrant, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities of the Company that such holder would hold on the date of such exercise had it been the holder of record of the security receivable upon exercise of this Warrant on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available to it as aforesaid during such period, giving effect to all adjustments called for during such period by the provisions of this Section 11. (f) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment pursuant to this Section 11, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each Holder of this Warrant a certificate setting forth, in reasonable detail, the event requiring the adjustment or readjustment, the amount of such adjustment or readjustment, the method by which such adjustment or readjustment was calculated, the Exercise Price at the time in effect, and the number of shares and the amount, if any, of other property that at the time would be received -11- upon the exercise of the Warrant. The Company shall upon the written request, at any time, of any such Holder, furnish or cause to be furnished to such Holder a like certificate. (g) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the Exercise Price pursuant to this Section 11, this Warrant shall thereafter evidence the right to receive upon payment of the adjusted Exercise Price that number of shares of Common Stock (calculated to the nearest hundredth) obtained from the following formula: Y x A X = --- B X = the adjusted number of shares of Common Stock issuable upon exercise of the Warrant by payment of the adjusted Exercise Price. Y = the number of shares of Common Stock previously issuable upon the exercise of the Warrant by payment of the Exercise Price prior to adjustment. A = the Exercise Price prior to adjustment. B = the adjusted Exercise Price. * * * 12. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the Holder that all shares of Common Stock that may be issued upon the exercise of this Warrant will, upon issuance, be validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership thereof, and free from all taxes, liens and charges with respect to the issue thereof (other than pursuant to the Purchase Agreement and/or any other document to be delivered in connection with the transactions contemplated by the Purchase Agreement). The Company will from time to time use its best efforts to take all such action as may be required to assure that the stated or par value per share of the Common Stock is at all times no greater than the then effective Exercise Price. The Company shall at all times have authorized and reserved, free from pre-emptive rights, a sufficient number of shares of its Common Stock to provide for the exercise of this Warrant. The Company shall not take any action which would cause the number of authorized but unissued shares of Common Stock to be less than the number of such shares required to be reserved hereunder for issuance upon exercise of the Warrant. The Company shall take all reasonable actions to cause all shares of Common Stock reserved for the purpose of issuance upon the exercise of this Warrant to be issued and delivered by the Company pursuant to an available exemption from registration under applicable federal and state securities laws. -12- IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized as of the date first above written, intending to be legally bound hereby. BLUESTONE SOFTWARE, INC. By: ------------------------------------ Name: Title: -13- EX-10.33 33 EXHIBIT 10.33 Exhibit 10.33 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PREFERRED STOCK PURCHASE AGREEMENT - -------------------------------------------------------------------------------- BLUESTONE SOFTWARE, INC. Sale of Series C Convertible Preferred Stock May 25, 1999 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
TABLE OF CONTENTS SECTION 1 . AUTHORIZATION OF CAPITAL STOCK..................................................................1 SECTION 2 . PURCHASE AND SALE OF STOCK......................................................................1 2.1 Purchasers of Series C Preferred Stock..........................................................1 2.2 Closing.........................................................................................2 SECTION 3 . REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................................................2 3.1 Organization....................................................................................2 3.2 Subsidiaries....................................................................................2 3.3 Capital Stock...................................................................................2 3.4 Authorization...................................................................................3 3.5 Valid Issuance..................................................................................3 3.6 No Consents Required; No Violation of Laws......................................................4 3.7 Qualification To Do Business....................................................................4 3.8 Absence of Defaults, Conflicts, Etc.............................................................4 3.9 Disclosure Materials, Financial Statements, Material Liabilities................................5 3.10 Indebtedness....................................................................................5 3.11 Absence of Certain Developments.................................................................5 3.12 Contracts, Agreements...........................................................................6 3.13 Compliance with Law.............................................................................6 3.14 Pending Actions.................................................................................6 3.15 Tax Matters.....................................................................................6 3.16 Employees.......................................................................................6 3.17 Employee Benefit Plans..........................................................................7 3.18 Intellectual Property Rights....................................................................7 3.19 Title to Tangible Assets; Leasehold Interests...................................................8 3.20 Insurance.......................................................................................8 3.21 Transactions with Related Parties...............................................................9 3.22 Interest in Competitors.........................................................................9 3.23 Registration Rights.............................................................................9 3.24 Disclosure Materials............................................................................9 SECTION 4 . REPRESENTATIONS AND WARRANTIES OF PURCHASERS....................................................9 4.1 Authorization...................................................................................9 4.2 Investment for Own Account......................................................................9
-i- 4.3 Offering Exemption.............................................................................10 4.4 Knowledge and Experience; Ability to Bear Economic Risks.......................................10 4.5 Limitations on Disposition.....................................................................10 4.6 Residence......................................................................................11 4.7 Representations and Warranties as of Closing Date..............................................11 4.8 Purchaser Questionnaire........................................................................11 4.9 Residence......................................................................................11 4.10 Representations and Warranties as of Closing Date..............................................12 SECTION 5 . PURCHASERS' CLOSING CONDITIONS.................................................................12 5.1 Representations and Warranties.................................................................12 5.2 Compliance with Agreement......................................................................12 5.3 Officer's Certificates.........................................................................12 5.4 Certificate; Shareholder Action................................................................12 5.5 Other Agreements...............................................................................12 5.6 Legal Opinion..................................................................................12 5.7 Injunction.....................................................................................13 5.8 Legal Investment...............................................................................13 SECTION 6 . COMPANY'S CLOSING CONDITIONS...................................................................13 6.1 Representations and Warranties.................................................................13 6.2 Compliance with Agreement......................................................................13 6.3 Other Agreements...............................................................................13 6.4 Approval of Proceedings........................................................................13 6.5 Injunction.....................................................................................13 6.6 Legal Investment...............................................................................13 SECTION 7 . COVENANTS......................................................................................14 7.1 Financial and Business Information.............................................................14 7.2 Confidentiality................................................................................15 7.3 Resale of Securities...........................................................................15 7.4 Regulation D Filing............................................................................16 7.5 Further Assurances.............................................................................16 SECTION 8 . INTERPRETATION OF THIS AGREEMENT...............................................................16 8.1 Defined Terms..................................................................................16 8.2 Directly or Indirectly.........................................................................17 8.3 Governing Law..................................................................................17 8.4 Section Headings...............................................................................17
-ii- SECTION 9 . MISCELLANEOUS..................................................................................17 9.1 Notices........................................................................................17 9.2 Expenses.......................................................................................18 9.3 Reproduction of Documents......................................................................18 9.4 Successors and Assigns.........................................................................19 9.5 Entire Agreement; Disclosure Schedules; Amendment and Waiver...................................19 9.6 Counterparts...................................................................................19 9.7 Survival.......................................................................................19
-iii- Exhibits A Form of Third Amended and Restated Certificate of Incorporation B Form of Escrow Agreement C Form of Second Restated First Refusal and Co-Sale Agreement D Form of Second Restated Investors' Rights Agreement Schedules 2.1 Name and Address of Purchasers 3.3 Capital Stock 3.10 Security Interests 3.16 Employment and Severance Agreements -iv- PREFERRED STOCK PURCHASE AGREEMENT This Agreement is made and entered into as of the 25th day of May, 1999, by and between Bluestone Software, Inc., a Delaware corporation (the "Company"), and those individuals and entities listed on SCHEDULE 2.1 attached hereto ("Purchasers"). Certain capitalized terms used in this Agreement are defined in Section 8.1. 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 Company's Board of Directors has authorized the filing of the Third Amended and Restated Certificate of Incorporation which includes, among other things, the preferences and rights of the Series C Preferred Stock (the "Certificate") in the form of EXHIBIT A attached hereto, creating a new series of preferred stock consisting of 9,191,176 shares of Series C Preferred Stock, par value $.001 per share (the "Series C Preferred Stock"). The terms, limitations and relative rights and preferences of the Series C Preferred Stock are set forth in the Certificate. SECTION 2 . PURCHASE AND SALE OF STOCK. 2.1 PURCHASERS OF SERIES C 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 $2.72 per share, up to 9,191,176 shares of Series C Preferred Stock for an aggregate purchase price of up to $25,000,000. 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 C Preferred Stock to be purchased under this Agreement, against delivery by Purchasers to the Company of (a) those certain Convertible Notes, dated April 2, 1999 and May 3, 1999, in the aggregate principal amount of $1,350,000 made by the Company in favor of certain of the holders of the Series B Preferred Stock, which notes shall be canceled and deemed paid in full, and (b) an aggregate of up to $23,650,000 payable by Purchasers. Each Purchaser will purchase the number of shares of Series C Preferred Stock set forth on SCHEDULE 2.1 beside such Purchaser's name. Each Purchaser agrees to pay the amount set forth on SCHEDULE 2.1 beside such Purchaser's name by wire transfer payable to the order of Pepper Hamilton LLP, as escrow agent for the Company, pursuant to an Escrow Agreement in the form of EXHIBIT B attached to this Agreement, for the benefit of the Company. As soon as practicable following each Closing, the Company will deliver to each Purchaser a certificate registered in the Purchaser's name evidencing the number of shares of Series C 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., Eastern Standard time, on May 25, 1999, or such other date as Purchasers and the Company may mutually agree in writing (the "Closing Date"), at the offices of Pepper Hamilton LLP, 1235 Westlakes Drive, Suite 400, Berwyn, Pennsylvania 19312 or such other location as Purchasers and the Company shall mutually select. SECTION 3 . REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to Purchasers that: 3.1 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. 3.2 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. The Company is not a participant in any joint venture or partnership. 3.3 CAPITAL STOCK. (a) On the date hereof, the capitalization of the Company is as set forth on SCHEDULE 3.3. On the Closing Date, after giving effect to the transactions contemplated hereby, the capitalization of the Company will be as set forth on SCHEDULE 3.3. (b) Pursuant to the Company's 1996 Incentive and Non-Qualified Stock Option Plan (the "Stock Option Plan"), there are 9,429,049 shares of the common stock of the Company (the "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 6,295,441 shares of Common Stock. (c) The private placement memorandum of the Company dated May 1, 1999 (the "Memorandum") 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 Second Restated First Refusal and Co-Sale Agreement, there is no agreement, restriction or encumbrance (including, without limitation, any -2- 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). 3.4 AUTHORIZATION. (a) The Board of Directors of the Company has authorized the execution, delivery and performance of this Agreement, the Second Restated First Refusal and Co-Sale Agreement, and the Second Restated Investors' Rights Agreement (collectively, with this Agreement, referred to as the "Agreements"), and each of the transactions contemplated hereby and thereby, including the execution and filing of the Certificate and the issuance and delivery of the shares of Series C Preferred Stock in accordance with this Agreement. Except for the action by the Board of Directors described in the preceding sentence and the shareholder action contemplated by Section 5.4, no other corporate action is necessary to authorize the performance by the Company of its obligations under the Agreements. (b) Each of the Agreements constitute the valid and binding obligation of the Company, enforceable against the Company in accordance with their respective 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. 3.5 VALID ISSUANCE. (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 Memorandum or as contemplated by the Agreements, its Second Amended and Restated Certificate of Incorporation, as filed in Delaware on April 23, 1998, as amended on July 2, 1998 and January 21, 1999 (the "Certificate of Incorporation") of the Company and the Certificate, 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 Certificate of Incorporation or the Agreements, no shareholder 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 C Preferred Stock as contemplated by this Agreement and in accordance with the Certificate, the shares of Series C 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. -3- (c) All corporate action on the part of the Company, its officers, directors and stockholders necessary for the sale and issuance of the Series C Preferred Stock and the performance by the Company of its obligations under the Agreements 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 9,191,176 shares of Common Stock for issuance upon conversion of the Series C Preferred Stock. 3.6 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 C Preferred Stock 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 and Federal securities law filings. 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 authorization, issuance, offer and sale of the Series C Preferred Stock under this Agreement, except for the consent of the holders of (i) a majority of the outstanding shares of Common Stock of the Company, and (ii) 75% of the Series A Convertible Preferred Stock and Series B Convertible Preferred Stock, each voting as a separate class, on the transactions contemplated by this Agreement. 3.7 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 on the business or financial position of the Company. 3.8 ABSENCE OF DEFAULTS, CONFLICTS, ETC. The execution and delivery of the Agreements, the authorization, issuance, offer and sale of the Series C 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 will 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 indenture, mortgage, deed of trust, credit agreement, note or other evidence of indebtedness, instrument or other agreement of the Company, or (B) violate the Certificate of Incorporation 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 -4- 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. 3.9 DISCLOSURE MATERIALS, FINANCIAL STATEMENTS, MATERIAL LIABILITIES. (a) The Company has previously delivered to Purchasers the Memorandum containing certain financial statements of the Company (the "Financial Statements"). Such Financial Statements, including the notes thereto, 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 in conformity with generally accepted accounting principles ("GAAP") consistently applied. The portions of the Memorandum 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. 3.10 SECURITY INTERESTS. SCHEDULE 3.10 hereto sets forth (i) any 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 counsel to the Agent 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. 3.11 ABSENCE OF CERTAIN DEVELOPMENTS. Since March 31, 1999, 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 -5- 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. 3.12 CONTRACTS, AGREEMENTS. All material contracts, agreements and understandings are in full force and effect and the Company or any other party thereto has not 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. 3.13 COMPLIANCE WITH LAW. The Company has not been notified of any 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. 3.14 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 Agreements, 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 on the business or financial position of the Company, 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. 3.15 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. 3.16 EMPLOYEES. Other than as set forth on SCHEDULE 3.16, 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 -6- troubles pending or, to the knowledge of the Company threatened, between the Company and any of its employees. The Company has complied 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. 3.17 EMPLOYEE BENEFIT PLANS. Other than as disclosed in the Memorandum, 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 on the Company. The Company has complied 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. 3.18 INTELLECTUAL PROPERTY RIGHTS. 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 proposed to be conducted, except where the failure to have such rights would not have a material adverse effect on the business or financial position of the Company. 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. 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. -7- 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. 3.19 TITLE TO TANGIBLE ASSETS; LEASEHOLD INTERESTS. 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 on the Company. 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. 3.20 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. -8- 3.21 TRANSACTIONS WITH RELATED PARTIES. Except as disclosed in the Memorandum, the Company is not a party to any agreement in excess of $20,000 with any of its officers, shareholders 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. 3.22 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. 3.23 REGISTRATION RIGHTS. Except as set forth in the Second Restated Investors' Rights Agreement, the Company is not under any obligation to register any of its securities under the Act. 3.24 DISCLOSURE MATERIALS. The confidential private placement memorandum of the Company dated May 1, 1999 does not contain an untrue statement of a material fact or omit a material fact necessary to make the statements contained therein not misleading. SECTION 4 . REPRESENTATIONS AND WARRANTIES OF PURCHASERS. Each Purchaser represents and warrants, severally and jointly, to the Company that: 4.1 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. 4.2 INVESTMENT FOR OWN ACCOUNT. Purchaser is acquiring the Series C Preferred Stock purchased under this Agreement (and will acquire the Common Stock upon conversion of the Series C Preferred Stock) for its own account for investment and not with a view towards the -9- resale, transfer or distribution thereof. Such Purchaser has no present intention of distributing such Series C Preferred Stock (or the shares of the Common Stock acquired upon conversion of the Series C Preferred Stock). No other Person has any right with respect to or interest in the Series C Preferred Stock to be purchased by Purchaser, nor has Purchaser agreed to give any Person any such interest or right in the future. 4.3 OFFERING EXEMPTION. Purchaser understands that the shares of the Series C 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 C 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. 4.4 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 the Memorandum 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. 4.5 LIMITATIONS ON DISPOSITION. Purchaser recognizes that no public market exists for the Series C Preferred Stock to be sold hereunder, 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 C 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 C 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 in the Second Restated Investors' Rights Agreement, the Company has no obligation or present intention of so registering the Series C 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 otherwise transfer any or all of the Series C Preferred Stock or the Common Stock issuable on conversion of the Series C Preferred Stock in the amounts or at the times -10- 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 C 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. 4.6 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 C Preferred Stock or the Common Stock issuable upon conversion of the Series C Preferred Stock. 4.7 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 her, his 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. 4.8 PURCHASER QUESTIONNAIRE. The information provided in the Purchaser Questionnaire submitted to the Company by such Purchaser, is true, complete and correct as of the date hereof. 4.9 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 C Preferred Stock, including obtaining any required governmental or other consents or observing any other applicable formalities. -11- 4.10 REPRESENTATIONS AND WARRANTIES AS OF CLOSING DATE. The representations and warranties contained in Sections 4.1 through 4.9 will be true and correct 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. SECTION 5 . PURCHASERS' CLOSING CONDITIONS. The obligation of Purchasers to purchase the Series C Preferred Stock to be sold pursuant to this Agreement on the Closing Date is subject to the following conditions: 5.1 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. 5.2 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. 5.3 OFFICER'S CERTIFICATES. Purchasers shall have received a certificate, dated the Closing Date, signed by an executive officer of the Company on behalf of the Company, certifying that with respect to the Company, the conditions specified in Sections 5.1 and 5.2 of this Agreement have been fulfilled. 5.4 CERTIFICATE; SHAREHOLDER 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 shareholders in connection with the transactions contemplated by this Agreement shall have been duly taken by such holders. 5.5 OTHER AGREEMENTS. The Company and the Purchasers shall have entered into the Escrow Agreement, Second Restated First Refusal and Co-Sale Agreement and the Second Restated Investors' Rights Agreement in the form of EXHIBIT B, EXHIBIT C and EXHIBIT D attached hereto. 5.6 LEGAL OPINION. Pepper Hamilton LLP, counsel to the Company, shall have delivered an opinion letter to BT Alex. Brown, Incorporated (the "Agent"). -12- 5.7 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. 5.8 LEGAL INVESTMENT. On the Closing Date, the sale and issuance of the shares of Series C 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 6 . COMPANY'S CLOSING CONDITIONS. The obligation of the Company to sell the Series C Preferred Stock to be sold pursuant to this Agreement on the Closing Date is subject to the following conditions: 6.1 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. 6.2 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. 6.3 OTHER AGREEMENTS. The Company and Purchasers shall have entered into the Escrow Agreement, Second Restated First Refusal and Co-Sale Agreement and the Second Restated Investors' Rights Agreement. 6.4 APPROVAL OF PROCEEDINGS. All proceedings to be taken in connection with the transactions contemplated by this Agreement shall be satisfactory in form and substance to the Company and its counsel, Pepper Hamilton LLP, and the Company shall have received copies of all documents or other evidence which the Company and its counsel may reasonably request in connection with such transactions. 6.5 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. 6.6 LEGAL INVESTMENT. On the Closing Date, the sale and issuance of the shares of Series C Preferred Stock and the issuance of the shares of Common Stock upon conversion -13- thereof shall be legally permitted by all laws and regulations to which Purchasers and the company are subject. SECTION 7 . COVENANTS. 7.1 FINANCIAL AND BUSINESS INFORMATION. From and after the date hereof, the Company shall deliver to Purchasers so long as Purchasers hold shares of Series C 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 90 days thereafter, copies of: (1) consolidated and consolidating balance sheets of the Company and its subsidiaries at the end of such year; and (2) consolidated statements of income, shareholders' 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 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. -14- 7.2 CONFIDENTIALITY. (a) As much of the information and other material furnished under or in connection with this Agreement (whether furnished before, on or after the date hereof, including without limitation, information furnished pursuant to Section 7.1) as constitutes or contains confidential business, financial or other information of the Company or its subsidiaries, 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 such information to persons other than their respective authorized employees, counsel, accountants, shareholders, 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 or other after giving written notice to the Company of such requirements. For purposes of this Section 7.2(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, to the extent that any of the information furnished pursuant to Section 7.1 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. 7.3 RESALE OF SECURITIES. (a) Each Purchaser covenants that it will not sell or otherwise transfer the Series C Preferred Stock (or any shares of Common Stock acquired upon the conversion of shares of Series C 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. (b) The certificates evidencing the shares of Series C Preferred Stock and the shares of Common Stock acquired upon conversion thereof shall bear a legend substantially to the following effect: -15- THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY 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. 7.4 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. 7.5 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. Each such shall use its best efforts to fulfill or obtain the fulfillment of the conditions to the Closing as promptly as practicable. SECTION 8 . INTERPRETATION OF THIS AGREEMENT 8.1 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 New Jersey. -16- "CODE" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. "EXCHANGE ACT" means the Securities Exchange Act of 1934. "PERSON" means an individual, partnership, joint-stock company, corporation, trust or unincorporated organization, and a government or agency or political subdivision thereof. 8.2 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. 8.3 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. 8.4 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 9 . MISCELLANEOUS. 9.1 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, 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: Bluestone Software, Inc. 1000 Briggs Road Mount Laurel, New Jersey 08054 Attention: Chief Financial Officer Telecopier: (609)787-9395 -17- With a copy to: William A. Scari, Jr., Esq. Pepper Hamilton LLP 1235 Westlakes Drive Suite 400 Berwyn, Pennsylvania 19312 Telecopier: (610)640-7835 9.2 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. The Company has agreed to reimburse the Agent on a quarterly basis for reasonable out-of-pocket expenses and the fees and expenses of the Agent's special counsel, Willkie Farr & Gallagher, PROVIDED, HOWEVER, that the total of all such reimbursements will not exceed $95,000. 9.3 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 C 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. 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 (whether or not 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 C 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. -18- 9.4 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. 9.5 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. 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. 9.6 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. 9.7 SURVIVAL. The representations, warranties, covenants and agreements made in this Agreement, the Shareholders' Agreement, or in any certificate or instrument delivered in connection with this Agreement or the Shareholder's 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 PAGES FOLLOW] -19- SIGNATURE PAGES PREFERRED STOCK PURCHASE AGREEMENT IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date above first written. Bluestone Software, Inc. By: /s/ P. Kevin Kilroy --------------------------- P. Kevin Kilroy President INVESTORS: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Anton Simunovic --------------------------- Name: Anton Simunovic Title: Vice President Address: 260 Long Ridge Road Stamford, CT 06927 Telephone No.:(203) 961-2887 Facsimile No.: (203) 357-4565 THE P/A FUND, L.P. By: FOSTIN CAPITAL PARTNERS II, L.P., its General Partner By: /s/ William C. Hulley --------------------------- Name: William C. Hulley Title: General Partner Address: 518 Broad Street Sewickley, PA 15143 Telephone No.: (412)749-9454 Facsimile No.: (412)749-9459 -20- SIGNATURE PAGES PREFERRED STOCK PURCHASE AGREEMENT PATRICOF PRIVATE INVESTMENT CLUB, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC. its General Partner By: /s/ Gregory M. Case --------------------------- Name: Gregory M. Case Title: Vice President Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: (610)265-0286 Facsimile No.: (610)265-4959 APA EXCELSIOR IV, L.P., By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC. its General Partner By: /s/ Gregory M. Case --------------------------- Name: Gregory M. Case Title: Vice President Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: (610)265-0286 Facsimile No.: (610)265-4959 -21- SIGNATURE PAGES PREFERRED STOCK PURCHASE AGREEMENT COUTTS & CO. (CAYMAN) LTD., CUST. FOR APA EXCELSIOR IV/OFFSHORE, LP. By: PATRICOF & CO. VENTURES, INC. its Investment Advisor By: /s/ Gregory M. Case --------------------------- Name: Gregory M. Case Title: Managing Director Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: (610)265-0286 Facsimile No.: (610)265-4959 [OMNIBUS SIGNATURE PAGES FOLLOW] -22- EX-10.34 34 EXHIBIT 10.34 Exhibit 10.34 BLUESTONE SOFTWARE, INC. SECOND RESTATED FIRST REFUSAL AND CO-SALE AGREEMENT THIS SECOND RESTATED FIRST REFUSAL AND CO-SALE AGREEMENT is made as of the 25th day of May, 1999, by and among Bluestone Software, Inc., a Delaware corporation (the "COMPANY"), the investors listed on SCHEDULE A attached hereto (the "SERIES A INVESTORS"), the investors listed on SCHEDULE B attached hereto (the "SERIES B INVESTORS"), the investors listed on SCHEDULE C hereto (the "SERIES C INVESTORS" and together with the Series A Investors, the Series B Investors and Mel Baiada, the "INVESTORS") and the individuals listed on SCHEDULE D hereto (the "INDIVIDUAL STOCKHOLDERS;" the Individual Stockholders, together with the Investors, are collectively referred to as the "STOCKHOLDERS," and individually referred to as a "STOCKHOLDER"). The Company, the Series A Investors and the Individual Stockholders are parties to the Series A Preferred Stock Purchase Agreement dated as of April 18, 1997 (the "SERIES A AGREEMENT") relating to the sale of Series A Convertible Preferred Stock of the Company (the "SERIES A PREFERRED STOCK"). The Company and Series B Investors are parties to the Series B Preferred Stock Purchase Agreement dated as of April 23, 1998 (the "SERIES B AGREEMENT") relating to the sale of Series B Convertible Preferred Stock of the Company (the "SERIES B PREFERRED STOCK"). The Company and the Series C Investors are parties to the Preferred Stock Purchase Agreement dated as of May 25, 1999 (the "SERIES C AGREEMENT" and together with the Series A Agreement and Series B Agreement, the "PURCHASE AGREEMENTS") relating to the sale of Series C Convertible Preferred Stock of the Company (the "SERIES C PREFERRED STOCK" and together with the Series A Preferred Stock and Series B Preferred Stock, the "PREFERRED STOCK"). In consideration for the purchase by the Investors of the Preferred Stock under the Purchase Agreements, the Stockholders desire to grant the Investors rights of first refusal and co-sale rights set forth herein. This Second Restated First Refusal and Co-Sale Agreement amends and restates in its entirety the Restated First Refusal and Co-Sale Agreement dated as of April 23, 1998 between the Company and the parties signatory thereto (the "PRIOR AGREEMENT"). INTENDING TO BE LEGALLY BOUND, and in consideration of the mutual agreements stated below and in the Purchase Agreements, the parties hereby agree as follows: 1. RIGHT OF FIRST REFUSAL. 1.1 GRANT. The Company and the Investors are hereby each granted a right of first refusal with respect to any proposed disposition of shares, directly or indirectly through the disposition of interests in any entity which directly or indirectly owns such shares, of the Company's Common Stock, $.001 par value per share (the "COMMON STOCK"), or Preferred Stock (collectively referred to with the Common Stock as the "STOCK") by a Stockholder (or any permitted transferee of the Stock under paragraph 3.1 hereof, hereafter collectively included in all references to "STOCKHOLDER"), in the following order of priority. The Company shall have the first right to purchase any Stock proposed to be transferred to a third party by a Stockholder. In the event the Company elects not to exercise its first refusal rights with respect to all or any portion of such proposed transfer, then the Company agrees to waive such rights with respect to such portion in favor of the Investors' first refusal and co-sale rights under this Agreement. 1.2 NOTICE OF INTENDED DISPOSITION. In the event a Stockholder desires to accept a bona fide third-party offer for the transfer of any or all of the Stock (the shares subject to such offer to be hereafter called the "STOCKHOLDER'S TARGET SHARES"), the Stockholder shall promptly deliver to the Company and each of the Investors written notice of the intended disposition ("STOCKHOLDER'S DISPOSITION NOTICE") and the basic terms and conditions thereof, including the identity of the proposed purchaser. 1.3 EXERCISE OF RIGHT BY COMPANY. (a) The Company (or its assignees) shall, for a period of thirty (30) days following receipt of the Stockholder's Disposition Notice, have the right to repurchase Stockholder's Target Shares upon substantially the same terms and conditions specified in the Stockholder's Disposition Notice, subject to the following conditions. Such right shall be exercisable by written notice (the "COMPANY'S EXERCISE NOTICE") delivered to the Stockholder and the Investors prior to the expiration of the thirty (30) day exercise period. If such right is exercised with respect to all the Stockholder's Target Shares specified in the Stockholder's Disposition Notice, then the Company (or its assignees) shall effect the repurchase of such Stockholder's Target Shares, including payment of the purchase price, not more than five (5) business days after the delivery of the Company's Exercise Notice; and at such time the Stockholder shall deliver to the Company the certificates representing the Stockholder's Target Shares to be repurchased, each certificate to be properly endorsed for transfer. If such right is exercised with respect to only a portion of the Stockholder's Target Shares specified in the Stockholder's Disposition Notice, then this right to repurchase shall be contingent upon the Investors' election to repurchase the remaining balance of the Stockholder's Target Shares. The Company shall notify the Investors of its intent to repurchase only a portion of the Stockholder's Target Shares within the thirty (30) day exercise period specified above. The Company's repurchase of such Stockholder's Target Shares shall be consummated, if at all, at the time of the Investors' exercise of their repurchase rights in accordance with paragraph 1.5 herein. In the event the Investors do not elect to repurchase the remaining Stockholder's Target Shares, the Company shall be deemed to have waived its right of first refusal. (b) Should the purchase price specified in the Stockholder's Disposition Notice be payable in property other than cash or evidences of indebtedness, the Company (or its assignees) shall have the right to pay the purchase price in the form of cash equal in amount to the value of such property. If the Stockholder and the Company (or its assignees) cannot agree on such cash value within ten (10) days after the Company's receipt of the Stockholder's Disposition Notice or otherwise disagree as to the purchase price attribution to a transfer of Stockholder Target Shares, the valuation shall be made by an appraiser of recognized standing -3- selected by the Stockholder and the Company (or its assignees) or, if they cannot agree on an appraiser within twenty (20) days after the Company's receipt of the Stockholder's Disposition Notice, each shall select an appraiser of recognized standing and the two appraisers shall designate a third appraiser of recognized standing, and the average of the two appraisals which are closest in value shall be determinative of such cash value. The cost of such appraisal(s) shall be shared equally by the Stockholder and the Company. The closing shall then be held on the later of (i) the fifth business day following the delivery of the Company's Exercise Notice, or (ii) the fifth business day after such cash valuation shall have been made. 1.4 NON-EXERCISE OF RIGHT. In the event the Company's Exercise Notice is not given by the Company to the Stockholder and the Investors within thirty (30) days following the date of the Company's receipt of the Stockholder's Disposition Notice, the Company shall be deemed to have waived its right of first refusal. 1.5 EXERCISE OF RIGHT BY AN INVESTOR. Subject to the rights of the Company, the Investors shall, for a period (the "INVESTORS' EXERCISE PERIOD") of the shorter of (i) sixty (60) days from receipt of the Stockholder's Disposition Notice or (ii) thirty (30) days from receipt of written notice of Company's election either to waive its right of first refusal or to repurchase only a portion of the Stockholder's Target Shares, whichever is shorter, have the right to purchase all, or the remaining balance after the Company's repurchase, of the Stockholder's Target Shares, upon substantially the same terms and conditions specified in the Stockholder's Disposition Notice, subject to the following conditions. Such right shall be exercisable by written notice (the "INVESTORS' EXERCISE NOTICE") delivered to the Stockholder and the Company prior to the expiration of the Investors' Exercise Period, and the Investors shall effect the purchase of such Stockholder's Target Shares, including payment of the purchase price, not more than five (5) business days after the delivery of the Investors' Exercise Notice; provided that such five (5) business day period shall be extended for a period not to exceed forty-five (45) days to permit any Investor to obtain any regulatory approvals necessary in connection with such purchase; and at the closing of such purchase the Stockholder shall deliver to the Investors the certificates representing the Stockholder's Target Shares to be purchased, each certificate to be properly endorsed for transfer. 1.6 NON-EXERCISE OF RIGHT. Subject to the Investors' co-sale rights described in Section 2 below, in the event the Company's and Investors' Exercise Notice with respect to any portion of the Stockholder's Target Shares is not given to the Stockholder within sixty (60) days following the date of the Company's and Investors' receipt of the Stockholder's Disposition Notice, the Stockholder shall have a period of thirty (30) days thereafter in which to notify the Company and Investors of his intent to sell or otherwise dispose of the Stockholder's Target Shares to the third-party transferee identified in the Stockholder's Disposition Notice upon terms and conditions (including the purchase price) no more favorable to the third-party transferee than those specified in the Stockholder's Disposition Notice. Thereafter, the Stockholder shall have an additional thirty (30) days to consummate the sale of the Stockholder's Target Shares to the identified third-party transferee. The third-party transferee shall acquire the Stockholder's Target -4- Shares free and clear of subsequent rights of first refusal under this section. In the event the Stockholder does not notify the Investors or consummate the sale or disposition of the Stockholder's Target Shares within the respective periods described above, the Company's and Investors' first refusal rights shall continue to be applicable to any subsequent disposition of the Stockholder's Target Shares by the Stockholder until such right lapses in accordance with paragraph 6.1 hereof 1.7 ALLOCATION AMONG INVESTORS. The right of first refusal granted hereunder to the Investors shall be allocated among such parties pro rata based on their respective aggregate holdings of Common Stock (giving effect to all shares of Common Stock issuable upon conversion of the Company's Preferred Stock). 1.8 PARTIAL EXERCISE OF RIGHT. In the event that the Company and/or the Investors do not exercise the right of first refusal pursuant to this Article I with respect to all Stockholder's Target Shares described in a particular Stockholder's Disposition Notice, then such right shall not apply to any Stockholder's Target Shares described in such Stockholder's Disposition Notice. 2. CO-SALE RIGHTS OF INVESTORS. 2.1 NOTICE OF OFFER. The provisions of paragraph 1.2 requiring a Stockholder to give notice of any intended transfer of the Stock are incorporated in this Article 2. 2.2 GRANT OF CO-SALE RIGHTS. Subject to Section 2.5, each Investor shall have the right, exercisable upon written notice delivered to the Stockholder prior to the expiration of the Investors' Exercise Period, to participate in the transfer of the Stockholder's Target Shares on the same terms and conditions as those set forth in the Stockholder's Disposition Notice. To the extent one or more of the Investors exercise such right of participation, the number of shares of Stockholder's Target Shares that the Stockholder may sell in the transaction shall be correspondingly reduced. The right of participation of each of the Investors shall be subject to the terms and conditions set forth in this Section 2.2 and Section 2.5. (a) The shares to be sold by any Stockholder pursuant to this Article 2 shall be shares of the same class or classes as the shares described in the Stockholder's Disposition Notice (except that if the shares to be sold are Preferred Stock, Mel Baiada shall be entitled to sell shares of Common Stock pursuant to this Article 2; and if the shares to be sold are Common Stock, the Stockholder shall be entitled to sell shares of Preferred Stock or Common Stock). (b) Subject to paragraph (a), each of the Investors may sell all or any part of a number of shares of Stock of the Company equal to the product obtained by multiplying (i) the aggregate number of shares of Stock covered by the purchase offer by (ii) a fraction the numerator of which is the number of shares of Preferred Stock of the Company (or, in the case of Mel Baiada, the number of shares of Common Stock) at the time owned by the Investor and the denominator of which is the combined number of shares of Preferred Stock of the Company at -5- the time owned by the Investors (and, in the case of Mel Baiada, the number of shares of Common Stock owned by him). (c) To the extent an Investor elects not to sell the full number of shares it is entitled to sell pursuant subparagraph (b) above, the other Investors' rights to participate in the sale shall be increased pro rata by a corresponding number of shares. (d) Each of the Investors may effect its participation in the sale by delivering to the Stockholder for transfer to the purchase offeror one or mote certificates, properly endorsed for transfer, which represent: (i) the number of shares of Stock which the Investor elects to sell pursuant to this Section 2.2; or (ii) that number of shares of Preferred Stock that is at such time convertible into the number of shares of Common Stock that (x) the party has elected to sell pursuant to this Section 2.2, if the shares of Stock covered by the Stockholder's Disposition Notice are Common Stock or (y) would be issuable upon conversion of the share of Stock of the class or classes covered by the Stockholder's Disposition Notice, if such shares are other than Common Stock. 2.3 PAYMENT OF PROCEEDS. The stock certificates which the Investors deliver to such Stockholder pursuant to Section 2.2 shall be transferred by the Stockholder to the purchase offeror in consummation of the sale of the Stock pursuant to the terms and conditions specified in the Stockholder's Disposition Notice to the Investors, and such Stockholder shall promptly thereafter remit to each Investor that portion of the sale proceeds to which the Investor is entitled by reason of its participation in such sale. 2.4 NON-EXERCISE. The exercise or non-exercise of the rights of the Investors hereunder to participate in one or more sales of Stock made by the Stockholders shall not adversely affect their rights to participate in subsequent Stock sales by the Stockholders. 2.5 SALES OF SERIES C PREFERRED STOCK NOT SUBJECT TO CO-SALE RIGHTS. Notwithstanding anything to the contrary contained herein, sales of the shares of Series C Preferred Stock shall not be subject to the rights of co-sale of the Investors set forth in this Section 2, and no Investor shall be entitled to participate as set forth in this Section 2 in any sale or disposition of Series C Preferred Stock. 3. EXEMPT TRANSFERS. 3.1 PERMITTED TRANSACTIONS. Notwithstanding the foregoing, the co-sale and the first refusal rights of the Investors shall not apply to (i) any bona fide transfer of Stock to the ancestors, descendants, siblings or spouse of a Stockholder or to trusts for the benefit of such -6- persons or (ii) any bona fide transfer of Stock between and among the Investors or to any subsidiary, parent, partner or affiliate of each such Investor; provided that the transferee shall furnish the Investors with a written agreement to be bound by and comply with all provisions of this Agreement. Such transferred Stock shall remain "Stock" hereunder, and such transferee shall be treated as a "Stockholder" and/or "Investor," as may be applicable, for the purposes of this Agreement. 3.2 COMPANY ISSUANCE OR REPURCHASE OR PUBLIC OFFERING. The provisions of this Agreement shall not apply to the sale or issuance of any Stock (i) in a transaction primarily to effectuate a reincorporation of the Company in a different state, (ii) to the public pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "SECURITIES ACT"), the gross public offering price of which is greater than or equal to 150% of then applicable conversion price of the Series C Preferred Stock and which raises gross proceeds of $20,000,000 or more in the aggregate, or (iii) to the Company. 4. PROHIBITED TRANSFERS. 4.1 GRANT. In the event a Stockholder should sell, transfer, assign, convey or dispose of any Stock of the Company, directly or indirectly, in contravention of the participation rights of the Investors, under this Agreement (each a "PROHIBITED TRANSFER"), the Investors shall have the put option provided in Section 4.2. 4.2 INVESTORS PUT OPTION. In the event of a Prohibited Transfer by a Stockholder, each Investor shall have the option to sell to such Stockholder the shares of Stock that such Investor would have been entitled to sell had such Prohibited Transfer been effected in accordance with Section 2 hereof, on the following terms and conditions: (a) The price per share at which the shares are to be sold to the Stockholder shall be equal to the price per share paid by the third party purchaser or purchasers of the Stockholders' Stock to the Stockholder. (b) The Investors shall deliver to the Stockholder, within ninety (90) days after they have received notice from the Stockholder or otherwise become aware of the Prohibited Transfer, the certificate or certificates representing shares to be sold, each certificate to be properly endorsed for transfer. (c) The Stockholder shall, upon receipt of the certificates for the repurchased shares, pay the aggregate Section 4.2 purchase price therefor, by certified check or bank draft made payable to the order of the Investor exercising such option, and shall reimburse such parties for any additional expenses, including legal fees and expenses, incurred in effecting such purchase and resale. -7- 5. LEGEND REQUIREMENTS. 5.1 LEGEND. Each certificate representing the Stock owned by the Stockholders shall be endorsed with the following legend: "THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN SECOND RESTATED FIRST REFUSAL AND CO-SALE AGREEMENT BY AND AMONG THE REGISTERED HOLDER (OR HIS PREDECESSOR IN INTEREST), THE COMPANY AND CERTAIN INVESTORS IN THE CAPITAL STOCK OF BLUESTONE SOFTWARE, INC. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY." 5.2 REMOVAL. The Section 5.1 legend shall be removed upon termination of this Agreement in accordance with the provisions of Section 6.1. 6. MISCELLANEOUS PROVISIONS. 6.1 TERMINATION. The rights of an Investor under this Agreement and the correlative obligations of each Stockholder with respect to such Investor shall terminate at such time as such Investor shall no longer be the owner of any shares of capital stock of the Company. Unless sooner terminated in accordance with the preceding sentence, this Agreement shall terminate upon the occurrence of any one of the following events: (a) the liquidation, dissolution or indefinite cessation of the business operations of the Company; (b) the execution by the Company of a general assignment for the benefit of creditors or the appointment of a receiver or trustee to take possession of the property and assets of the Company; or (c) immediately prior to the closing of a bona fide firm commitment underwritten public offering of the Company's Common Stock registered under the Securities Act of 1933 on Form S-1 (or any successor form designated by the Securities and Exchange Commission), resulting in aggregate gross proceeds to the Company of at least $20,000,000 at a gross offering price to the public which is greater than or equal to 150% of then applicable conversion price of the Series C Preferred Stock. 6.2 NOTICES. Unless otherwise provided, all notices, consents or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given (i) when delivered personally, (ii) three business days after being mailed by first class mail, postage prepaid, or (iii) one business day after being sent by a reputable overnight delivery service, postage or delivery charges prepaid, to the parties at -8- their respective addresses stated on the signature page of this Agreement. Notices may also be given by prepaid telegram or facsimile and shall be effective on the date transmitted if confirmed within 24 hours thereafter by a signed original sent in the manner provided in the preceding sentence. Any party may change its address for notice and the address to which copies must be sent by giving notice of the new addresses to the other parties in accordance with this Section 6.2, except that any such change of address notice shall not be effective unless and until received. 6.3 SEVERABILITY. In the event one or more of the provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed and interpreted in such manner as to be effective and valid under applicable law. 6.4 WAIVER OR MODIFICATION. Any amendment or modification of this Agreement shall be effective only if evidenced by a written instrument executed by the Company, 75% in interest of the Investors or their assignees. 6.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to the principles of conflicts of law of any jurisdiction. 6.6 ATTORNEYS' FEES. In the event of any dispute involving the terms hereof, the prevailing parties shall be entitled to collect legal fees and expenses from the other party to the dispute. 6.7 FURTHER ASSURANCES. Each party agrees to act in accordance herewith and not to take any action which is designed to avoid the intention hereof. 6.8 OWNERSHIP. Each Stockholder represents and warrants that he is the sole legal and beneficial owner of the shares of stock subject to this Second Restated First Refusal and Co-Sale Agreement and that no other person has any interest (other than a community property interest) in such shares. 6.9 SUCCESSORS AND ASSIGNS. This Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives. The parties hereto specifically consent to any assignment by the Company in order to effectuate a change in the state in which the Company is incorporated. 6.10 AGGREGATION OF STOCK. For the purposes of determining the availability of any rights under this Agreement, the holdings of transferees and assignees of an individual or a partnership who are spouses, ancestors, lineal descendants or siblings of such individual or partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Stock by gift, will or intestate -9- succession) shall be aggregated together with the individual or partnership, as the case may be, for the purpose of exercising any rights or taking any action under this Agreement. 6.11 ENTIRE AGREEMENT. This Agreement, the Second Restated Investors' Rights Agreement dated as of May 25, 1999 between the Company and the parties signatory thereto and the Series C Agreement constitute the entire agreement with respect to the subject matter hereof among the parties, and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. This Agreement supersedes the Prior Agreement, which shall be of no further force or effect. [SIGNATURE PAGES FOLLOW.] -10- SIGNATURE PAGE SECOND RESTATED FIRST REFUSAL AND CO-SALE AGREEMENT IN WITNESS WHEREOF, the parties have executed this Second Restated First Refusal and Co-Sale Agreement on the day and year indicated above. BLUESTONE SOFTWARE, INC. By: /s/ P. Kevin Kilroy ------------------------------------------ Name: P. Kevin Kilroy Title: President Address: 1000 Briggs Road Mt. Laurel, NJ 08054 Telephone No.: 609-727-4600 Facsimile No.: 609-787-9395 INVESTORS: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Anton Simunovic ------------------------------------------ Name: Anton Simunovic Title: Vice President Address: 260 Long Ridge Road Stamford, CT 06927 Telephone No.: (203) 961-2887 Facsimile No.: (203) 357-4565 -11- SIGNATURE PAGE SECOND RESTATED FIRST REFUSAL AND CO-SALE AGREEMENT THE P/A FUND, L.P. By: FOSTIN CAPITAL PARTNERS II, L.P. its General Partner By: /s/ William C. Hulley ------------------------------------------ Name: William C. Hulley Title: General Partner Address: 518 Broad Street Sewickley, PA 15143 Telephone No.: 412-749-9454 Facsimile No.: 412-749-9459 PATRICOF PRIVATE INVESTMENT CLUB, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By: /s/ Gregory M. Case ------------------------------------------ Name: Gregory M. Case Title: Vice President Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 -12- SIGNATURE PAGE SECOND RESTATED FIRST REFUSAL AND CO-SALE AGREEMENT APA EXCELSIOR IV, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By: /s/ Gregory M. Case ----------------------------------------- Name: Gregory M. Case Title: Vice President Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 COUTTS & CO. (CAYMAN) LTD., CUST. FOR APA EXCELSIOR IV/OFFSHORE, L.P. By: PATRICOF & CO. VENTURES, INC., its Investment Advisor By: /s/ Gregory M. Case ------------------------------------------ Name: Gregory M. Case Title: Managing Director Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 -13- SIGNATURE PAGE SECOND RESTATED FIRST REFUSAL AND CO-SALE AGREEMENT /s/ Mel Baiada ------------------------------------------ MEL BAIADA Address: 1000 Briggs Road Mt. Laurel, NJ 08054 Telephone No.: 609-727-4600 Facsimile No.: 609-787-9395 /s/ Eugene Levy ------------------------------------------ EUGENE LEVY Address: 90 Riverside Drive Apt. 5E New York, NY 10024 Telephone No.: 212-753-6300 Facsimile No.: 212-319-6155 STOCKHOLDER: /s/ Mark Baiada ------------------------------------------ MARK BAIADA Address: 741 Mill Street Moorestown, NJ 08057 Telephone: 609-231-1000 Facsimile 609-231-1950 -14- EX-10.35 35 EXHIBIT 10.35 Exhibit 10.35 BLUESTONE SOFTWARE, INC. SECOND RESTATED INVESTORS' RIGHTS AGREEMENT MAY 25, 1999 TABLE OF CONTENTS
1. Registration Rights................................................... 1 1.1 Definitions.............................................. 1 1.2 Request for Registration................................. 2 1.3 Company Registration..................................... 4 1.4 Obligations of the Company............................... 5 1.5 Furnish Information...................................... 6 1.6 Expenses of Demand Registration.......................... 7 1.7 Expenses of Company Registration......................... 7 1.8 Underwriting Requirements................................ 7 1.9 Indemnification.......................................... 8 1.10 Reports Under Securities Exchange Act of 1934............ 10 1.11 Form S-3 Registration.................................... 11 1.12 Assignment of Registration Rights........................ 12 1.13 Limitations on Subsequent Registration Rights............ 12 1.14 "Market Stand-Off" Agreement............................. 13 1.15 Termination of Registration Rights....................... 13 1.16 Delay of Registration.................................... 14 2. Covenants of the Company.............................................. 14 2.1 Delivery of Financial Statements......................... 14 2.2 Inspection............................................... 15 2.3 Board of Directors....................................... 15 2.4 Tax Matters.............................................. 16 2.5 Maintenance of Properties and Leases..................... 16 2.6 Insurance................................................ 16 2.7 Key Person Life Insurance................................ 17 2.8 Accounts and Records..................................... 17 2.9 Independent Accountants.................................. 17 2.10 Compliance with Requirements of Government Authorities... 17 2.11 Maintenance of Corporate Existence....................... 17 2.12 Employee Agreements...................................... 17 2.13 Notice of Breach......................................... 18 2.14 Transactions with Affiliates............................. 18 2.15 Maintenance of a Standard System of Accounting........... 18 2.16 Payment of Indebtedness.................................. 18 2.17 Unix GUI Business........................................ 18 2.18 Termination of Covenants................................. 18
-i-
3. Miscellaneous......................................................... 18 3.1 Successors and Assigns................................... 19 3.2 Governing Law............................................ 19 3.3 Counterparts............................................. 19 3.4 Titles and Subtitles..................................... 19 3.5 Notices.................................................. 19 3.6 Expenses................................................. 19 3.7 Amendments and Waivers................................... 19 3.8 Severability............................................. 20 3.9 Aggregation of Stock..................................... 20 3.10 Confidential Information................................. 20 3.11 Entire Agreement......................................... 20
-ii- SECOND RESTATED INVESTORS' RIGHTS AGREEMENT THIS SECOND RESTATED INVESTORS' RIGHTS AGREEMENT is made as of the 25th day of May, 1999 by and among Bluestone Software, Inc., a Delaware corporation (the "COMPANY"), the investors listed on SCHEDULE A hereto, each of which is herein referred to as an "INVESTOR," and the individual listed on SCHEDULE B hereto, who is herein referred to as the "COMMON STOCKHOLDER." The Company and each of the Investors are parties to one or more of the Series A Preferred Stock Purchase Agreement dated as of April 18, 1997 (the "SERIES A AGREEMENT"), pursuant to which the Company sold and certain of the Investors purchased shares of Series A Convertible Preferred Stock, par value $.001 per share, of the Company (the "SERIES A PREFERRED STOCK"), the Series B Convertible Preferred Stock Purchase Agreement dated as of April 23, 1998 (the "SERIES B AGREEMENT"), pursuant to which the Company sold and certain of the Investors purchased shares of Series B Preferred Stock, par value $.001 per share, of the Company (the "SERIES B PREFERRED STOCK"), or the Preferred Stock Purchase Agreement dated as of May 25, 1999 (the "SERIES C AGREEMENT" and together with the Series A Agreement and the Series B Agreement, the "PURCHASE AGREEMENTS"), pursuant to which the Company sold and certain of the Investors purchased shares of Series C Convertible Preferred Stock, par value $.001 per share, of the Company (the "SERIES C PREFERRED STOCK," and together with the Series A Preferred Stock and the Series B Preferred Stock, the "PREFERRED STOCK"). In consideration for the purchase by the Investors in the Preferred Stock under the Purchase Agreements, the Company desires to grant the Investors the registration rights, right of first offer and other rights set forth herein. This Second Restated Investors' Rights amends and restates in its entirety the Restated Investors' Rights Agreement dated as of April 23, 1998 between the Company and the parties signatory thereto as amended by the First Amendment dated as of January 21, 1999 (the "PRIOR AGREEMENT"). INTENDING TO BE LEGALLY BOUND, and in consideration of the mutual agreements stated below and in the Purchase Agreements, the parties hereby agree as follows: 1. REGISTRATION RIGHTS. The Company covenants and agrees as follows: 1.1 DEFINITIONS. For purposes of this Section 1: (a) The term "ACT" means the Securities Act of 1933, as amended. (b) The term "FORM S-3" means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (c) The term "HOLDER" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.12 hereof (d) The term "INITIATING HOLDERS" means the holders of a majority of the outstanding shares on an as-converted basis of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock. (e) The term "1934 ACT" shall mean the Securities Exchange Act of 1934, as amended. (f) The term "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document. (g) The term "REGISTRABLE SECURITIES" means the Common Stock issuable or issued (i) upon conversion of the Series A Preferred Stock, the Series B Preferred Stock or the Series C Preferred Stock issued or issuable by the Company or (ii) upon exercise of the warrants to purchase shares of the Company's Common Stock issued pursuant to the Convertible Subordinated Secured Note and Warrant Purchase Agreement, dated as of January 21, 1999, by and between the Company and the investors signatory thereto or (iii) as a result of a dividend or distribution or stock split or reclassification of the Series A Preferred Stock, the Series B Preferred Stock or the Series C Preferred Stock or the Common Stock issued or issuable upon conversion thereof. (h) The number of shares of "REGISTRABLE SECURITIES THEN OUTSTANDING" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities. (i) The term "SEC" shall mean the Securities and Exchange Commission. (j) With respect only to Sections 1.3, 1.4, 1.5, 1.7, 1.8, 1.10, 1.11 (other than with respect to the right to request that the Company effect such registration), 1.12, 1.14, 1.15 and 2.3 (except for Subsection 2.3(e)) hereof, the term "Holder" shall also include the Common Stockholder and the term "Registrable Securities" shall also include any Common Stock held by the Common Stockholder (whether issued upon conversion of the Preferred Stock or otherwise, other than shares of Common Stock issued after the date hereof for incentive purposes). 1.2 REQUEST FOR REGISTRATION -2- (a) If the Company shall receive, at any time after the earlier of (i) two (2) years after the date hereof, or (ii) one (1) year after the effective date of the first registration statement for a public offering (the "Initial Public Offering") of securities of the Company (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or a SEC Rule 145 transaction), a written request from the Initiating Holders, that the Company file a registration statement under the Act covering an offering of securities of the Company at a gross offering price of at least $20,000,000 in the aggregate, then the Company shall: (i) within ten (10) days of the receipt thereof, give written notice of such request to all Holders; (ii) file with the SEC as soon as practicable, but in any event within sixty (60) days of the receipt of such request, a registration statement covering the registration under the Act of all Registrable Securities which the Holders request to be registered, subject to the limitations of subsection 1.2(b), within twenty (20) days of the mailing of such notice by the Company in accordance with Section 3.5; and (iii) use its best efforts to cause such registration statement to become effective as soon as practicable, but in any event within sixty (60) days after the filing thereof. (b) If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of its request made pursuant to subsection 1.2(a), and the Company shall include such information in the written notice referred to in subsection 1.2(a). The underwriter will be selected by the Company and shall be reasonably acceptable to the Initiating Holders. In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed upon by the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 1.4(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 1.2, if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder; provided, however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. -3- (c) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2 a certificate signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer taking action with respect to such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve-month period. (d) In addition, the Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to this Section 1.2: (i) After the Company has effected two (2) registrations at the request of Initiating Holders pursuant to this Section 1.2 and such registrations have been declared or ordered effective; (ii) During the period starting with the date sixty (60) days prior to the Company's good faith estimate of the date of filing of, and ending on a date one hundred eighty (180) days after the effective date of, a registration subject to Section 1.3 hereof, provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or (iii) If the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 1.11 below. 1.3 COMPANY REGISTRATION. If at any time after the Initial Public Offering, (but without any obligation to do so) the Company proposes to register any of its stock or other securities under the Act in connection with the public offering in excess of $1,000,000 of such securities solely for cash in excess of $1,000,000 (other than a registration initiated by a Holder on Form S-3, a registration relating solely to the sale of securities to participants in a Company stock option, stock purchase or similar plan or a SEC Rule 145 transaction, a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities or a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.5, the Company shall, subject to the provisions of Section 1.8, include in such registration all of the Registrable Securities that each such Holder has requested to be registered, and shall use its best efforts to cause such registration statement to become effective. -4- 1.4 OBLIGATIONS OF THE COMPANY. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of at least a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to one hundred twenty (120) days or until the distribution contemplated in the Registration Statement has been completed, whichever occurs first; provided, however, that (i) such 120-day period shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company; and (ii) in the case of any registration of Registrable Securities on Form S-3 that are intended to be offered on a continuous or delayed basis, such 120-day period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold, provided that Rule 415, or any successor rule under the Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment that (A) includes any prospectus required by Section 10(a)(3) of the Act or (B) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (A) and (B) above to be contained in periodic reports filed pursuant to Section 13 or 15(d) of the 1934 Act in the registration statement. (b) Prepare and file with the SEC such amendment and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Act. -5- (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) File all applications, documents and other information necessary to list the Registrable Securities being registered hereunder on each securities exchange on which similar securities issued by the Company are then listed, and otherwise use its best efforts to cause such listing to be effected. (h) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereto and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. (i) Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 1.5 FURNISH INFORMATION. (a) It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. (b) The Company shall have no obligation with respect to any registration requested pursuant to Section 1.2 or Section 1.11 if, due to the operation of subsection 1.5(a), the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the anticipated aggregate offering price -6- required to originally trigger the Company's obligation to initiate such registration as specified in subsection 1.2(a) or subsection 1.11(b)(2), whichever is applicable. 1.6 EXPENSES OF DEMAND REGISTRATION. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Section 1.2, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company (including fees and disbursements of counsel for the Company in its capacity as counsel to the selling Holders hereunder and if Company counsel does not make itself available for this purpose, then the Company will pay the reasonable fees and disbursements of one (1) counsel for the selling Holders) shall be borne by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 if the registration request is subsequently withdrawn at the request of the Holders of at least a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses ratably based on the ratio that the amounts of Registrable Securities each participating Holder included in such withdrawn registration statement bears to the total amount of Registrable Securities included in such registration statement by all participating Holders), unless the Initiating Holders agree to forfeit its right to one demand registration pursuant to Section 1.2; provided further, however, that if at the time of such withdrawal the Holders have learned of a material adverse change in the condition or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their fights pursuant to Section 1.2. 1.7 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 1.3 for each Holder (which right may be assigned as provided in Section 1.12), including (without limitation) all registration, filing, and qualification fees, printers and accounting fees relating or apportionable thereto and the fees and disbursements of counsel for the Company in its capacity as counsel to the selling Holders hereunder and if Company counsel does not make itself available for this purpose, then the Company will pay the reasonable fees and disbursements of one counsel for the selling Holders selected by them, but excluding underwriting discounts and commissions relating to Registrable Securities. 1.8 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 1.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by -7- stockholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, that the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be determined first by excluding securities requested to be included that are not Registrable Securities, then by excluding securities requested to be included that are Registrable Securities held by the Common Stockholder and then by apportioning pro rata among the selling Holders who are not the Common Stockholder according to the total amount of Registrable Securities entitled to be included therein owned by each such selling Holder or in such other proportions as shall mutually be agreed to by such selling Holders) but in no event shall any shares being sold by a stockholder exercising a demand registration right similar to that granted in Section 1.2 be excluded from such offering. For purposes of the preceding parenthetical concerning apportionment, for any selling Holder of Registrable Securities that is a partnership or corporation, the partners, retired partners and stockholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling stockholder," and any pro-rata reduction with respect to such "selling stockholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling stockholder," as defined in this sentence. Notwithstanding any other provisions of this Section 1.8, if the underwritten offering is a Company registration pursuant to Section 1.3, then the shares being sold by the Company shall not be excluded from such offering. 1.9 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the 1934 Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "VIOLATION"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, or the 1934 Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action-provided, however, that the indemnity agreement contained in this subsection 1.9(a) shall not -8- apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.9(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder (which consent shall not be unreasonably withheld); provided, that, in no event shall any indemnity under this subsection 1.9(b) exceed the gross proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.9, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than -9- under this Section 1.9. Each indemnified party shall furnish such information regarding itself or the claim in question as an indemnifying party may reasonably request in writing and as shall be reasonably required in connection with the defense of such claim. (d) If the indemnification provided for in this Section 1.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and Holders under this Section 1.9 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 1.10 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public; (b) take such action, including the voluntary registration of its Common Stock under Section 12 of the 1934 Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; -10- (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents filed by the Company with the SEC, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 1.11 FORM S-3 REGISTRATION. In case the Company shall receive from any Holder or Holders a written request or requests that the Company effect a registration on Form S- 3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; (b) file with the Commission as soon as practicable, but in any event within 30 days after the receipt of such request, a registration statement on Form S-3 covering such Registrable Securities, and use its best efforts to cause such registration statement to become effective as soon as practicable, but in any event within 60 days thereafter, and use its best efforts to effect all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect more than one registration pursuant to this Section 1.11 in any twelve-month period, and further provided that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this section 1.11: (1) if Form S-3 is not available for such offering by the Holders, (2) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commission) of less than $1,000,000; (3) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than sixty (60) -11- days after receipt of the request of the Holder or Holders under this Section 1.11; provided, however, that the Company shall not utilize this right more than once in any twelve month period; or (4) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance; and (c) All expenses incurred in connection with a registration requested pursuant to Section 1.11, including (without limitation) all registration, filing, qualification, printer's and accounting fees and the reasonable fees and disbursements of counsel for the selling Holder or Holders and counsel for the Company, but excluding any underwriters' discounts or commissions associated with Registrable Securities, shall be borne by the Company. Registrations effected pursuant to this Section 1.11 shall not be counted as demands for registrations or registrations effected pursuant to Sections 1.2 or 1.3, respectively. 1.12 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations and provided that the rights of the Initiating Holders to request registration pursuant to Section 1.2 shall not be assignable) by a Holder to a transferee or assignee of such securities who acquires at least two percent (2%) of the Registrable Securities (as adjusted for stock splits, combinations and the like), provided: (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement, including without limitation the provisions of Section 1.14 below; and (c) such assignment shall be effective only if such transfer is exempt from registration under the Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together with the partnership; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under this Section 1. 1.13 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of at least a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company that would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 1.2 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders that is included or (b) to make a demand registration that could result in such registration statement being declared effective prior -12- to the earlier of either of the dates set forth in subsection 1.2(a) or within one hundred eighty (180) days of the effective date of any registration effected pursuant to Section 1.2. 1.14 "MARKET STAND-OFF" AGREEMENT. Each Investor hereby agrees that, during the period of duration specified by the Company and an underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the Act, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except Common Stock included in such registration; provided, however, that: (a) such agreement shall be applicable only to the first such registration statement of the Company that covers Common Stock (or other securities) to be sold on its behalf to the public in an underwritten offering; and (b) all officers and directors of the Company and all other persons with registration rights (whether or not pursuant to this Agreement) enter into similar agreements; and (c) such market stand-off time period shall not exceed 180 days. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Investor (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. Notwithstanding the foregoing, the obligations described in this Section 1.14 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or a similar form that may be promulgated in the future. 1.15 TERMINATION OF REGISTRATION RIGHTS. (a) No Holder shall be entitled to exercise any right provided for in this Section 1 after five (5) years following the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the initial firm commitment underwritten offering of its securities to the general public. (b) In addition, the right of any Holder to request registration or inclusion in any registration pursuant to Sections 1.2, 1.3 and 1.11 shall terminate on the closing of the first Company-initiated registered public offering of Common Stock of the Company if all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may -13- immediately be sold under Rule 144 during any 90-day period, or on such date after the closing of the first Company-initiated registered public offering of Common Stock of the Company as all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day period; provided, however, that the provisions of this Section 1.15(b) shall not apply to any Holder who owns more than two percent (2%) of the Company's outstanding Common Stock. 1.16 DELAY OF REGISTRATION. No Holder shall have any right to take action to restrain, enjoin or otherwise delay any registration as result of any controversy that might arise with respect to the interpretation or implementation of this Section 1, provided, however, that this Section 1.16 shall not affect any right or remedy that the Holder may otherwise have. 2. COVENANTS OF THE COMPANY. 2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver to each Investor: (a) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of stockholders' equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principals ("GAAP"), and audited and certified by independent public accountants of nationally recognized standing selected by the Company; (b) so long as an Investor holds at least five percent (5.0%) of the then outstanding Common Stock of the Company (on a fully as-converted basis, as if all shares of Preferred Stock and all convertible securities had been fully converted into shares of Common Stock): within thirty (30) days of the end of each month, an unaudited income statement and statement of cash flows and balance sheet for and as of the end of such month, in reasonable detail comparing actual performance to budget; (c) so long as an Investor holds at least five percent (5.0%) of the then outstanding Common Stock of the Company (on a fully as-converted basis, as if all shares of Preferred Stock and all convertible securities had been fully converted into shares of Common Stock): as soon as practicable, but in any event thirty (30) days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, including balance sheets and statements of cash flows for such months and, as soon as prepared, statements of operating goals for each of the Company's functional units and any other budgets or revised budgets prepared by the Company; (d) with respect to the financial statements called for in subsections (b) and (c) of this Section 2.1, an instrument executed by the Chief Financial Officer or President of -14- the Company and certifying that such financials were prepared in accordance with GAAP consistently applied with prior practice for earlier periods (with the exception of footnotes that may be required by GAAP) and fairly present the financial condition of the Company and its results of operation for the period specified, subject to year-end audit adjustment; and (e) so long as an Investor holds at least five percent (5.0%) of the then outstanding Common Stock of the Company (on a fully as-converted basis, as if all shares of Preferred Stock and all convertible securities had been fully converted into shares of Common Stock): such other information relating to the financial condition, business, prospects or corporate affairs (including press releases and the like) of the Company as the Investor or any assignee of any Investor may from time to time reasonably request, provided, however, that the Company shall not be obligated under this subsection (e) or any other subsection of Section 2.1 to provide information which the Company's Board deems in good faith to be a trade secret or similar confidential information. 2.2 INSPECTION. The Company shall permit each Investor that holds at least five percent (5.0%) of the then outstanding Common Stock of the Company (on a fully as-converted basis, as if all shares of Preferred Stock and all convertible securities had been fully converted into shares of Common Stock), at such Investor's expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Investor; provided, however, that the Company shall not be obligated pursuant to this Section 2.2 to provide access to any information which it reasonably considers to be a trade secret or similar confidential information. 2.3 BOARD OF DIRECTORS. (a) Following the Closing and in accordance with Section D.1 of the Company's Third Amended and Restated Certificate of Incorporation, the Board of Directors of the Company shall consist of six (6) members. Subject to Section D.1 of the Company's Third Amended and Restated Certificate of Incorporation, the Company shall use its best efforts to cause and maintain the election of the following persons to the Board of Directors: (i) the Company's Chief Executive Officer, (ii) one (1) director nominated by the holders of a majority of the outstanding shares of Common Stock of the Company, (iii) two (2) directors nominated by the holders of the outstanding shares of Series A Preferred Stock (each an "INVESTORS' BOARD REPRESENTATIVE"), one of whom shall be selected by Patricof & Co. Ventures, Inc., or its successors or assigns, and one of whom shall be selected by Adams Capital Management, Inc., or its successor or assigns, (iv) one (1) outside director selected by a majority of the outstanding shares of Common Stock, so long as such person is approved by the holders of at least seventy-five percent (75%) of the Series A Preferred Stock and Series B Preferred Stock, then outstanding, voting together on an as-converted basis, and (v) one (1) director nominated by GE Capital ("GECC BOARD REPRESENTATIVE"). The Investors' Board Representatives and the GECC -15- Board Representative shall have the right, but not the obligation, to be elected to any and all committees of the Board; (b) The Company shall hold meetings of its Board of Directors no less frequently than bimonthly, unless the Board unanimously agrees to hold such meetings less frequently. The Company shall reimburse the Investors' Board Representatives' and the GECC Board Representative's reasonable expenses incurred in attending the meetings of the Company's Board (or any committee thereof) which are required and/or requested, and any reasonable business expense incurred by such Representative. 2.4 TAX MATTERS. (a) The Company will promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, property or business of the Company or any subsidiary; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Company shall have set aside on its books adequate reserves with respect thereto, and provided, further, that the Company will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any hen which may have attached as security therefor; (b) During the entire period the Preferred Stock (and upon conversion, the Common Stock) is held by an Investor, the Company agrees to meet the active business requirements set forth in Section 1202(c)(2)(A) and Section 1202(e) of the Internal Revenue Code of 1986, as amended (the "Code"); and (c) The Company agrees to submit such reports to the Secretary of the Treasury as required by Section 1202(d)(1) of the Code. 2.5 MAINTENANCE OF PROPERTIES AND LEASES. The Company will keep its properties and those of its subsidiaries in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needful and proper repairs, renewals, replacements, additions and improvements thereto; and the Company and its subsidiaries will at all times comply with each material provision of all leases to which any of them is a party or under which any of them occupies property if the breach of such provision might have a material and adverse effect on the condition, financial or otherwise, or operations of the Company. 2.6 INSURANCE. The Company will keep its assets and those of its subsidiaries which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in the Company's line of business, and the Company will maintain, with financially sound and -16- reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner customary for companies in similar businesses similarly situated. 2.7 KEY PERSON LIFE INSURANCE. The Company has as of the date hereof obtained and will cause to be maintained, from financially sound and reputable insurers, term life insurance on the life of Mel Baiada in the amount of $2,000,000, on the life of Kevin Kilroy in the amount of $1,000,000, and on each of the lives of Robert Bickel, Mark Nigro and John Capobianco in the amount of $500,000. Such policies shall name the Company as loss payee and shall not be cancellable by the Company without prior approval of the Holders of at least 75% of the Registrable Securities then outstanding. 2.8 ACCOUNTS AND RECORDS. The Company will keep true records and books of account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs in accordance with generally accepted accounting principles applied on a consistent basis. 2.9 INDEPENDENT ACCOUNTANTS. The Company will retain independent public accountants of recognized national standing who shall certify the Company's financial statements at the end of each fiscal year. In the event the services of the independent public accountants so selected, or any firm of independent public accountants hereafter employed by the Company, are terminated, the Company will promptly thereafter notify the Holders and will request the firm of independent public accountants whose services are terminated to deliver to the Holders a letter from such firm setting forth the reasons for the termination of their services. In the event of such termination, the Company will promptly thereafter engage another firm of independent public accounts of recognized national standing. In its notice to the Holders the Company shall state whether the change of accountants was recommended or approved by the Board of Directors of the Company or any committee thereof. 2.10 COMPLIANCE WITH REQUIREMENTS OF GOVERNMENT AUTHORITIES. The Company and all its subsidiaries shall duly observe and conform to all valid requirements of governmental authorities relating to the conduct of their businesses or to their properties or assets. 2.11 MAINTENANCE OF CORPORATE EXISTENCE. The Company shall maintain in full force and effect its corporate existence, rights and franchises and all licenses and other rights in or to use patents, processes, licenses, trademarks, trade names or copyrights owned or possessed by it or any subsidiary and deemed by the Company to be necessary to the conduct of their business. 2.12 EMPLOYEE AGREEMENTS. The Company will cause each person employed by it or any subsidiary to enter into an agreement containing, among other things, confidentiality, non-competition/non-solicitation and discovery/inventions provisions in form and content reasonably satisfactory to the Investors. -17- 2.13 NOTICE OF BREACH. The Company shall furnish to each of the Investors within ten (10) days after becoming aware of (i) any material default or breach of the terms of this Agreement, any Purchase Agreement, the Second Restated First Refusal and Co-Sale Agreement or the Restated Voting Agreement (collectively, the "TRANSACTION AGREEMENTS"), or any document or agreement delivered in connection with the Transaction Agreements, or (ii) any material adverse event affecting the Company or its business, financial condition, operations, prospects or affairs, a statement setting forth, in reasonable detail, such default, breach or event, including the Company's proposed response thereto. 2.14 TRANSACTIONS WITH AFFILIATES. The Company shall not, without the approval of the disinterested members of the Company's Board of Directors, engage in any loans, leases, contracts or other transactions with any director, officer or key employee of the Company, or any member of any such person's immediate family, including the parents, spouse, children and other relatives of any such person (including the hiring thereof) or any affiliate of any such person, including without limitation Bluestone Consulting Inc. 2.15 MAINTENANCE OF A STANDARD SYSTEM OF ACCOUNTING. The Company will maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.16 PAYMENT OF INDEBTEDNESS. The Company will promptly pay or cause to be paid when due, or in conformance with customary trade terms otherwise in accordance with policies related thereto adopted by the Company's Board of Directors, all indebtedness incident to operations of the Company. 2.17 UNIX GUI BUSINESS. Except as provided in the letter agreement dated April 23, 1998, between the Company and Bluestone Consulting, Inc., the Company has discontinued its Unix GUI business, and will not incur any additional obligations in respect of, or make any investment or advance to, such business and the discontinuance and/or disposition of such business has not resulted in and will not result in any tax or other liabilities to the Company. 2.18 TERMINATION OF COVENANTS. The covenants set forth in this Section 2 shall terminate and be of no further force and effect after the time of effectiveness of the Company's first firm commitment underwritten public offering of Common Stock pursuant to a registration statement under the Securities Act, resulting in aggregate gross proceeds to the Company of at least $20,000,000 at a gross offering price to the public which is greater than or equal to 150% of then applicable conversion price of the Series C Preferred Stock. 3. MISCELLANEOUS. 3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective -18- successors and assigns of the parties (including transferees of any shares of Registrable Securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 3.2 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Delaware without giving effect to conflict of law principles. 3.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 3.5 NOTICES. Unless otherwise provided, all notices, consents or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given (i) when delivered personally, (ii) three business days after being mailed by first class mail, postage prepaid, or (iii) one business day after being sent by a reputable overnight delivery service, postage or delivery charges prepaid, to the parties at their respective addresses stated on the signature page of this Agreement. Notices may also be given by prepaid telegram or facsimile and shall be effective on the date transmitted if confirmed within 24 hours thereafter by a signed original sent in the manner provided in the preceding sentence. Any party may change its address for notice and the address to which copies must be sent by giving notice of the new addresses to the other parties in accordance with this Section 3.5, except that any such change of address notice shall not be effective unless and until received. 3.6 EXPENSES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 3.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of at least 75% of the Registrable Securities then outstanding (excluding any securities deemed Registrable Securities pursuant to Section 1.1(i) hereof); provided, however, that in the event such amendment or waiver adversely affects the rights and/or obligations of the Common Stockholder under this Agreement in a different manner than other Holders, such amendment or waiver shall also require the written consent of a majority of the Common Stockholder. Any amendment or waiver effected in accordance with this paragraph -19- shall be binding upon each Holder of any Registrable Securities then outstanding or securities exercisable for or convertible into Registrable Securities (including Holders of any securities deemed Registrable Securities pursuant to Section 1.1(i) hereof), each future holder of all such Registrable Securities, and the Company. 3.8 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 3.9 AGGREGATION OF STOCK. All shares of Registrable Securities held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 3.10 CONFIDENTIAL INFORMATION. Each Investor acknowledges that the information received by them pursuant to Sections 2.1 and 2.2 of this Agreement may be confidential. Each Investor agrees that it will not use such Confidential Information in violation of the 1934 Act or reproduce, disclose or disseminate such information to any third person (other than its employees, agents or attorneys), except in connection with the exercise of any right hereunder. For purposes of this Section 3.10, Confidential Information shall not include any information that (i) is or becomes generally available to the public other than as a result of a disclosure by the Company or any of its directors, officers, employees or agents, (ii) is or becomes available to the Investors on a non-confidential basis from a source other than the Company, or (iii) is independently acquired or developed by the Investors without violating any of the Investors' obligations under this Agreement. 3.11 ENTIRE AGREEMENT. This Agreement, the Series C Agreement and the Second Restated First Refusal and Co-Sale Agreement dated as of May 25, 1999 between the Company and the parties signatory thereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof. [SIGNATURE PAGES FOLLOW] -20- SIGNATURE PAGES SECOND RESTATED INVESTORS' RIGHTS AGREEMENT IN WITNESS WHEREOF, the parties have executed this Second Restated Investors' Rights Agreement as of the date first above written. BLUESTONE SOFTWARE, INC. By: /s/ P. Kevin Kilroy -------------------------------------- Name: P. Kevin Kilroy Title: President Address: 1000 Briggs Road Mt. Laurel, NJ 08054 Telephone No.: 609-727-4600 Facsimile No.: 609-787-9395 INVESTORS: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Anton Simunovic -------------------------------------- Name: Anton Simunovic Title: Vice President Address: 260 Long Ridge Road Stamford, CT 06927 Telephone No.: (203) 961-2887 Facsimile No.: (203) 357-4565 -21- SIGNATURE PAGES SECOND RESTATED INVESTORS' RIGHTS AGREEMENT THE P/A FUND, L.P. By: FOSTIN CAPITAL PARTNERS II, L.P. its General Partner By: /s/ William C. Hulley -------------------------------------- Name: William C. Hulley Title: General Partner Address: 518 Broad Street Sewickley, PA 15143 Telephone No.: 412-749-9454 Facsimile No.: 412-749-9459 PATRICOF PRIVATE INVESTMENT CLUB, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By: /s/ Gregory M. Case -------------------------------------- Name: Gregory M. Case Title: Vice President Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 -22- SIGNATURE PAGES SECOND RESTATED INVESTORS' RIGHTS AGREEMENT APA EXCELSIOR IV, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By: /s/ Gregory M. Case -------------------------------------- Name: Gregory M. Case Title: Vice President Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 COUTTS & CO. (CAYMAN) LTD., CUST. FOR APA EXCELSIOR IV/OFFSHORE, L.P. By: PATRICOF & CO. VENTURES, INC., its Investment Advisor By: /s/ Gregory M. Case -------------------------------------- Name: Gregory M. Case Title: Managing Director Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 -23- SIGNATURE PAGES SECOND RESTATED INVESTORS' RIGHTS AGREEMENT /s/ Mel Baiada ----------------------------------- MEL BAIADA Address: 100 Briggs Road Mt. Laurel, NJ 08054 Telephone No.: 609-727-4600 Facsimile No.: 609-787-9395 /s/ Eugene Levy ----------------------------------- EUGENE LEVY Address: 90 Riverside Drive Apt. 5E New York, NY 10024 Telephone No.: 212-753-6300 Facsimile No.: 212-319-6155 -24- FIRST AMENDMENT TO THE SECOND RESTATED INVESTORS' RIGHTS AGREEMENT THIS AGREEMENT is made as of June 16, 1999, by and among Bluestone Software, Inc., a Delaware corporation (the "Company"), and the parties listed on the signature pages hereto (the "Investors"). BACKGROUND The Company and the Investors are parties to that certain Second Restated Investor's Rights Agreement dated as of May 25, 1999 (the "Investors' Rights Agreement"). The Company and the Investors desire to amend the Investors' Rights Agreement as provided herein. INTENDING TO BE LEGALLY BOUND, the parties hereto agree as follows: 1. Section 2.3(a) of the Investors' Rights Agreement shall be amended and restated in its entirety to read as follows: (a) In accordance with Section E.1 of the Company's Third Amended and Restated Certificate of Incorporation, as amended by the Certificate of Amendment date June __, 1999 (the "Certificate of Incorporation"), the Board of Directors of the Company shall consist of seven (7) members. Subject to Section E.1 of the Company's Certificate of Incorporation, the Company shall use its best efforts to cause and maintain the election of the following persons to the Board of Directors: (i) the Company's Chief Executive Officer, (ii) one (1) director nominated by the holders of a majority of the outstanding shares of Common Stock of the Company, (iii) two (2) directors nominated by the holders of the outstanding shares of the Series A Preferred Stock (each an "INVESTORS' BOARD REPRESENTATIVE"), one of whom shall be selected by Patricof & Co. Ventures, Inc., or its successors and assigns, (iv) two (2) outside directors selected by a majority of the outstanding shares of Common tock, so long as such persons are approved by the holders of at least seventy-five percent (75%) of the Series A Preferred Stock and Series B Preferred Stock, then outstanding, voting together on an as-converted basis, and (v) one (1) director nominated by GE Capital ("GECC BOARD REPRESENTATIVE"). The Investors' Board Representatives and the GECC Board Representative shall have the right, but no the obligation, to be elected to any and all committees of the Board. 2. The Investors' Rights Agreement is amended in accordance with Section 3.7 therein. 3. Except as specifically amended herein, the Investors' Rights Agreement shall remain in full force and effect in accordance with its terms. 4. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which shall constitute on agreement, and the signatures of any party to any counterpart shall be deemed to be a signature to, and may be appended to, any other counterpart. [SIGNATURE PAGES FOLLOW] -2- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. THE COMPANY: BLUESTONE SOFTWARE, INC. By: /s/ P. Kevin Kilroy ---------------------------- Name: P. Kevin Kilroy Title: President THE INVESTORS: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Anton Simunovic ---------------------------- Name: Anton Simunovic Title: Vice President THE P/A FUND, L.P. By: FOSTIN CAPITAL PARTNERS II, L.P., its General Partner By: /s/ William C. Hulley ---------------------------- Name: William C. Hulley Title: General Partner [SIGNATURES CONTINUE] -3- PATRICOF PRIVATE INVESTMENT CLUB, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By: /s/ Gregory M. Case ---------------------------- Name: Gregory M. Case Title: Vice President APA EXCELSIOR IV, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By: /s/ Gregory M. Case ---------------------------- Name: Gregory M. Case Title: Vice President COUTTS & CO. (CAYMAN) LTD., CUST. FOR APA EXCELSIOR IV/OFFSHORE, L.P. By: PATRICOF & CO. VENTURES, INC., its Investment Advisor By: /s/ Gregory M. Case ---------------------------- Name: Gregory M. Case Title: Managing Director -4- EX-10.36 36 EXHIBIT 10.36 Exhibit 10.36 BLUESTONE SOFTWARE, INC. RESTATED VOTING AGREEMENT THIS AGREEMENT is made as of the 23rd day of April, 1998, by and among Bluestone Software, Inc., a Delaware corporation (the "Company"), the investors listed on SCHEDULE A attached hereto (the "Investors"), and the individuals listed on SCHEDULE B attached hereto (the "Founders"). The Company and certain of the Investors are parties to a certain Series A Preferred Stock Purchase Agreement dated April 18, 1997 (the "Series A Agreement"), pursuant to which such Investors purchased 5,526,316 shares, in the aggregate, of the Company's Series A Convertible Preferred Stock (the "Series A Preferred Stock"); the Company and certain of the Investors are parties to a certain Series B Preferred Stock Purchase Agreement dated the date hereof, pursuant to which such Investors are purchasing 8,782,695 in the aggregate, of the Company's Series B Convertible Preferred Stock (the "Series B Preferred Stock" and together with Series A Preferred Stock, the "Preferred Stock"). It is a condition to such issuance by the Company of the Series B Preferred Stock and to the investment by the Investors in the Series B Preferred Stock that the Founders and the Company enter into a voting agreement relating to the election of members to the Company's Board of Directors (the "Board of Directors") amending and restating the Voting Agreement dated April 18, 1997. Any and all references to outstanding shares of the Preferred Stock also refers to Common Stock issued upon conversion thereof. Any and all references to outstanding shares of Common Stock also refers to Common Stock issued upon conversion and exercise of all convertible securities. INTENDING TO BE LEGALLY BOUND, and in consideration of the voting agreement stated below, the parties agree as follows: 1. FOUNDERS' AGREEMENT TO VOTE. During the term of this Agreement, the Founders agree to vote all of the shares of the Company's voting securities now or hereafter owned by them, whether beneficially or otherwise (the "Founders' Shares"), as follows: (a) INVESTORS' REPRESENTATIVES. The Founders shall vote or act with respect to the Founders' Shares so as always to elect as directors of the Company (i) two (2) designees nominated by holders of the Series A Preferred Stock, one such designee shall be nominated by Patricof & Co. Ventures (which term refers to the group of funds that include APA Excelsior IV, L.P., Coutts & Co. (Cayman) Ltd., Cust. for APA Excelsior IV/Offshore, L.P., The P/A Fund, L.P. and Patricof Private Investment Club, L.P.), and the other designee shall be nominated by Adams Capital Management, Inc.; and (ii) one (1) designee nominated by General Electric Capital Corporation ("GE Capital") for as long as GE Capital is a holder of any capital stock of the Company. (b) CHIEF EXECUTIVE OFFICER. The Founders agree to vote or act with respect to the Founders' Shares so as always to elect the Company's Chief Executive Officer as a director of the Company; (c) FOUNDERS' REPRESENTATIVE. The Founders shall vote or act with respect to the Founders' Shares so as always to elect one (1) designee nominated by the holders of a majority of the outstanding shares of Common Stock of the Company held by the Founders, as a director of the Company; and (d) OUTSIDE DIRECTORS. The Founders shall vote or act with respect to the Founders' Shares so as to always elect one (1) designee nominated by the holders of a majority of the outstanding shares of Common Stock held by the Founders and reasonably approved by the holders of at least 75% of the outstanding shares of Preferred Stock held by the Investors as a director of the Company. In the event, but only for as long as, the Founders and Investors cannot agree as to such director, the Founders shall vote or act with respect to the Founders' Shares so as to leave one vacancy on the Board. (e) EVENT OF DEFAULT. Upon the occurrence of an Event of Default, as defined in the Company's Second Amended and Restated Certificate of Incorporation, the Founders agree to vote or act with respect to the Founders' Shares in accordance with the recommendation of at least a majority of the Company's Board of Directors. (f) INCREASE IN AUTHORIZED COMMON STOCK. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, the Founders agree to vote or act with respect to the Founders' Shares so as to increase the Company's authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including without limitation, voting in favor of any necessary amendment to the Company's Certificate of Incorporation. 2. INVESTORS' AGREEMENT TO VOTE. During the term of this Agreement, the Investors agree to vote all of the shares of the Company's voting securities now or hereafter owned by them, whether beneficially or otherwise (the "Investors' Shares"), as follows: (a) INVESTORS' REPRESENTATIVES. The Investors shall vote or act with respect to the Investors' Shares so as always to elect as directors of the Company (i) two (2) designees nominated by holders of the Series A Preferred Stock, one such designee shall be nominated by Patricof & Co. Ventures, and the other designee shall be nominated by Adams Capital Management, Inc.; and (ii) one (1) designee nominated by GE Capital for as long as GE Capital is a holder of any capital stock of the Company. -2- (b) CHIEF EXECUTIVE OFFICER. The Investors agree to vote or act with respect to the Investors' Shares so as always to elect the Company's Chief Executive Officer as a director of the Company; (c) FOUNDERS' REPRESENTATIVE. The Investors shall vote or act with respect to the Investors' Shares so as always to elect one (1) designee nominated by the holders of a majority of the outstanding shares of Common Stock of the Company held by the Founders, as a director of the Company; and (d) OUTSIDE DIRECTORS. The Investors shall vote or act with respect to the Investors' Shares so as to always elect one (1) designee nominated by the holders of a majority of the outstanding shares of Common Stock held by the Founders and reasonably approved by the holders of at least seventy-five (75%) of the outstanding shares of Preferred Stock held by the Investors as a director of the Company. In the event, but only for as long as, the Founders and Investors cannot agree as to such director, the Investors shall vote or act with respect to the Investors' Shares so as to leave one vacancy on the Board. 3. BOARD OBSERVER. The Company, the Founders and the Investors agree that, for as long as each of Patricof & Co. Ventures and GE Capital is a holder of any capital stock of the Company, Patricof & Co. Ventures and GE Capital shall each be entitled to have one observer selected by Patricof & Co. Ventures or GE Capital, as the case may be, present at all meetings (whether in person, by telephone or video conference) of the Board (in addition to any nominees of GE Capital and Patricof & Co. Ventures. serving as directors of the Company) and such two observers shall have the same access to information concerning the business and operations of the Corporation and at the same time as directors of the Corporation and shall be entitled to participate in discussions and consult with the Board at each such meeting, without voting. Notwithstanding anything to the contrary set forth in this Section 3 or in the Company's Second Amended and Restated Certificate of Incorporation, Patricof & Co. Ventures and GE Capital (each a "Designator") agree that in the event that the director nominated by a Designator pursuant to Sections 1(a) and 2(a) hereof is not eligible to act upon a matter before the Board due to a conflict of interest between the Company and such Designator with respect to such matter, then all rights of such Designator's observer granted under this Section 3 shall be suspended with respect to such matter. 4. SUCCESSORS IN INTEREST OF THE FOUNDERS AND INVESTORS. (a) The provisions of this Agreement shall be binding upon the successors in interest of (i) the Founders to any of the Founders' Shares, and (ii) the Investors to any of the shares of the Company's voting securities now or hereafter owned by them, whether beneficially or otherwise (the "Investors" Shares). The Company shall not permit the transfer of any Founders' Shares or Investors' Shares on its books or issue a new certificate representing any Founders' Shares or Investors' Shares unless and until the person to whom such security is to be -3- transferred shall have executed a written agreement, satisfactory in form and substance to the Investors, 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 was a Founder or Investor, whichever is applicable, hereunder. (b) Each certificate representing any Founders' Shares or Investors' Shares shall be endorsed by the Company with a legend reading as follows: THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT (A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SAID VOTING AGREEMENT. 5. COVENANTS OF THE COMPANY. The Company agrees to take all actions required to ensure that the rights given to the Investors hereunder are effective and that the Investors enjoy the benefits thereof. Such actions include, without limitation, the use of the Company's best efforts to cause the nomination of the designees of the Investors for election as directors of the Company. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all of the provisions of this Agreement and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the Investors hereunder against impairment. 6. TERMINATION. This Agreement shall terminate upon the earlier of the date when the Investors, or their successors and assigns, no longer hold any shares of the Preferred Stock or Common Stock issued upon conversion thereof, or upon the consummation of the Company's initial public offering on a firm underwriting basis, the gross offering price of which was not less than $5.18 per share (adjusted to reflect stock dividends, stock splits or recapitalizations) and $10,000,000 in the aggregate. 7. AMENDMENTS AND WAIVERS. Any term hereof may be amended and the observance of any term hereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company, and holders of 75% in interest of the Investors or their assigns and holders of a majority in interest of the Founders' Shares, their successors and assigns. 8. STOCK SPLITS, STOCK DIVIDENDS, ETC. In the event of any stock split, stock dividend, recapitalization, reorganization, or the like, any securities issued with respect to the Founders' Shares shall become Founders' Shares for purposes of this Agreement and shall be endorsed with the legend set forth in Section 3(b) hereof. -4- 9. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 10. GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Delaware, without regard to the conflict of laws provisions thereof. 11. COUNTERPARTS. This Agreement and the other New Transaction Agreements (as defined in the Series B Agreement) may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided in this Agreement, the provisions hereof shall inure to the benefit of, and be binding upon, the successors and assigns of the parties hereto. 13. ENTIRE AGREEMENT. This Agreement and the other New Transaction Agreements (as defined in the Series B Agreement) constitute the entire agreement with respect to the subject matter hereof among the parties, and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. This Agreement supersedes the Voting Agreement dated April 18, 1997, which shall be of no further force or effect. IN WITNESS WHEREOF, the parties have executed this Restated Voting Agreement as of the date first above written. BLUESTONE SOFTWARE, INC. By: /s/ Mel Baiada Name: Mel Baiada Title: President Address: 1000 Briggs Road Mt. Laurel, NJ 08054 Telephone No.: 609-727-4600 Facsimile No.: 609-778-8125 -5- INVESTORS: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Anton Simunovic --------------------------- Name: Anton Simunovic Title: Vice President Address: 260 Long Ridge Road Stamford, CT 06927 Telephone No.: (203) 961-2887 Facsimile No.: (203) 357-4565 -6- THE P/A FUND, L.P. By: APA PENNSYLVANIA PARTNERS II, L.P., its General Partner By: /s/ William C. Hulley ---------------------------- Name: William C. Hulley Title: General Partner Address: 518 Broad Street Sewickley, PA 15143 Telephone No.: 412-749-9454 Facsimile No.: 412-749-9459 PATRICOF PRIVATE INVESTMENT CLUB, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By: /s/ Gregory M. Case -------------------------- Name: Gregory M. Case Title: Vice President Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 -7- APA EXCELSIOR IV, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By: /s/ GREGORY M. CASE -------------------------- Name: Gregory M. Case Title: Vice President Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 COUTTS & CO. (CAYMAN) LTD., CUST. FOR APA EXCELSIOR IV/OFFSHORE, L.P. By: PATRICOF & CO. VENTURES, INC., its Investment Advisor By: /s/ Gregory M. Case ---------------------------- Name: Gregory M. Case Title: Managing Director Address: 455 South Gulph Road Suite 410 King of Prussia, PA 19406 Telephone No.: 610-265-0286 Facsimile No.: 610-265-4959 -8- /s/ Mel Baiada ------------------- MEL BAIADA Address: 1000 Briggs Road Mt. Laurel, NJ 08054 Telephone No.: 609-727-4600 Facsimile No.: 609-778-8125 /s/ Eugene Levy ------------------- EUGENE LEVY Address: 90 Riverside Drive, Apt. 5E New York, New York 10024 Telephone No.: 212-753-6300 Facsimile No.: 212-319-6155 FOUNDERS: /s/ Mel Baiada ------------------- MEL BAIADA Address: 1000 Briggs Road Mt. Laurel, NJ 08054 Telephone No.: 609-727-4600 Facsimile No.: 609-778-8125 /s/ Mark Baiada ------------------- MARK BAIADA Address: 741 Mill Street Moorestown, NJ 08057 Telephone No.: -9- Facsimile No.: -10- FIRST AMENDMENT TO THE RESTATED VOTING AGREEMENT THIS AGREEMENT is made as of June 16, 1999, by and among Bluestone Software, Inc., a Delaware corporation (the "Company"), and the parties listed on the signature pages hereto (as applicable, the "Investors" and the "Stockholders"). BACKGROUND The Company and the Investors and the Stockholders are parties to that certain Restated Voting Agreement dated as of April 23, 1998 (the "Voting Agreement"). The parties hereto desire to amend the Voting Agreement as provided herein. INTENDING TO BE LEGALLY BOUND, the parties hereto agree as follows: 1. Section 1(d) of the Voting Agreement shall be amended and restated in its entirety to read as follows: (d) OUTSIDE DIRECTORS. The Founders shall vote or act with respect to the Founders' Shares so as to always elect two (2) designees nominated by the holders of a majority of the outstanding shares of Common Stock held by the Founders and reasonably approved by the holders of at least 75% of the outstanding shares of Preferred Stock held by Investors as directors of the Company. In the event, but only for so long as, the Founders and Investors cannot agree as to one or both of such directors, the Founders shall vote or act with respect to the Founders' Shares so as to leave one or both vacancies on the Board. As of the date hereof, the outside directors shall be Andrew Filipowski and Paul Blondin. 2. Section 2(d) of the Voting Agreement shall be amended and restated in its entirety to read as follows: (d) OUTSIDE DIRECTORS. The Investors shall vote or act with respect to the Investors' Shares so as to always elect two (2) designees nominated by the holders of a majority of the outstanding shares of Common Stock held by the Founders and reasonably approved by the holders of at least 75% of the outstanding shares of Preferred Stock held by Investors as directors of the Company. In the event, but only for so long as, the Founders and Investors cannot agree as to one or both of such directors, the Founders shall vote or act with respect to the Founders' Shares so as to leave one or both vacancies on the Board. As of the date hereof, the outside directors shall be Andrew Filipowski and Paul Blondin. 3. The Voting Agreement is amended in accordance with Section 7 thereof. 4. Except as specifically amended herein, the Voting Agreement shall remain in full force and effect in accordance with its terms. 5. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which shall constitute on agreement, and the signatures of any party to any counterpart shall be deemed to be a signature to, and may be appended to, any other counterpart. [SIGNATURE PAGES FOLLOW.] -2- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. THE COMPANY: BLUESTONE SOFTWARE, INC. By: /s/ P. Kevin Kilroy --------------------------- Name: P. Kevin Kilroy Title: President THE INVESTORS: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Anton Simunovic ---------------------------- Name: Anton Simunovic Title: Vice President THE P/A FUND, L.P. By: FOSTIN CAPITAL PARTNERS II, L.P., its General Partner By: /s/ William C. Hulley ---------------------------- Name: William C. Hulley Title: General Partner [SIGNATURES CONTINUE] -3- PATRICOF PRIVATE INVESTMENT CLUB, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By: /s/ Gregory M. Case ---------------------------- Name: Gregory M. Case Title: Vice President APA EXCELSIOR IV, L.P. By: APA EXCELSIOR IV PARTNERS, L.P., its General Partner By: PATRICOF & CO. MANAGERS, INC., its General Partner By: /s/ Gregory M. Case ---------------------------- Name: Gregory M. Case Title: Vice President COUTTS & CO. (CAYMAN) LTD., CUST. FOR APA EXCELSIOR IV/OFFSHORE, L.P. By: PATRICOF & CO. VENTURES, INC., its Investment Advisor By: /s/ Gregory M. Case ---------------------------- Name: Gregory M. Case Title: Managing Director [SIGNATURES CONTINUE] -4- /s/ Eugene Levy ------------------------------- Eugene Levy STOCKHOLDERS: /s/ Mel Baiada --------------------- MEL BAIADA /s/ Mark Baiada ------------------- MARK BAIADA -5- EX-10.37 37 EXHIBIT 10.37 LEASE BETWEEN BRIGGS PROPERTIES PARTNERSHIP - -------------------------------------------------------------------------------- LESSOR AND BLUESTONE CONSULTING, INC. - -------------------------------------------------------------------------------- LESSEE 14,551 SQ. FT., 1000 BRIGGS ROAD, MT. LAUREL, NEW JERSEY 08054 - -------------------------------------------------------------------------------- DEMISED PREMISES INDEX
Article Heading I Demised Premises II Term of Lease III Minimum Rent IV Taxes V Security Deposit VI Description of Lessor's Work VII Lessee's Work and Signs VIII Use of Premises IX Alterations X Maintenance of Demised Premises XI Maintenance, Control & Expense of Common Areas XII Utilities XIII Destruction by Fire or Casualty XIV Lessee's Property in Demised Premises XV Access to Demised Premises XVI Surrender of Demised Premises XVII Indemnity and Insurance by Lessee XVIII Assignment and Subletting XIX Eminent Domain XX Default by Lessee XXI Waiver of Lessee's Default XXII Default of Lessor XXIII Limitation of Liability and Transfer of Lessor's Interest XXIV Estoppel Certificate by Lessee XXV Option to Renew XXVI Quiet Enjoyment XXVII Subordination XXVIII Tides of Articles XXIX Notices XXX Definition of Terms XXXI Invalidity of Particular Provisions XXXII Provisions Binding XXXIII Relationship of Parties XXXIV Complete Agreement
THIS Lease made on this 27th day of SEPTEMBER 1993, by and between BRIGGS PROPERTIES PARTNERSHIP, 1629 Locust Street, Philadelphia, Pennsylvania 19103 as "Lessor", and BLUESTONE CONSULTING, INC., 1200 Church Street, Mt. Laurel, New Jersey 08054 as "Lessee," witnesses that Lessor and Lessee covenant with each other as follows: RECITALS A. Lessor is the contractual owner of a certain real property located at and known as 1000 Briggs Road, Mt. Laurel, New Jersey. The Lessor intends to PURCHASE the property by September 27, 1993. IN THE EVENT LESSOR DOES NOT SETTLE ON THE PROPERTY BY OCTOBER 1, 1993, THIS LEASE SHALL LAPSE BY LESSEE'S WRITTEN NOTICE TO LESSOR OF ITS INTENT TO TERMINATE THE LEASE. B. Lessor desires to lease the Premises to Lessee, and Lessee desires to Lease the Premises from Lessor, on and subject to the terms and conditions herein set forth. ARTICLE I - Demised Premises The Lessor hereby leases to the Lessee and Lessee hereby rents from Lessor the following described premises as outlined in red on Exhibit A attached herewith, herein called "Demised Premises" containing 14,551 square feet, situated in CAMBRIDGE CROSSING herein referred to as "Demised Premises." The street address of the Demised Premises will be 1000 BRIGGS ROAD, MT. LAUREL, NEW JERSEY 08054. ARTICLE II - Terms of Lease 1. TO HAVE AND TO HOLD for a term to commence on the latter of DECEMBER 1, 1993 or the date on which lessor has substantially completed Lessor's work in accordance with this lease and delivered the Premises to Lessee ready for occupancy and to end at midnight on the 30TH DAY OF NOVEMBER, 2003. 2. EXPANSION OPTION/FIRST RIGHT OF REFUSAL. Lessee shall have an expansion option on all contiguous space exercisable AFTER THE 61ST MONTH FROM THE COMMENCEMENT DATE OF THIS LEASE in the 61st month after the commencement date of this Lease. The rental rate for the expansion space will be the minimum monthly rent per square foot ($7.95/SF) increased by the increase in the Consumer Price Index, PHILADELPHIA REGION, from the commencement date and occupancy of the expansion space. (EXAMPLE $7.95 X 3 % ANNUAL CPI X 5 YEARS = $9.22) In the event the Lessor is unable to accommodate a minimum of 2,500 SF of Lessee's expansion requirement, the Lessee's sole remedy is to terminate this Lease by first giving the Lessor nine (9) months prior written notice of Lessee's intent to terminate the Lease and the Lessee's payment to Lessor of One Hundred Ten Thousand and 00/100 ($110,000.00) Dollars as additional rent as reimbursement to Lessor for unamortized tenant improvements paid in nine (9)equal monthly payment as additional rent on the first of every month. 1 LESSEE SHALL HAVE A FIRST RIGHT OF REFUSAL ON ALL UNLEASED SPACE FROM THE COMMENCEMENT DATE THROUGH THE 60TH MONTH ANNIVERSARY AT MARKET RENT. LESSOR SHALL NOTIFY LESSEE IN WRITING OF ITS INTENT TO LEASE. IF LEASEE DOES NOT EXERCISE ITS OPTION TO LEASE WITHIN FIVE (5) BUSINESS DAYS OF NOTICE, LESSOR SHALL HAVE NO FURTHER OBLIGATION TO LESSEE REGARDING THAT SPACE IDENTIFIED IN THE LESSOR NOTICE. ARTICLE III - Minimum Rent 1. Initial Minimum Monthly Rent: The initial minimum monthly rent shall be NINE THOUSAND SIX HUNDRED FORTY AND 04/100 ($9,640,04) Dollars, all in advance, on the first day of every calendar month during the term hereof without deduction or set off. If the term of this Lease shall commence or end on a day other than the first day of the month, Lessee shall pay minimum rental equal to one-thirtieth (1/30th) of the monthly minimum rental multiplied by the number of rental days of such fractional month. There shall be a penalty added to all payments due of five percent (5%) for monies received more than five (5) days after the payment is due. The Lessee shall pay the first months rent upon execution of the Lease by Lessor. ARTICLE IV - Taxes 1. Taxes ("Taxes") shall mean any form of tax, assessment, excise of impost (whether general, special, ordinary or extraordinary), license fee, business tax, rental tax, improvement bond, levy, lien, charge or penalty imposed or assessed by an authority having the direct or indirect power to tax (including any city, county, state or federal government, or any school, agricultural, lighting, drainage, sewage, irrigation or other improvement or other special district) against or in respect of or which may be or become a lien or charge upon (a) any legal or equitable interest or Lessor in the Demised Premises or in the real property of which the Demised Premises is a part, or (b) Lessor's right to or receipt of rent or other income from the Demised Premises or by Lessor's business or leasing the Dernised Premises. 2. The amount payable by Lessee to Lessor as additional rent shall be paid within twenty (20) days after each such tax billing is received by Lessee. The amount payable by Lessee shall be based upon a fraction the numerator of which is the amount of floor area occupied by Lessee and the denominator is the amount of net leasable area of the building (14,551 + 40,500 = 36%) multiplied by the total of such Taxes or other amount deemed to be Taxes. The Lessor has the right to require prepayment, in which event the annual amount shall be prorated and payable in equal monthly installments on the same day the rent is paid. The monthly estimated Taxes shall not be less than 1/12th of the actual Taxes for the Demised Premises for the preceding tax year. Semi-annually and following Lessor's receipt of invoices and review of budget projections, Lessor may notify Lessee of any additional amount due and Lessee shall pay said additional rent due within twenty (20) days after each such billing is received. If Lessee's monthly Tax payments exceed the actual Taxes for the SEMIANNUAL period covered by the actual Tax bill, such 2 excess shall be credited against the next monthly installment of rent and additional rent and charges due. ARTICLE V - Security Deposit Lessee does herewith deposit with Lessor the sum of NINE THOUSAND SIX HUNDRED FORTY AND 04/100 ($9,640,04) Dollars, to be held as security for the full and faithful performance by Lessee of Lessee's obligations under this Lease and for the payment of damages to the Demised Premises. No interest will be paid to Lessee on the security deposit except for such sum as shall be lawfully applied by Lessor to satisfy valid claims against Lessee arising from defaults under this Lease or by reason of damages to the Demised Premises, the security deposit shall be returned to Lessee at the expiration of the terms of this Lease or any renewals or extensions thereof. It is understood that no part of any security deposit is to be considered as the last rental due under the terms of the Lease. THE LESSEE SHALL DELIVER THE SECURITY DEPOSIT TO LESSOR UPON EXECUTION OF THIS LEASE. ARTICLE VI- Description of Lessor's Work Lessee acknowledges that neither Lessor nor its agents have made any promise to alter, remodel or improve the demised premises or the building or any other improvement thereon, except as expressly provided in a written rider, addendum or amendment to this Lease. Lessee acknowledges neither Lessor not its agents have made any representation or warranty with respect to the condition of the demised premises or the building or any other improvement thereon, Lessee's taking possession of the demised premises shall conclusively establish that the Lessee hereby waives any claims which may hereafter arise against Lessor resulting from the condition of the demised premises or any improvement thereon. ARTICLE VII- Lessee's Work and Signs 1. Lessee may enter the Demised Premises prior to the date hereinafter fixed for the commencement of the term of this Lease for the purpose of installing fixtures and other equipment, provided such work by Lessee shall be done in such manner so as not to interfere with the work to be done by Lessor or Lessor's contractor in the Demised Premises and provided further that such work on the part of Lessee shall be done in compliance with such rules and regulations established by Lessor or its contractor and shall not be in conflict with any Union Contract to which Lessor, its contractor or any sub-contractor might be a part. Lessee shall furnish to Lessor all certificates and approvals with respect to work done by Lessee, or on Lessee's behalf, that may be required from any authorities for the issuance of a Certificate of Occupancy. It is further understood and agreed that Lessor shall have no responsibility or liability whatsoever for any loss or damage to any such fixtures or equipment installed or left in the Demised Premises, and Lessee's entry on and occupancy of the Demised Premises prior to the commencement of this Lease shall be governed by and subject to all the provisions, covenants and conditions of this Lease other than those requiring the payment of minimum rent. 3 No work shall be undertaken by Lessee without first securing a Stipulation Against Liens by the contractor and filing same as required by law to prevent the filing of mechanics liens. 2. In any event Lessee covenants and agrees that promptly after delivery of possession of the Demised Premises to Lessee as substantially completed, Lessee shall commence and shall proceed with due diligence to make all improvements to and install in the Demised Premises all fixtures and other equipment which may be necessary or proper in the operation of Lessee's business and thereafter to commence business. 3. Lessee may, at its own risk, lawfully erect a sign, concerning the business of the occupant of the Demised Premises, on the exterior thereof, and agrees to maintain said sign in a good state of repair and save the Lessor harmless from any loss, cost or damage as a result of the erection, maintenance, existence or removal of the same, and shall repair any damage which may have been caused by the erection, existence, maintenance or removal of such sign. All signs must be approved by the Lessor and the location of the same must be approved by the Lessor, Lessor's consent will not be unreasonably withheld. Upon vacating the premises and if requested by Lessor, the Lessee agrees to remove all signs and repair all damage caused by such removal. 4. Lessee further covenants and agrees to pay promptly when due all taxes, including real estate taxes assessed against Lessee's fixtures, furnishings, equipment and stock-in-trade placed in or on the Demised Premises. Any such taxes paid by Lessor shall be due and payable, as additional rent within twenty (20) days after billings therefor are rendered to Lessee. For the purpose of this Article, Lessee's fixtures shall be deemed to include all trade fixtures which Lessee may, as heretofore provided, have the right of removing at the expiration of the term of this Lease. ARTICLE VIII - Use of Premises The Demised Premises shall be occupied and used solely for the purpose of GENERAL OFFICE USE AND SALE OF COMPUTER SOFTWARE, TRAINING AND COUNSELING, AND RELATED ACTIVITIES. 1. Lessee shall not use or permit the demised premises to be used for any other purposes without the prior written consent of Lessor. Lessee expressly acknowledges that Lessor or its agents have not made any representations as to the suitability of the demised premises for the use stated above and Lessee has been advised by Lessor or its agents to make its own independent determination as to the suitability of the demised premises to the stated use, and any related zoning or other laws, ordinances, regulations and directives or any applicable covenants, conditions and restrictions affecting the demised premises which may limit or restrict the stated use. Lessee shall indemnify and hold Lessor harmless against any requirements for building and or building systems alterations that may be required by any local, state or federal codes as a result of Lessee's occupancy of the Demised Premises. Lessee shall not commit, or suffer to be permitted to be committed, any waste upon the Premises or any nuisance or other act in violation 4 of public policy. Further, Lessee shall not commit, or suffer to be committed, anything which would subject the Lessor to responsibility or liability for injury or damage to any person or property or which would invalidate or increase the cost of any insurance coverage described in this Lease. Lessee shall comply with all rules, regulations, orders and requirements of Lessor's then current insurance carrier(s) with respect to the use of the demised premises and necessary for maintaining reasonable insurance coverage of the types specified in this Lease. 2. Lessor reserves the absolute rights to itself to (a) use the roof, exterior walls and the area beneath the demised premises and (b) install, use, maintain and replace equipment, machinery, pipes, conduits and wiring located within the demised premises which serve other parts of the Property in a manner and in locations which do not unreasonably interfere with Lessee's use of the demised premises. 3. No wood-shaving or spraying material processes will be performed on any part of the demised premises except in any environmental controlled by appropriately designed and installed air-handling equipment which shall be maintained and operated at all times during the Lease terms as required to prevent hazardous accumulations of wood and chemical pollutants in the atmosphere within the demised premises, and all equipment installations required to comply with his subparagraph 5 shall be commenced, performed and completed promptly after the commencement date. Lessee warrants to Lessor that such installation shall be made in correctly designed facilities and in a workmanlike manner in full compliance with all applicable legal requirements. ARTICLE IX - Alterations Lessee covenants and agrees not to make or permit to be made any alterations, improvements and additions to the Demised Premises or any other part thereof except by and with the written consent of Lessor first had. Lessor's approval shall not be unreasonably withheld. All alterations, improvements and additions to said premises shall be made in accordance with all applicable laws and shall at once when made or installed be deemed to have attached to the freehold and to have become the property of Lessor and shall remain for the benefit of Lessor at the end of the term or other expiration of this Lease in as good order and condition as they were installed, reasonable wear and tear excepted; provided, however, if prior to the termination of this Lease, or within fifteen (15) days thereafter Lessor so directs by written notice to Lessee, who then shall promptly remove the additions, improvements, fixtures and installations which were placed in the Demised Premises by Lessee and which are designated in said notice and repair any damage occasioned by such removal and in default thereof Lessor may effect said removals and repairs at Lessee's expense. In the event of such alterations, improvements and additions as herein provided Lessee further agrees to indemnify and save harmless the Lessor from all expenses, liens, claims or damages to either persons or property arising out of, or resulting from the undertaking or making of said alterations, additions and improvements. 5 ARTICLE X - Maintenance of Demised Premises All damage or injury to the demised premises or Complex, if such latter terms defined in this Lease, caused by the act or negligence of Lessee or its employees, agents, representatives, visitors or invitees shall be promptly repaired by Lessee at Lessee's expense and to the satisfaction of Lessor in accordance with this Paragraph 10.1. If Lessee does not promptly make such repairs, Lessor, at Lessor's option, may make or cause to be made any such repairs and may charge Lessee for any costs and expenses paid or incurred, by Lessor in connection therewith. Except as specifically provided in Article XIII, there shall be no reduction in rent payable by Lessee and no liability on the part of Lessor by reason of inconvenience, annoyance or injury to business arising from the making of any repairs, alterations or improvements or any portion of the demised premises or the Complex or fixtures and equipment related thereto, and no liability on the part of Lessor for failure to make repairs, alterations or improvements to the demised premises or the Complex or any fixtures and equipment related thereto which are necessitated by reason of the act or negligence of any other tenant or occupant of the Complex. Lessor agrees to exercise due diligence in making exterior repairs, notwithstanding the fact that the Lessee may have been responsible for the damage. Lessor shall use best efforts not to disrupt Lessee's business. ARTICLE XI - Maintenance, Control and Expense of Common Areas All costs and expenses ("common area maintenance costs") incurred by Lessor in connection therewith shall be charged and prorated in the manner stated below. It is understood and agreed that the term "common area maintenance costs" shall mean all sums expensed by Lessor for payment of all work reasonably deemed necessary by Lessor for the management, operation, maintenance, replacement and repair of the buildings on the property and its common areas. including the following (the specific recitation of which shall not be deemed to limit the definition of such costs and expenses): painting, janitorial services; maintenance, repair and replacement when necessary of sidewalks curbs, bumpers, signs, planting and landscaping, and lighting and other utilities; resurfacing, restriping, cleaning and sweeping the parking areas; operation, maintenance and repair of any common fire protection systems, automatic sprinkler systems and storm drainage systems; personnel to implement such services including but not limited to the cost of security guards; police and fire protection services; any taxes and assessments imposed by governmental agencies; costs of utility services; depreciation on maintenance and operating machinery and equipment, if owned, and rental paid for such machinery and equipment if rented; public liability and property damage insurance on the common areas; all wage and labor costs (including salaries, wages, payroll and similar taxes; Social Security taxes, unemployment insurance costs, workers compensation and other insurance and medical and other benefits) applicable to persons engaged in the management, operation maintenance, replacement and repair of the common areas; fuel; cost of repairing and replacing roofs; cost of reasonably and customary management fees; and supplies for the provision of the foregoing services Lessor may cause any of such services or items to be provided by an independent contractor or contractors. The amount payable by Lessee to Lessor as additional rent shall be 6 paid within twenty (20) days after each such billing is received. The amount payable by Lessee shall be based upon a fraction the numerator of which is the amount of floor area occupied by Lessee and the denominator is the amount of net leasable area of the building (14,551 - 40,500 = 36%) multiplied by the total of such costs and expenses or other amount deemed to be costs and expenses. The Lessor has the right to require prepayment, in which event the annual amount shall be prorated and payable in equal monthly installments on the same day the rent is paid. The monthly estimated Common Area Maintenance charges shall not be less than 1/12th of the actual charges for the Demised Premises for the preceding lease year. Semi-annually and following Lessor's receipt of invoices and review of budget projections, Lessor may notify Lessee of any additional amount due and Lessee shall pay said additional rent within twenty (20) days after each such billing is received. If Lessee's monthly Common Area Maintenance payments exceed the actual Common Area Maintenance charges for the semi-annual period covered by the actual Common Area Maintenance bill, such excess shall be credited against the next monthly installment of rent and additional rent and charges due. ARTICLE XII - Utilities Lessee covenants and agrees to pay for all public utility and other services rendered or furnished to the Demised Premises during the term hereof, including heat, water, gas, electricity, sewer rental, trash disposal and the like, together with all taxes levied or other charges on such utilities. In no event shall Lessor be liable for the quality, quantity, failure or interruption of such services to the Demised Premises. If such items are not separately metered for Lessee, then Lessee agrees to pay his proportionate share based upon a fraction the numerator of which is the amount of floor area occupied by the Lessee and the denominator is the amount of net leasable area of the building (excluding common area) multiplied by the total of such costs. ARTICLE XIII - Destruction by Fire or Casualty 1. If the Demised Premises shall be totally destroyed by fire or other casualty covered by the policy of fire and extended coverage insurance during the first FIVE (5) years of this Lease, and at least FIVE (5) years remain on the Lease then Lessor shall replace the Demised Premises with a building containing space equal to the present leased space, and of the same general type of construction or better, the same to be done as soon as possible after the insurance adjustments, but in no event later than seven (7) months from the date of the receipt of said insurance adjustment. If such event occurs after said FIVE (5) year period, then Lessor may rebuild but does not agree to do so unless Lessee, within thirty (30) days after receipt of insurance adjustment by Lessor, enters into renewal of this Lease on the same terms and conditions for a period equal to the original term of this Lease, [but in no event less than FIVE (5) years], to commence upon the date of the completion of such rebuilding. Otherwise, Lessor shall have the option to rebuild or of terminating this Lease. 2. In the event of total destruction of the Demised Premises as above mentioned, Lessee's rent shall completely abate from the date of such destruction until possession of the 7 rebuilt premises is delivered to Lessee, but in the event of a partial destruction or damage whereby Lessee shall be deprived of the occupancy of only a portion of said premises, then minimum rent shall be equitably apportioned according to the area of the Demised Premises which is unusable by Lessee until such time as the Demised Premises shall be repaired or restored. ARTICLE XIV - Lessee's Property in Demised Premises 1. All Lessee's personal property of every kind or description which may at any time be in the Demised Premises shall be at Lessee's sole risk, or at the risk of those claiming under Lessee, and Lessor shall not be liable for any damage to said property or loss suffered by the business or occupation of Lessee caused by water from any source whatsoever or from the bursting, overflowing or leaking of sewer or steam pipes or from the sprinkler system or from the heating or plumbing fixtures or from electric wires or from gas or odors caused in any manner whatsoever except as may result from and be caused by the negligence of Lessor. ARTICLE XV - Access to Demised Premises 1. Lessee agrees to permit Lessor or Lessor's agents to inspect or examine the Demised Premises at any reasonable time and to permit Lessor to make such repairs, decorations, alterations, improvements or additions in the Demised Premises or to the building of which the Demised Premises is a part, that Lessor may deem desirable or necessary or which Lessee has not covenanted herein to do or has failed so to do, without the same being construed as an eviction of Lessee in whole or in part and the rent shall in no wise abate while such decorations, repairs, alterations, improvements or additions are being made by reason of loss or interruption of the business of Lessee because of the prosecution of such work. 2. Lessor shall also have the right to enter upon the Demised Premises for a period commencing one hundred eighty (180) days prior to the termination of this Lease for the purpose of exhibiting the same to prospective tenants or purchasers. During said period Lessor may place signs in, or upon said premises to indicate that same are for rent or sale, which signs shall not be removed, obliterated or hidden by Lessee. ARTICLE XVI - Surrender of Demised Premises 1. Lessee covenants and agrees to deliver up and surrender to the Lessor possession of the Demised Premises upon expiration of this Lease, or its earlier termination as herein provided, broom clean and in as good condition and repair as the same shall be at the commencement of the term of this Lease, or may have been put by the Lessor during the continuance thereof, ordinary wear and tear and damage by fire or the elements excepted. Lessee shall also surrender all keys for the Demised Premises, as well as all building drawings and environmental reports of any kind relating to the Demised Premises. The foregoing shall require that Lessee cause the following (which is not an exclusive list) to be true as of the date of 8 surrender: 1. All interior and exterior lights are operational and burning. 2. All exhaust, ceiling and overhead fans are operational. 3. Floor is broom swept and clean of all trash and materials. 4. All electrical, plumbing, and other utilities which are terminated are disconnected, capped and/or terminated according to applicable, building codes and all other governmental requirements. 5. All electrical conduit and wiring installed by Tenant specifically for Tenant's equipment are removed to originating electrical panel if Landlord so requires. 6. Interior and exterior doors are operational and in good condition. 7. All furniture, trash and debris are removed. 8. All pictures, posters, signage, stickers and all similar items are removed from all walls, windows, doors and other interior and exterior surfaces of the Premises. 9. Carpet areas are vacuumed. 10. All uncarpeted office floors are swept, and any excess wax buildup on tile and vinyl floors is removed. 11. All Tenant-installed computer cable is removed to point of origin. 12. All doors, windows, and miscellaneous hardware are operational. 13. All heating, air conditioning and mechanical equipment is operational and in good working condition. 14. Ceiling tiles, grid, light lenses, air grills and diffusers are in place with no holes or stains. 15. There are no broken windows or other glass items. 16. Bathroom, walls, floors, and fixtures are clean. 17. All plumbing fixtures are intact and operational and do not leak. 18. All downspouts are undamaged and operational. 19. Walls (internal and external) are clean and any holes are properly and permanently patched. 20. If landscaping is Tenant's responsibility under this Lease, all lawn sprinkler equipment is operational with no water leaks. 21. If landscaping is Tenant's responsibility under this Lease, all plants, trees and shrubbery are intact and healthy. 22. If landscaping is Tenant's responsibility under this Lease, all lawns have recently been mowed and edged, and shrubbery trimmed. 23. If roof repair is Tenant's responsibility under this Lease, the roof is in good condition and repair (in accordance with NRA guidelines) and no apparent leaks. Acceptance of delivery of the Demised Premises or opening same for business shall be deemed conclusive evidence that the Demised Premises were in good order and condition at the commencement of the term of this Lease. 2. Lessee shall at Lessee's expense remove all property of Lessee and all alterations, 9 additions and improvements as to which Lessor shall have made the election hereinbefore provided, repair all damage to the Demised Premises caused by such removal and restore the Demised Premises to the condition in which they were prior to the installation of the articles so removed. Any property not so removed and as to which Lessor shall have not made said election, shall be deemed to have been abandoned by Lessee and may be retained or disposed of by Lessor, as Lessor shall desire. Lessee's obligation to observe or perform this covenant shall survive the expiration of the term of this Lease. ARTICLE XVII - Indemnity and Insurance by Lessee 1. Lessee covenants and agrees that it will protect and save and keep the Lessor forever harmless and indemnified against and from any penalty or damage or charges imposed for any violation of any law or ordinance, whether occasioned by the neglect of Lessee or those holding under Lessee, and that Lessee will at all times protect, indemnify and save and keep harmless the Lessor against and from all claims, loss, cost, damage or expense arising out of or from any accident or other occurrence on or about the Demised Premises causing injury to any person or property whomsoever or whatsoever, and will protect, indemnify, save and keep harmless the Lessor against and from any and all claims and against and from any and all loss, cost, damage or expense arising out of any failure of Lessee in any respect to comply with and perform all the requirements and provisions of this Lease or to comply with any government law, rule, or regulation. 2. Lessee agrees that, at its own cost and expense, it will procure and continue in force general liability insurance covering any and all claims for injuries to persons occurring in, upon or about the Demised Premises, and common areas including all damage from signs, glass, awnings, fixtures or other appurtenances now or hereafter erected on the Demised Premises during the term of this Lease, such insurance at all times to be in an amount of not less than Two Million Dollars ($2,000,000) Combined Single Limit of Bodily Injury and Property Damage Liability. Such insurance shall be written with a company or companies authorized to engage in the business of general liability and property insurance in the state in which the Demised Premises are located and shall be rated B+ or better by A. M. Best & Co. The Lessor and its Agent(s), Briggs Property Partnership and Cumberland Management, shall be a named as additional insureds on said policy, and there shall be delivered to the Lessor a copy of the insurance contract and evidence that the contract premium has been paid. In the event Lessees fails to furnish such policies, or continue the same in full force and effect, the Lessor may obtain such insurance and the premiums on such insurance shall be deemed additional rent to be paid by the Lessee unto the Lessor upon demand. 3. The cost of all insurance for the Demised Premises shall be paid by the Lessee. LESSEE SHOULD HAVE THE RIGHT TO REVIEW ALL INSURANCE AGENCIES FOR THE DEMISED PREMISES ANNUALLY BY REQUESTING A COPY IN WRITING NOT MORE THAN ONCE PER YEAR. Such costs shall be allocated among the several tenants of the building based upon a fraction the numerator of which is the amount of floor area occupied by the Lessee and the denominator is the amount of net leasable area of the 10 building multiplied by the total of such insurance costs. Such insurance shall be purchased by Lessor on a full replacement cost basis, and include loss of rents insurance, and the premium for the same shall be paid by Lessee as additional rent within 10 days after billing for same. 4. Lessor and Lessee hereby agree that all insurance policies to insure the Demised Premises and the contents therein against casualty loss, and all liability policies which they shall carry pertaining to the use and occupancy of the Demised Premises shall contain waivers of the right of subrogation against Lessor and Lessee herein, their heirs, administrators, successors, and assigns. 5. The Lessee agrees to comply with all rules, recommendations, and regulations of Factory Mutual Engineering or comparable insurance organization. 6. If any boiler or pressured vessel is maintained on the Demised Premises, the Lessee shall, at its expense, secure insurance coverage as is applicable in amounts consistent with other coverage on the building, naming Lessor and Lessee as insured parties, and shall keep filed with Lessor a current policy of insurance. 7. Lessee covenants and agrees not to permit, introduce or maintain, on or about any portion of the premises, any hazardous or toxic materials, wastes or other such substances identified in CERCLA, RCRA or other federal, state or local legislation, regulations or ordinances whether now existing or hereafter enacted or promulgated or any judicial or administrative interpretation of such laws, rules or regulations (hereinafter referred to as "Hazardous Materials"). In addition, tenant covenants and agrees that it will remain in strict compliance with all applicable federal, state and local laws, decisions of the courts and regulations, rules directives, decrees, and orders of federal, state and local government authorities regarding the protection of the environment and the protection of the public health and safety. Lessee further covenants and agrees to indemnify, protect and save Lessor harmless against and from any and all damages, losses, liabilities, obligations, proceedings, costs, disbursements or expenses of any kind and of any nature whatsoever (including, without limitation, attorneys' and experts' fees and disbursements) which may at any time be imposed upon, incurred by or asserted or awarded against Lessor and arising from or out of any Hazardous Materials in all or any portion of the premises, introduced by, or on behalf of, Lessee, including without limitation: (i) the cost of removal, restoration or other such remedial work done in connection with any such Hazardous Materials existing on all or any portion of the premises, (ii) additional costs required to take necessary precautions to protect against the release of Hazardous Materials on, in, under or affecting the premises, into the air, any body of water, any other public domain or any surrounding areas, (iii) costs incurred to comply with all applicable laws, orders, judgments and regulations with respect to Hazardous Materials on all or any part of the premises, (iv) costs related to the payment of environmental consultants to evaluate the risk or potential threat to the environment created by the presence of any Hazardous Materials on all or any portion of the premises, and (v) costs related to the Lessor being named a potentially responsible party for the violation of CERCLA, RCRA or any other environmental law or regulation. 11 ARTICLE XVIII - Assignment and Subletting 1. Notice and Documentation: As conditions precedent to any assignment of the whole of Lessee's interest in this Lease or subletting by Lessee of the whole or any part of the demised premises, (i) at least thirty (30) days prior to any proposed assignment or subletting Lessee shall submit to Lessor a statement containing: (a) the name and address of the proposed assignee or subtenant; (b) a financial statement of the proposed assignee or subtenant containing therein bank and other credit references; (c) the type of use proposed for the demised premises; and (d) all of the principal terms and conditions of the proposed assignment or subletting including, but not limited to, the proposed commencement and expiration dates of the term thereof and the amount of rent to be payable by the assignee or subtenant and a floor plan delineating the proposed, assigned or sublet area; and (ii) Lessee shall deliver to Lessor an original assignment or sublease executed by Lessee and the proposed assignee or subtenant on a form approved by Lessor which shall expressly provide (a) for the assumption by such proposed assignee or subtenant of all of Lessee's obligations under the terms of this Lease; (b) that Lessee shall indemnify and hold Lessor harmless from any and all claims, obligations and liabilities (including reasonable attorney's fees) arising from such assignee's or any portion thereof, whether such claim, obligation or liability arises from such assignee's or subtenant's conduct, activity, work or any other matter in, or about the demised premises and/or the Complex; (c) that Lessee shall further indemnify and hold Lessor harmless from any costs, obligations or liabilities (including reasonable attorney's fees) arising from any act or negligence of such assignee or subtenant, or any officer, employee, agent or invitee of such assignee or subtenant, and from any claim, action or proceeding brought thereon; (d) that in no event shall Lessee, by reason of Landlord's approval of the assignment or sublease, be deemed relieved from any obligation or liability under the Lease, including, but not limited to, the obligation to obtain Lessor's consent to any further assignment or subletting; and (e) that such proposed assignment or subletting shall not be deemed effective for any purpose unless and until Lessor's written consent thereto is obtained. LESSOR CONSENT SHALL NOT UNREASONABLY BE WITHHELD. 2. Right to Recapture: In lieu of giving or withholding its consent to any proposed subletting or assignment, Lessor shall have the following right to recapture the demised premises and shall thereafter be free to lease the area subject to the proposed assignment or sublease directly to the proposed assignee or subleasee or any other person without such act being construed to (1) unreasonably interfere with Leasee's contractual. relations; (2) constitute unfair competition or (3) otherwise create any cause or action in favor of Lessee. In lieu of consenting or not consenting, Lessor may within 30 days after Lessor has received all of the documentation described in subparagraph 1 of this Article XVI at its option, (i) in the case of the proposed assignment or subletting of Lessee's entire leasehold interest, terminate Lessee's lease in its entirety, or (ii) terminate Lessee's lease as to that portion of the demised premises which Lessee has proposed to sublet. In the event Lessor elects to terminate this Lease pursuant to clause (ii) above, Lessee's obligation as to rent shall be reduced in the same proportion that the rentable area of the portion of the demised premises taken by the proposed assignee or subtenant bears to 12 the total rentable area of the demised premises. The reservation of Lessor's right to recapture is a critically important economic right in favor of Lessor which has been expressly negotiated between the parties and which requires the release of liability on the part of Lessee for any obligations with respect to the area subject to the proposed sublease or assignment. 3. Signs: Lessee shall not be permitted to advertise in any form its desire to assign or sublet its lease or demised premises unless Lessee has been given Lessor's prior written consent to do so. ARTICLE XIX - Eminent Domain 1. In the event the Demised Premises or any part thereof shall be taken or condemned either permanently or temporarily for any public or quasi public use or purpose by any competent authority in appropriation proceedings or by any right of eminent domain the entire compensation award for both leasehold and reversion shall belong to the Lessor without any deduction therefrom for any present and future estate of Lessee, and Lessee hereby assigns to Lessor all its right, title and interest to any such award. Lessee shall, however, be entitled to claim, prove and receive in such condemnation proceedings such award as may be allowed for fixtures and other equipment installed by it by only if such award shall be in addition to the award for the land and the building (or portion thereof) containing the Demised Premises. 2. If the entire Demised Premises shall be taken as aforesaid, then this Lease shall terminate and shall become null and void from the time possession thereof is required for public use and from that date, the parties hereto shall be released from further obligation hereunder but in the event a portion only of the Demised Premises itself shall be so taken or condemned then Lessor, at its own expense, shall repair and restore the portion not affected by the taking and thereafter the minimum rental to be paid by Lessee shall be equitably and proportionately adjusted. ARTICLE XX - Default by Lessee If the Lessee, after ten (10) days prior written notice of a monetary default and after thirty (30) days of a non-monetary default (a) Does not pay in full when due any and all installments of rent and/ or other charge or payment herein reserved, included, or agreed to be treated or collected as rent and/or any other charge, expense, or cost herein agreed to be paid by the Lessee, or (b) Violates or fails to perform or otherwise breaks any covenant or agreement herein contained; or (c) Vacates the Demised Premises or removes or attempts to remove or manifests an intention to remove any goods or property therefrom otherwise than in the ordinary and usual 13 course of business without having first paid and satisfied the Lessor in full for all rent and other charges then due or that may thereafter become due until the expiration of the then current term, above mentioned; or (d) Becomes insolvent, or makes an assignment for the benefit of creditors, or if a petition in bankruptcy is filed by or against Lessee or a complaint in equity or other proceedings for the appointment of a receiver for Lessee is filed, or if proceedings for reorganization or for composition with creditors under any State or Federal law be instituted by or against Lessee, or if the real or personal property of Lessee shall be levied upon or be sold, or if for any other reason Lessor shall, in good faith, believe that Lessee's ability to comply with the covenants of this Lease, including the prompt payment of rent hereunder, is or may become impaired, thereupon: (1) The whole balance of rent and other charges, payments, costs, and expenses herein agreed to be paid by Lessee, or any part thereof, and also all costs and officer's commissions including watchmen's wages shall be taken to be due and payable and in arrears as if by the terms and provisions of this Lease said balance of rent and other charges, payment, taxes, costs and expenses were on that date, payable in advance. Further, if this Lease or any part thereof is assigned, or if the premises, or any part thereof is sub-let, Lessee hereby irrevocably constitutes and appoints Lessor as Lessee's agent to collect the rents due from such assignee or sub-lessee and apply the same to the rent due hereunder without in any way affecting Lessee's obligation to pay any unpaid balance of rent due hereunder; or (2) At the option of Lessor, this Lease and the terms hereby created shall terminate and become absolutely void without any right on the part of Lessee to reinstate this Lease by payment of any sum due or by other performance of any condition, term, or covenant broken; whereupon, Lessor shall be entitled to recover damages for such breach in an amount equal to the amount of rent reserved for the balance of the term of this Lease, less the fair rental value of the said Demised Premises for the remainder of the Lease term. In the event of any default as above set forth, Lessor, or anyone acting on Lessor's behalf, at Lessor's option: (a) May let said premises or any part or parts thereof to such person or persons as may, in Lessor's discretion, be best; and Lessee shall be liable for any loss of rent for the balance of the then current term. Any such re-entry or re-letting by Lessor under the terms hereof shall be without prejudice to Lessor's claim for actual damages, and shall under no circumstances, release Lessee from liability for such damages arising out of the breach of any of the covenants, terms, and conditions of this Lease. (b) May proceed as a secured party under the provisions of the Uniform Commercial Code against the goods in which Lessor has been granted a security interest. 14 (c) May have and exercise any and all other rights and/or remedies, granted or allowed landlords by any existing or future Statute, Act of Assembly, or other law of this state in cases where a landlord seeks to enforce rights arising under a lease agreement against a tenant who has defaulted or otherwise breached the terms of such lease agreement; subject, however, to all of the rights granted or created by any such Statute, Act of Assembly, or other law of this state existing for the protection and benefit of tenants; and (d) May have and exercise any and all other rights and remedies contained in this Lease agreement OR UNDER NEW JERSEY LAW. All of the remedies hereinbefore given to Lessor and all rights and remedies given to it by law and equity shall be cumulative and concurrent. No determination of this Lease or the taking or recovering possession of the premises shall deprive Lessor of any of its remedies or actions against the Lessee for rent due at the time or which, under the terms hereof would in the future become due as if there had been no determination, nor shall the bringing of any action for rent or breach of covenant, or the resort to any other remedy herein provided for the recovery of rent be construed as a waiver of the right to obtain possession of the premises. ARTICLE XXI - Waiver of Lessee's Default No waiver of any covenant or condition or of the breach of any covenant or condition of this Lease shall be taken to constitute a waiver of any subsequent breach of such covenant or condition nor to justify or authorize the non-observance on any other occasion of the same or of any other covenant or condition hereof, nor shall the acceptance of rent by Lessor at any time when Lessee is in default under any covenant or condition hereof, be construed as a waiver of such default or of Lessor's right to terminate this Lease on account of such default, nor shall any waiver or indulgence granted by Lessor to Lessee be taken as an estoppel against Lessor, it being expressly understood that if at any time Lessee shall be in default in any of its covenants or conditions hereunder an acceptance by Lessor of rental during the continuance of such default or the failure on the part of Lessor promptly to avail itself of such other rights or remedies the Lessor may have, shall not be constured as a waiver of such default, but Lessor may at any time thereafter, if such default continues, terminate this Lease on account of such default in the manner hereinbefore provided. NOTWITHSTANDING THE ABOVE, ANY ACTION BY LESSOR OR LESSEE SHALL BE IN ACCORDANCE WITH NEW JERSEY LAW. ARTICLE XXII - Default of Lessor Lessor shall in no event be charged with default in the performance of any of its obligations hereunder unless and until Lessor shall have failed to perform such obligations within thirty (30) days (or such additional time as is reasonably required to correct any such default) after notice to Lessor by Lessee properly specifying wherein Lessor has failed to perform any such obligations. 15 Provided, however, that if the holder of record of the first mortgage covering the Demised Premises shall have given prior written notice to Lessee that it is the holder of said first mortgage and that such notice includes the address at which notices to such mortgagee are to be sent, then Lessee agrees to give to the holder of record of such first mortgage notice simultaneously with any notice given to Lessor to correct any default of Lessor as hereinabove provided and agrees that the holder of record of such first mortgage shall have the right, within sixty (60) days after receipt of said notice, to correct or remedy such default before Lessee may take any action under this Lease AND UNDER NEW JERSEY LAW, by reason of such default. ARTICLE XXIII - Limitation of Liability and Transfer of Lessor's Interest A. Limitation on Liability: The liability of Lessor to Lessee for any default by Lessor under this Lease or arising in connection herewith or with Lessor's operation, management, leasing, repair, renovation, alteration, or any other matter relating to the Premises, or any Complex of which it is part, shall be limited to the interest of Lessor in the Premises and Complex (if any). Lessee agrees to look solely to Lessor's interest in the Premises and Complex (if any) for the recovery of any judgment against Lessor, and Lessor shall not be personally liable for any such judgment or deficiency after execution thereon. The limitations of liability contained in this provision shall apply equally and inure to the benefit of Lessor's present and future partners, beneficiaries, officers, directors, trustees, shareholders, agents and employees, and their respective trustees, beneficiaries, partners, heirs, successors and assigns. Notwithstanding the foregoing to the contrary, Lessor shall have personal liability for insured claims, beyond Lessor's interest in the Premises and Complex to the extent of Lessor's liability insurance coverage available for such claims. B. Release from Individual Liability: It is expressly understood and agreed that nothing contained in this Lease shall be construed as creating any liability whatsoever against Lessor's Manager or any of the partners of Lessor personally, and in particular, without limiting the generality of the foregoing, there shall be no personal liability of Lessor's Manager or any of the partners of Lessor to pay any indebtedness accruing under this Lease or to perform any term, covenant, condition or agreement, either express or implied, contained in this Lease, or to keep, preserve or sequester any property of Lessor. The personal liability of Lessor's Manager or of said partners, if any, is hereby expressly waived by Lessee and by every person now or hereafter claiming any right or security hereunder, and the owner of any interest, indebtedness or liability accruing under this Lease shall look solely to Lessor, the building and the real property of which the Premises forms a part for payment thereof C. Transfer of Lessor's Interest: Lessor and each successor to Lessor shall be fully released from the performance of Lessor's obligations subsequent to their transfer of Lessor's interest in the Premises and/or the Complex, if such term is defined in this Lease. Lessor shall not be liable for any obligation imposed by this Lease after a transfer of its interest in the Premises and/or the Complex. THE CONVEYANCE OF INTEREST IN THE SUBJECT PREMISES IN WHICH FIFTY (50) PERCENT OR MORE OF THE PRINCIPALS IN BRIGGS PROPERTIES PARTNERSHIP RETAIN AN OWNERSHIP 16 INTEREST SHALL NOT BE CONSIDERED A TRANSFER FOR THE PURPOSE OF THIS PROVISION. ARTICLE XXIV - Estoppel Certificate by Lessee Lessee agrees at any time within ten (10) days of Lessor's written request to execute, acknowledge and deliver to Lessor a written statement certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), and the dates to which the basic rent and other charges have been paid in advance, if any, it being intended that any such statement delivered pursuant to this Article may be relied upon by an prospective purchaser or mortgagee of the fee of the Demised Premises. ARTICLE XXV - Option to Renew The Lessee is hereby granted an option to extend this Lease for ONE (1) additional period of FIVE (5) years on the same terms, conditions and rent. The Lessee shall notify the Lessor in writing nine (9) months prior to the expiration of the then current term of its intention not to extend said Lease, otherwise the extension shall be automatic. The minimum rent (Article III) shall be increased during each option period by the percentage increase in the Revised Consumer Price Index for All Urban Consumers to THE PHILADELPHIA REGION between the commencement date hereof and the date the option period commences. The within option to extend this Lease may not be exercised by an assignee or sublessee of the Lessee, and such assignee or sublessee shall vacate the premises at the end of the then current period. In the event that Lessee shall give notice, as stipulated in this Lease, of intention to vacate the Demised Premises at the end of the present term, or any renewal or extension thereof, and shall fail or refuse so to vacate the same on the date designated by such notice, then it is expressly agreed that Lessor shall have the option either (a) to disregard the notice so given as having no effect, in which case all the terms and conditions of this Lease shall continue thereafter with full force precisely as if such notice had not been given, or (b) to treat the Lessee as a month to month holdover tenant with a rental equal to 150% of the then current fixed minimum rent, or (c) Lessor may, at any time within thirty days after the present term or any renewal or extension thereof, as aforesaid, give the said Lessee ten days written notice of his intention to terminate the said Lease; whereupon the Lessee expressly agrees to vacate said premises at the expiration of the said period of ten days specified in said notice. All powers granted to Lessor by this Lease may be exercised and all obligations imposed upon Lessee by this Lease shall be performed by Lessee as well during any extension of the original term of this Lease as during the original term itself. ARTICLE XXVI - Quiet Enjoyment Lessor covenants and agrees that if Lessee pays the fixed minimum rental and other charges herein provided and shall perform all of the covenants and agreements herein stipulated 17 to be performed on the Lessee's part, Lessee shall, at all times during said term, have the peaceable and quiet enjoyment and possession of said premises without any manner of hindrance from Lessor or any persons lawfully claiming through Lessor, except as to such portion of the Demised Premises as shall be taken under the power of eminent domain. ARTICLE XXVII - Subordination This Lease is and shall be subject and subordinate at all times to the lien of any mortgages which at any time may be made liens upon the Demised Premises; provided, however, that LESSOR SHALL USE ITS BEST EFFORTS TO HAVE THE HOLDER OF ANY SUCH MORTGAGE AGREE THAT so long as Lessee shall not be in default in the performance of its obligations under this Lease, neither this Lease nor Lessee's right to remain in exclusive possession of the Demised Premises shall be affected or disturbed by reason of any default under any such mortgage and, if such mortgage shall be foreclosed, this Lease and all Lessee's rights and obligations hereunder shall survive such foreclosure and continue in full force and effect. LESSEE SHALL EXECUTE AND DELIVER UPON DEMAND ANY FURTHER INSTRUMENT OR INSTRUMENTS CONFIRMING THE SUBORDINATION ATTORNMENT OF THIS LEASE TO THE LIEN OF ANY SUCH MORTGAGE IF REQUESTED TO DO SO BY LANDLORD WITH THE CONSENT OF THE MORTGAGEE. ARTICLE XXVIII - Titles of Articles The titles of the articles throughout this Lease are for convenience and reference only, and such titles shall in no way be held to explain, modify, amplify or aid in the interpretation, construction or meaning of the provisions of this instrument. ARTICLE XXIX - Notices All statements and notices to be given under this Lease shall be in writing and given in person or by registered or certified mail, return receipt requested, postage paid, addressed to the proper party at the following address: (a) If to Lessor: Briggs Property Partnership 1629 Locust Street Philadelphia, PA 19103 (b) If to Lessee: Bluestone Consulting, Inc. 1000 Briggs Road Mt. Laurel, NJ 08054 Attn: Mr. Baiada, President ARTICLE XXX - Definition of Terms 1. "Lease Year", as used herein, shall mean each twelve month period beginning 18 with the first day of the term of this Lease, and each yearly anniversary thereof, provided the commencement of the term of this Lease is on the first day of the month. If the term of this Lease commences on any day other than the first day of the month then "lease year" shall begin on the first day of the month following the end of the month during which the term of this Lease commences. 2. For the purpose of this Lease "floor area" shall be deemed to mean the actual number of square feet of floor space within the exterior faces of the exterior walls (except party walls and walls between space occupied by two or more separate occupants, in either of which cases the center of the wall in question shall be used instead of the exterior face thereof) of all floor, basements and mezzanines of the Demised Premises without deduction or exclusion for any space occupied by or used by columns, stairs or other interior construction or equipment. 3. As used in this indenture of Lease and when required by the context, each number (singular or plural) shall include all number, and each gender shall include all genders; and unless the context otherwise requires, the word "person" shall include "corporation, firm or association". ARTICLE XXXI - Invalidity of Particular Provisions If any term or provision of this Lease or the application thereof to any person or circumstance shall to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. ARTICLE XXXII - Provisions Binding All rights and liabilities herein given to, or imposed upon, the respective parties hereto shall extend to and bind the several and respective heirs, executors, administrators, successors and assigns of said parties; and if there shall be more than one Lessee, they shall all be bound jointly and severally by the terms, covenants and agreements herein, and the word "Lessee" shall be deemed and taken to mean each and every person or party mentioned as a Lessee herein, by the same one or more, and if there shall be more than one Lessee, any notice required or permitted by the terms of this Lease may be given by or to any one thereof, and shall have the same force and effect as if given by or to all thereof. The words "his" and "him" whenever stated herein, shall be deemed to refer to the "Lessor" or "Lessee" whether such Lessor or Lessee be singular or plural and irrespective of gender. No rights, however, shall inure to the benefit of any assignee of Lessee unless the assignment to such assignee has been approved by Lessor in writing as aforesaid. ARTICLE XXXIII - Relationship of Parties 19 Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any association whatsoever between Lessor and Lessee, it being expressly understood and agreed that neither the computation of rent nor any other provisions contained in this Lease nor any act or acts of the parties hereto shall be deemed to create any relationship between Lessor and Lessee other than the relationship of landlord and tenant. ARTICLE XXXIV - Complete Agreement This writing contains the entire agreement between the parties hereto, and no agent, representative, salesman or officer of Lessor hereto has authority to make or has made any statement, agreement or representation, either oral or written, in connection herewith, modifying, adding or changing the terms and conditions herein set forth. No dealings between the parties or custom shall be permitted to contradict various additions to or modify the terms hereof. No modification of this Lease shall be binding unless such modification shall be in writing and signed by the parties hereto. IN TESTIMONY WHEREOF, the Lessor and Lessee, intending to be legally bound, have caused this Lease to be signed in triplicate, upon the day and year first above written. Sign in the presence of: LESSOR: Witness: BRIGGS PROPERTIES PARTNERSHIP - -------------------------------- BY: /s/ Steven G. Park -------------------------------- Steven G. Park LESSEE: BLUESTONE CONSULTING, INC. Attest: - -------------------------------- BY: /s/ Mel Baiada -------------------------------- Mel Baiada President 20 between BRIGGS PROPERTIES PARTNERSHIP as Lessor and BLUESTONE CONSULTING, INC. as Lessee This Addendum to Lease is made this 1st day of December, 1993 by and between BRIGGS PROPERTIES PARTNERSHIP, 1629 Locust Street, Philadelphia, Pennsylvania 19103, herein called "Lessor" and BLUESTONE CONSULTING, INC., having offices at 1200 Church Street, Mount Laurel, New Jersey 08054, herein called "Lessee". WHEREAS, Lessor and Lessee entered into a lease dated September 27, 1993 for 14,551 square feet in 1000 Briggs Road, Mount Laurel, New Jersey 08054. WHEREAS, Lessor and Lessee have agreed that the Lessee requires $29,582.00 of additional tenant improvements. Lessee shall pay one half, or $14,791.00, upon execution of this First Amendment, and the Lessor shall pay half, and the Lessee will increase its base rental to $10,003.81 for the first sixty (60) months of the Lease term. NOW, THEREFORE, in consideration of the premises the mutual covenants herein contained, and for other good and valuable consideration, the parties covenant and agree as follows: ARTICLE III - MINIMUM RENT 1. The first sentence shall be changed to increase the minimum monthly rental to Ten Thousand Three and 81/100 ($10,003.81) Dollars for the first sixty (60) months of the Lease term. The minimum monthly rental for months 61 through 120 shall be Nine Thousand Six Hundred Forty and 04/100 ($9,640.04) Dollars. IN WITNESS WHEREOF, the parties, intending to be legally bound, have signed and sealed this First Addendum to Lease on the day and year first above written. All other terms and conditions of the Lease shall remain unchanged and in full force and effect. IN TESTIMONY WHEREOF, the Lessor and Lessee, intending to be legally bound, have caused this First Addendum to Lease to be signed in triplicate, upon the day and year first above written. Sign in the presence of: LESSOR: BRIGGS PROPERTIES PARTNERSHIP Witness: By: /s/ Steven G. Park - ---------------------------- -------------------------------- Steven G. Park LESSEE: BLUESTONE CONSULTING, INC. Attest: By: /s/ Mel Baiada - ---------------------------- -------------------------------- President BRIGGS PROPERTIES PARTNERSHIP as Lessor and BLUESTONE CONSULTING, INC. as Lessee This Addendum to Lease is made this 15th day of December, 1994 by and between BRIGGS PROPERTIES PARTNERSHIP, 1629 Locust Street, Philadelphia, Pennsylvania 19103, herein called "Lessor" and BLUESTONE CONSULTING, INC., having offices at 1000 Briggs Road, Mt. Laurel, New Jersey 08054, herein called "Lessee". WHEREAS, Lessor and Lessee entered into a lease dated September 27, 1993 for 14,551 square feet at 1000 Briggs Road, Mt. Laurel, New Jersey 08054 and amended the same on December 20, 1993. WHEREAS, Lessor and Lessee have agreed that the Lessee will add an additional 3,200 square feet, for a total of 17,751 square feet, effective upon the latter of substantial completion of the construction, or February 1, 1995, and to end at midnight on the 30th day of November, 2003. WHEREAS, Lessor and Lessee agree that the Lessee's proportionate share of the building shall increase from 36% to 44.00%. NOW, THEREFORE, in consideration of the premises the mutual covenants herein contained, and for other good and valuable consideration, the parties covenant and agree as follows: ARTICLE I - DEMISED PREMISES 1. This article will be amended by deleting "14,551 square feet" and inserting " 17,751 square feet, as outlined in Exhibit "B". ARTICLE III - MINIMUM RENT 1. The following paragraph shall replace the existing paragraph: The initial minimum monthly rent shall be (See Schedule below), all in advance, on the first day of every calendar month during the term hereof without deduction or set off. If the term of this Lease shall commence or end on a day other than the first day of the month, Lessee shall pay minimum rental equal to one-thirtieth (1/30th) of the monthly minimum rental multiplied by the number of rental days of such fractional month. There shall be a penalty added to all payments due of five percent (5%) for monies received more than five (5) days after the payment is due. The Lessee shall pay the first months rent upon execution of the Lease by Lessor. Original Demised Premises-14,551 Additional Space-3,200 Date Rent Date Rent 2/93-1/98 $10,003.91 Upon substantial completion 1/98+ $ 9,640.04 on or about 2/95 until 11/30/03 $2,106.67 Effective Minimum Monthly Rent Schedule Upon substantial completion on or about 2/95 - 1/98 $12,110.48 2/98 - 11/02 $11,746.71 ARTICLE IV - TAXES 1. Paragraph 2. The equation "(14,551 divided by 40,500 = 36%)" shall be deleted and "(17,751 divided by 40,500 = 44%)" shall be inserted. ARTICLE XI - MAINTENANCE, CONTROL AND EXPENSE OF COMMON AREAS 1. Paragraph 1. The equation "(14,551 divided by 40,500 = 36%)" shall be deleted and "(17,751 divided by 40,500 = 44%)" shall be inserted. IN WITNESS WHEREOF, the parties, intending to be legally bound, have signed and sealed this Second Addendum to Lease on the day and year first above written. All other terms and conditions of the Lease shall remain unchanged and in full force and effect. IN TESTIMONY WHEREOF, the Lessor and Lessee, intending to be legally bound, have caused this Second Addendum to Lease to be signed in triplicate, upon the day and year first above written. Sign in the presence of: LESSOR: BRIGGS PROPERTIES PARTNERSHIP Witness: By: /s/ Steven G. Park - ----------------------------------- -------------------------------- Steven G. Park LESSEE: BLUESTONE CONSULTING, INC. Attest: By: /s/ Mel Baiada -------------------------------- Mel Baiada President between BRIGGS PROPERTIES PARTNERSHIP as Lessor and BLUESTONE CONSULTING, INC. as Lessee This Addendum to Lease is made this 1st day of June, 1995 by and between BRIGGS PROPERTIES PARTNERSHIP, 1629 Locust Street, Philadelphia, Pennsylvania 19103, herein called "Lessor" and BLUESTONE CONSULTING, INC., having offices at 1000 Briggs Road, Mt. Laurel, New Jersey 08054, herein called "Lessee". WHEREAS, Lessor and Lessee entered into a lease dated September 27, 1993 for 14,551 square feet at 1000 Briggs Road, Mt. Laurel, New Jersey 08054 and amended the same on December 20, 1993, and December 15, 1994. WHEREAS, Lessor and Lessee have agreed that the Lessee will add an additional 9,500 square feet, for a total of 27,251 square feet, effective September 1, 1995, and to end at midnight on the 30th day of November, 2003. WHEREAS, Lessor and Lessee agree that the Lessee will pay for only 5,000 square feet of the 9,500 square feet from September 1, 1995 to December 31, 1995 and for the full 9,500 square feet beginning January 1, 1996. WHEREAS, Lessor and Lessee agree that the Lessor will make the improvements outlined in Exhibit "C" for which the Lessee will compensate the Lessor $8,500.00. WHEREAS, Lessor and Lessee agree that the Lessee's proportionate share of the building shall increase from 44% to 67.00%. NOW, THEREFORE, in consideration of the premises the mutual covenants herein contained, and for other good and valuable consideration, the parties covenant and agree as follows: ARTICLE I - DEMISED PREMISES 1. This article will be amended by deleting "17,751 square feet" and inserting "27,251 square feet, as outlined in Exhibit "C"". ARTICLE III - MINIMUM RENT 1. The following paragraph shall replace the existing paragraph: The initial minimum monthly rent shall be (See Schedule attached), all in advance, on the first day of every calendar month during the term hereof without deduction or set off. If the term of this Lease shall commence or end on a day other than the first day of the month, Lessee shall pay minimum rental equal to one-thirtieth (1/30th) of the monthly minimum rental multiplied by the number of rental days of such fractional month. There shall be a penalty added to all payments due of five percent (5%) for monies received more than five (5) days after the payment is due. The Lessee shall pay the first months rent upon execution of the Lease by Lessor. Minimum Monthly Rent Schedule - Effective 09/01/95
09/01/95 to 12/31/95 27,251 S.F. $15,422.98/mo. $6.79 01/01/96 to 02/17/99 27,251 S.F. S 18,404.23/mo. $8.10 02/18/99 to 11/31/03 27,251 S.F. S 18,404.46/mo. $7.94
ARTICLE IV - TAXES 1. Paragraph 2. The equation "(17,751 divided by 40,500 = 44%)" shall be deleted and "(27,251 divided by 40,500 = 67%)" shall be inserted. ARTICLE VI - DESCRIPTION OF LESSOR'S WORK 1. The following paragraph shall be added: 2. Lessor agrees to complete the work outlined in Exhibit "C". Lessee will pay the Lessor $8,500.00 upon substantial completion of the work. Lessee is only responsible for those items labelled "Lessee's Costs". ARTICLE XI - MAINTENANCE, CONTROL AND EXPENSE OF COMMON AREAS 1. Paragraph 1. The equation "(17,751 divided by 40,500 = 44%)" shall be deleted and "(27,251 divided by 40,500 = 67%)" shall be inserted. IN WITNESS WHEREOF, the parties, intending to be legally bound, have signed and sealed this Third Addendum to Lease on the day and year first above written. ALL OTHER TERMS AND CONDITIONS OF THE LEASE SHALL REMAIN UNCHANGED AND IN FULL FORCE AND EFFECT. IN TESTIMONY WHEREOF, the Lessor and Lessee, intending to be legally bound, have caused this Third Addendum to Lease to be signed in triplicate, upon the day and year first above written. Sign in the presence of: LESSOR: BRIGGS PROPERTIES PARTNERSHIP Witness: By: /s/ Steven G. Park ------------------------------------ --------------------------- Steven G. Park LESSEE: BLUESTONE CONSULTING, INC. Attest: By: /s/ Mel Baiada ------------------------------------ --------------------------- Mel Baiada President FOURTH ADDENDUM TO LEASE between BRIGGS PROPERTIES PARTNERSHIP as Lessor and BLUESTONE CONSULTING, INC. as Lessee This Addendum to Lease is made this 16th day of May, 1996 by and between BRIGGS PROPERTIES PARTNERSHIP, 1629 Locust Street, Philadelphia, Pennsylvania 19103, herein called "Lessor," and BLUESTONE CONSULTING, INC., having offices at 1000 Briggs Road, Mt. Laurel, New Jersey 08054, herein called "Lessee." WHEREAS, Lessor and Lessee entered into a lease dated September 27,1993 for 14,551 square feet at 1000 Briggs Road, Mt. Laurel, New Jersey 08054 and amended the same on December 1, 1993, December 15, 1994, and June 1, 1995; and WHEREAS, Lessor and Lessee have agreed that the Lessee will add an additional 7,495 square feet, herein referred to as the "Third Addition," for a total of 34,746 square feet; and WHEREAS, Lessor and Lessee agree that the term for the Third Addition will commence on July 1,1996 and run concurrent with the original lease term, expiring at midnight on the 30th day of November, 2003; and WHEREAS, Lessor and Lessee agree that the Lessee will pay an annual rental rate of $10.50 per square foot, triple net for the Third Addition; and WHEREAS, Lessor and Lessee agree that Lessee's proportionate share of the building shall increase from 67.00% to 82.60%; and WHEREAS, Lessor and Lessee that Lessee's ability to terminate this lease prior to its expiration will be eliminated. NOW, THEREFORE, in consideration of the premises the mutual covenants herein contained, and for other good and valuable consideration, the parties covenant and agree as follows: ARTICLE I - DEMISED PREMISES 1. This Article will be amended by adding the following: "The Lessee's Demised Premises will be expanded by 7,495 square feet as outlined in Exhibit "A" hereto and herein referred to as the 'Third Addition.' The Lessee's total Demised Premises will now be 34,746 square feet." ARTICLE II - TERMS OF LEASE 1. The term for the Third Addition will commence on the later of (i) July 1, 1996 or (ii) the date Lessor delivers possession to Lessee of the Third Addition with the improvements required by Paragraph 3 hereof completed to Lessee's reasonable satisfaction; provided, however, that if Lessee takes possession of the Third Addition prior to the foregoing dates, then the date Lessee takes possession shall be the commencement date of the Third Addition and Lessee's obligations with respect thereto. Such term shall run concurrent with the original lease term and shall expire on the 30th day of November, 2003. It is understood that the Third Addition is currently occupied and that surrender of possession of the space must be effected with the present tenant. Lessor covenants and agrees to use best efforts to effect such surrender, but shall not be held liable for failure to do so. 2. Section 2 of this Article shall be amended to delete in its entirety the third sentence thereof (which provides a termination right to Lessee) and to provide that, notwithstanding anything in Section 2 to the contrary, the maximum rental rate for any further expansion space at 1000 Briggs Road shall be $10.50 per square foot net. ARTICLE III - MINIMUM RENT 1. The following paragraph shall replace the existing paragraph: "The initial minimum monthly rent shall be as set forth below under the Revised Rent Schedule, to be paid in advance, on the first day of every calendar month during the term hereof without deduction or set off. If the term of this Lease shall commence or end on a day other than the first day of the month, Lessee shall pay minimum rental equal to one-thirtieth (1/30th) of the monthly minimum rental multiplied by the number of rental days of such fractional month. There shall be a penalty added to all payments due of five percent (5%) for monies received more than five (5) days after the payment is due. Lessee shall pay the first months rent upon execution of the Lease by Lessor." CURRENT RENT SCHEDULE ORIGINAL DEMISED PREMISES Current to 02/17/99 14,551 S.F. $10,000.81/mo. $8.25 02/18/99 to 11/30/03 14,551 S.F. $ 9,640.04/mo. $7.95 FIRST ADDITION Current to 11/30/03 3,200 S.F. $ 2,106.67/mo. $7.90 SECOND ADDITION Current to 11/30/03 9,500 S.F. $ 6,296.75/mo. $7.95 TOTAL DEMISED PREMISES Current to 02/17/99 27,251 S.F. $18,404.23/mo. $8.10 02/18/99 to 11/30/03 27,251 S.F. $18,043.46/mo. $7.95 REVISED RENT SCHEDULE EFFECTIVE 6/1/96 (OR WHEN THE THIRD ADDITION IS DELIVERED TO LESSEE IN ACCORDANCE HEREWITH) THIRD ADDITION to 11/30/03 7,495 S.F. $ 6,558.12/mo. $10.50 TOTAL DEMISED PREMISES Current to 12/31/98 34,746 S.F. $24,962.35/mo. $8.62 02/18/99 to 11/30/03 34,746 S.F. $24,601.58/mo. $8.50 ARTICLE IV - TAXES 1. Section 2 of this Article shall have the current equation "(27,251 divided by 40,500 = 67%)" deleted and the equation "(34,746 divided by 42,064 = 82.60%)" shall be inserted in its place. ARTICLE IX - ALTERATIONS 1. Notwithstanding any provision of Article IX to the contrary: a. Lessee shall have the right to remove any improvements installed by Lessee provided that (i) same can be removed without damage to the structural integrity of the building in which the Demised Premises are a part and (ii) Lessee restores the affected areas of the Demised Premises to a condition which is compatible with the remaining areas of the Demised Premises. b. Lessee shall not be obligated to remove any improvements made by Lessee to the Demised Premises for which Lessee has obtained Lessor's approval to same, unless removal of same was required as a condition of Lessor's consent thereto. ARTICLE XI - MAINTENANCE, CONTROL AND EXPENSE OF COMMON AREAS 1. The current equation "(27,251 divided by 40,500 = 67%)" shall be deleted and "(34,746 divided by 42,064 = 82.60%)" shall be inserted in its place. ARTICLE XIII - DESTRUCTION BY FIRE OR CASUALTY 1. Section 1 shall be revised to change "five (5) years" to "eight (8) years" where it appears for the first, third and fourth times; and to change "five (5) years" to "two (2) years" where it appears for the second time. 2. Notwithstanding any provision of the Lease to the contrary, the following shall apply in the event of any damage to, or destruction of, the Demised Premises: a. If, in the opinion of Lessor's insurance carrier the Demised Premises have been substantially or totally damaged, and Lessorand Lessee agree that the necessary reconstruction of the Demised Premises to the condition which existed prior to such casualty can not be completed within nine (9) months from the date of receipt of said insurance adjustment, then either Lessor or Lessee shall have the right to terminate this Lease. b. If, in the opinion of Lessor's insurance carrier the Demised Premises only have been partially damaged, and Lessor and Lessee determine that the necessary repair of the Demised Premises to the condition which existed prior to such casualty can not be completed within nine (9) months from the date of such casualty, then either Lessor or Lessee shall have the right to terminate this Lease. c. if this Lease shall not be terminated pursuant to Subsections (a) and (b) above, but the necessary repair or reconstruction shall not be completed within thirty (30) days of the foregoing nine (9) months period (as the case may be), then Lessee, upon notice to Lessor, shall have the right to terminate this Lease. d. In the event a claim shall not be submitted to Lessor's insurance carrier with respect to any casualty, the determination of the estimated time of repair shall be made in the reasonable judgment of Lessor and Lessee. If Lessor and Lessee shall be unable to agree, they shall select a reputable contractor (who shall be a fire reconstruction specialist if the damage was caused by fire) to estimate the time required for repair, which shall be binding upon Lessor and Lessee. ARTICLE XIV - LESSEE'S PROPERTY IN DEMISED PREMISES 1. Notwithstanding any provision of the Lease to the contrary, upon termination of the Lease, Lessee shall have the right to remove all of Lessee's personal property and trade fixtures (which include the unit work stations) which have been installed at the Demised Premises. ARTICLE XVII - INDEMNITY AND INSURANCE BY LESSEE 1. Notwithstanding any provision of the Section 1 of this Article to the contrary, Lessee's liability under the Lease, and any indemnification owed to Lessor under the Lease, shall be limited to liability arising from or occasioned by the negligence or wilful acts of Lessee, its employees, agents and invitees. 2. Section 5 and Section 6 are deleted. ARTICLE XVIII - ASSIGNMENT AND SUBLETTING 1. In the event that Lessor's consent is requested and Lessor shall elect to exercise its rights under Section 2 of this Article, Lessee shall have the right to rescind its request for consent, in which case Landlord's election under Section 2 shall be void and this Lease shall continue in full force and effect. ARTICLE XX - DEFAULT BY LESSEE 1. This Article is amended to recognize that, in the case of a nonmonetary default, Lessee shall not be in default under the Lease if (a) Lessee has commenced to cure such default during such thirty (30) day period, and (b) Lessee diligently proceeds to cure such default to the reasonable satisfaction of Lessor. ARTICLE XXVII - SUBORDINATION 1. This Article shall be revised as follows: a. The following language which begins at the end of the second line thereof shall be deleted: "Lessor shall use its best efforts to have the holder of any such mortgage agree that." b. The following language shall be inserted after the word "default" where it first appears in the forth line thereof: "beyond the expiration of any applicable grace or cure period." 2. Lessor further agrees to use best efforts to deliver to Lessee a nondisturbance agreement from the holder of the current mortgage on the property of which the Demised Premises are a part, the form of which shall be reasonably acceptable to Lessee. MISCELLANEOUS - NEW PROVISIONS 1. Notwithstanding any provision of the Lease to the contrary, the cost of any capital improvements made after the date hereof shall be amortized over a period equal to the useful life of such improvement determined in accordance with generally accepted accounting principles, and, to the extent Lessee is responsible for same under the Lease, payment shall be as follows: a. If the capital improvement is included as a common area maintenance cost, then only the amortized amount for the year in question shall be included as a common area maintenance cost; and b. If any such capital improvements is required in order to comply with the requirements of any governmental authority, insurance carrier or pursuant to any applicable law, regulation, ordinance or court directive, and is not otherwise included as a common area maintenance cost, then Lessee shall pay only the amortized amount for the year in question which shall fall due during the term of the Lease (and any renewal thereof); and c. Amounts due for the year of termination shall be prorated. 2. If Lessee shall come to occupy all of the space in the building available for lease by tenants, then Lessee, upon written notice to Lessor, shall have the right to perform, at its costs and expense, all exterior landscaping and/or all maintenance to the common areas of the building in which the Demised Premises are located, subject in each case to (i) compliance with Lessor's minimum standards for landscaping and building maintenance as the case may be and such reasonable rules and regulations which Lessor may enact with respect thereto and (ii) the requirements of any contracts then existing which Lessor may have entered with respect thereto, which Lessee shall be obligated to honor. 3. The Third Addition shall be delivered to Lessee on June 1, 1996, vacant and broom clean with the following improvements having been performed by Lessor at Lessor's expense: a. Professional cleaning of all carpeted areas b. Repainting of all interior areas c. Repair to any roof leaks d. Replacement of damaged ceiling tiles e. All mechanical systems in good and proper working order 4. In the event of any conflict between the terms of the Lease and the terms of this Addendum, this Addendum shall control. All other terms and conditions of the Lease shall remain unchanged and in full force and effect. The Lease, as modified by this Addendum, is the complete agreement of the parties and shall be further modified only by written agreement signed by Lessor and Lessee. IN WITNESS WHEREOF, the parties, intending to be legally bound, have signed this Fourth Addendum to Lease on the day and year first above written. Sign in the presence of: LESSOR: BRIGGS PROPERTIES PARTNERSHIP Witness: By: /s/ Steven G. Park - ------------------------------------- --------------------------------- Steven G. Park LESSEE: BLUESTONE CONSULTING, INC. Attest: By: /s/ Mel Baiada - ------------------------------------- --------------------------------- Mel Baiada, President FIFTH ADDENDUM TO LEASE THIS FIFTH ADDENDUM, made as of the 1st day of February 1998, by and between LIBERTY PROPERTY LIMITED PARTNERSHIP, a Pennsylvania limited partnership (hereinafter called "Lessor"), and BLUESTONE CONSULTING, INC., a New Jersey corporation (hereinafter called "Lessee'). W I T N E S S E T H : WHEREAS, Lessor's predecessor in title, Briggs Properties Partnership ("Briggs"), and Lessee entered into a Lease Agreement dated September 27, 1993, as amended by First Addendum to Lease dated December 1, 1993, Second Addendum to Lease dated December 15, 1994, Third Addendum to Lease dated June 1, 1995 and Fourth Addendum to Lease dated May 15, 1996 (hereinafter collectively called the "Lease"), covering certain Premises at 1000 Briggs Road, Mount Laurel, New Jersey, as more fully described in the Lease (hereinafter called the "Premises"); and WHEREAS, the Premises has been sold by Briggs to Lessor and Lessor is now the landlord under the Lease; and WHEREAS, Lessor desires to increase the amount of space leased under the Lease and Lesser has agreed to such increase subject to the provisions of this Fifth Addendum. Accordingly, Lessor and Lessee desire to amend the Lease. NOW, THEREFORE, the Parties hereto, in consideration of the mutual covenant contained herein and in the Lease, and intending to be legally bound hereby agree that: 1. Article 1 of the Lease, entitled "Demised Premises", is hereby amended by adding the following: "Effective on February 1, 1998 (the "Effective Date"), Lessee's Demised Premises will be expanded by 6,200 square feet as outlined in Exhibit "A" hereto and herein referred to as the "Fourth Addition". On the Effective Date, Lessee's total Demised Premises will be 40,946 square feet." 2. The term for the Fourth Addition will commence on the Effective Date and shall expire November 30, 2003. 3. The Fourth Addition is leased to and accepted by Lessee, subject to the terms and condition, without warranty as to physical condition, environmental condition, zoning, suitability for a particular purpose or any other matter whatsoever, and Lessor shall have no obligation whatsoever to perform any improvements with respect thereto or to pay any allowance for improvements with respect thereto. 4. Effective on the Effective Date, the minimum monthly rent set forth in the Revised Rent Schedule contained in Article III of the Fourth Addendum shall be increased by $4,469.17. 5. Effective on the Effective Date, Section 2 of Article IV of the Lease shall have the current equation "(34,746 divided by 42,064 = 82.60%)" deleted and the equation "(40,946 divided by 40,946 = 100.0%) shall be inserted in its place. 6. Effective an the Effective Data,, Article XI of the Lease shall have the currant equation "(34,746 divided by 42,064 = 82. 60%)" deleted and the equation "(40,946 divided by 40,946 = 100.0%)" shall be inserted in its place. 7. The parties agree that they have dealt with no broker in connection with this Fifth Addendum. Each party agrees to indemnify and hold the other harmless from any and all claims for commissions or fees in connection with this Fifth Addendum and the Lease from real estate brokers or agents with whom they may have dealt. 8. Lessor and Lessee acknowledge that the Lease is in full force and effect. Lessee acknowledges that as of the date hereof it has no claims or offsets against rent due or to become due hereunder. 9. Except as expressly modified herein, the terms and conditions of the Lease shall remain unchanged and in full force and effect. In the event of any conflict between the terms of the Lease and the terms of this Fifth Addendum, this Fifth Addendum shall control. 10. This Fifth Addendum shall be binding upon and inure to the benefit of the Parties and their respective successors and their respective successors and permitted assigns. IN WITNESS WHEREOF, the parties hereto have executed this Fifth Addendum the day and year first above written. LESSOR: LIBERTY PROPERTY LIMITED PARTNERSHIP, a Pennsylvania limited partnership By: Liberty Property Trust, a Maryland real estate investment trust, General Partner By: /s/ James J. Mazzarelli ----------------------------------- James J. Mazzarelli Senior Vice President LESSEE: BLUESTONE CONSULTING, INC. a New Jersey corporation Attest: By: /s/ Mel Baiada ------------------------------ ----------------------------------- EX-23.1 38 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. /s/ Arthur Andersen LLP Philadelphia, PA July 1, 1999 EX-27.1 39 EX-27.1
5 3-MOS 12-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 MAR-31-1999 DEC-31-1998 597,549 2,534,819 0 0 1,600,856 3,413,987 70,314 44,473 0 0 2,509,654 6,053,651 2,767,808 2,734,202 1,435,842 1,284,921 3,876,997 7,535,929 5,375,301 6,393,232 0 0 17,678,106 17,414,551 765,051 875,642 9,009 9,008 (20,950,470) (18,156,504) 3,876,997 7,535,929 2,256,567 3,391,226 3,276,839 8,117,911 57,420 258,572 1,394,790 5,335,001 4,364,716 14,341,072 0 0 48,389 46,520 (2,531,056) (11,604,682) 0 0 (2,531,056) (11,604,682) 0 0 0 0 0 0 (2,531,056) (11,604,682) (0.31) (1.38) (0.31) (1.38)
-----END PRIVACY-ENHANCED MESSAGE-----