-----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, LFGW3iERLfg/JcXn2hInr8Mvi0Ixp/+LoW/i38lpHF8ebGnNyHobreQKV7R83rP+ +uA7uAsa6GaD24MvRe2VxA== 0001047469-99-033267.txt : 19990823 0001047469-99-033267.hdr.sgml : 19990823 ACCESSION NUMBER: 0001047469-99-033267 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19990820 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLUESTONE SOFTWARE INC CENTRAL INDEX KEY: 0001039242 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 222964141 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-82213 FILM NUMBER: 99697137 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/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1999 REGISTRATION NO. 333-82213 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ BLUESTONE SOFTWARE, INC. (Exact name of Registrant as specified in its charter) 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 AMOUNT OF AGGREGATE OFFERING REGISTRATION FEE TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE (1) (2) (3) Common Stock, $.001 par value........................................................... $55,200,000 $15,346
(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. (3) The registration fee for all securities registered hereby of $15,346 has been calculated pursuant to Rule 457(o) of the Securities Act of 1933 by multiplying the proposed maximum aggregate offering price by .000278. A fee of $12,788 was paid on July 2, 1999. Pursuant to Rule 457(o) under the Securities Act, such previous fee has been credited against the registration fee in connection herewith. Accordingly, the additional registration fee required to be paid with this Registration Statement is $2,558. ------------------------------ 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 [LOGO] 4,000,000 Shares Common Stock We are offering 4,000,000 shares of common stock in an initial public offering. We have applied to list our common stock for quotation on the Nasdaq National Market under the symbol "BLSW." We expect that the initial public offering price will be between $11.00 and $13.00 per share. The market price of the shares of common stock after this offering may be higher or lower than the initial public offering price. Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 5. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Per Share Total Public Offering Price $ $ Underwriting Discount $ $ Proceeds to Bluestone $ $
We and certain selling stockholders have granted the underwriters a 30-day option to purchase up to 600,000 additional shares of common stock at the initial public offering price to cover any over-allotments. We expect to issue these shares on , 1999. Deutsche Banc Alex / / Brown SoundView Technology Group C.E. Unterberg, Towbin Legg Mason Wood Walker Incorporated , 1999 [INSIDE FRONT COVER OF PROSPECTUS] GRAPHIC: [Landscape format--1 page graphic]: A graphical figure of a single, floor-standing server cabinet, is located in the center of the page with the following text appearing immediately under the server: "APPLICATION SERVER - Provides standard services to make information access available, secure and reliable." Five two-directional arrows surround the text, and point, to various graphical representations located in the corners and bottom center of the page. Beginning in the bottom left corner of the page and moving in a clockwise direction are the following graphical figures: (1) A two-directional arrow cuts through a cloud which represents and is labelled as the "Internet," and points to the following text: "INFORMATION ACCESS--Access from applications or information devices." Below the text are graphical figures of a personal computer, a lap-top computer, a cellular phone and a handheld personal computing device. (2) in the upper left hand corner of the page is a graphical figure of a satellite dish on top of a metal tower. A two-directional arrow points between the server cabinet and one satellite dish. The following text is located to the right of the satellite dish: "APPLICATION MANAGEMENT--Control and reporting of application usage." (3) in the upper right hand corner of the page are graphical figures of a personal computer, a lap-top computer, a cellular phone and a handheld personal computing device. There is a two-directional arrow pointing between the aforementioned figures and the server cabinet. To the left of the figures is the following text: "INFORMATION ACCESS--Access from other information sources or computer systems." (4) in the right lower corner of the page is a graphical figure of an electrical plug. A two-directional arrow points between the electrical plug and the server cabinet. Above the electrical plug is the following text: "APPLICATION INTEGRATION--Provides access to all information in the Enterprise." (5) in the bottom center of the page is a graphical figure of a computer screen displaying a software application. A two-directional arrow points between the server cabinet and the computer screen. Directly above the computer screen is the following text: "APPLICATION DEVELOPMENT--The ability to build applications that provide information access." (6) The top center of the page contains a Bluestone logo with the words: "Bluestone Software--Enterprise." PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. GENERALLY, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT: - THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS BY BLUESTONE AND CERTAIN SELLING STOCKHOLDERS IS NOT EXERCISED; - THE CONVERSION OF ALL SHARES OF OUR OUTSTANDING SERIES A, SERIES B AND SERIES C CONVERTIBLE PREFERRED STOCK AND ALL ACCRUED DIVIDENDS THEREON INTO COMMON STOCK OCCURS IMMEDIATELY UPON COMPLETION OF THIS OFFERING; AND - A 1 FOR 3.2 REVERSE SPLIT OF THE COMMON STOCK IS EFFECTED IMMEDIATELY BEFORE THIS OFFERING. BLUESTONE We are a leading provider of software for enterprise interaction management, which enables businesses to extend information over the World Wide Web in a controlled manner and to support high volumes of users and interactions. Our flagship product, Sapphire/Web, is a framework for JAVA Web application servers and is currently in Release 6. A Web application server is a software product that allows broad access to stored corporate information and applications to a variety of users, including customers, suppliers and employees via the Web. We believe that our JAVA Web application server is the leading solution of its kind based on the breadth of its functionality. We believe that ours is the only product to adequately address the four defining elements of enterprise interaction management-- development, deployment, integration and management--and therefore provides the most complete overall solution to our customers. In January 1999, we released Bluestone XML-Server, which represents a new generation of specialized Web application server focused on commerce via the Internet. OUR INDUSTRY Businesses are rapidly adopting technology that allows their existing computer systems to operate and be accessed over the Web. To date, most businesses have simply provided marketing material on their Web sites and have not been able to take full advantage of the interactive potential of the Internet. The existing information technology infrastructure of most companies cannot reliably and securely handle a high volume of interactions across the Internet. Therefore, most companies are unable to utilize, integrate or deploy their existing information technology assets for Internet commerce or use over the Web. Deploying Web application servers allows real time, interactive access to complex information through the Web that is otherwise only available internally in an organization through its own applications and existing corporate databases. This enables a much broader and diverse audience to utilize and interact with a business' core systems and information. Uses of this capability include: - broad dissemination and more effective use of management information for decision support; - employee self-service applications that improve internal efficiencies; - customer relationship management activities that enhance service levels; - supply chain functions that increase coordination among trading partners; and - Internet commerce initiatives that create entirely new revenue streams and business models. Demand for these capabilities has resulted in significant growth in the market for Web application servers. In an August 1998 report, Forrester Research estimated that the market for application server 1 software would be approximately $700 million in 1999 and grow to approximately $1.8 billion by 2001, representing a compound annual growth rate of approximately 60%. Another independent technology research organization, Ovum, estimated in a June 1999 report that the market for application server technologies, which Ovum defines in a manner that more closely resembles our addressable market, will grow to $17 billion by 2004. As this market develops, businesses are recognizing that a broader set of facilities, beyond simple deployment alone, are required to capture the substantial benefits that Internet computing can provide. OUR SOLUTION We provide a comprehensive framework that enables businesses to deploy information across the Internet to employees, customers, suppliers and partners. Our solution furnishes businesses with the ability to Web-enable their existing systems, develop new Web-based applications, integrate their applications and enable Internet commerce. Our deployment solution is 100% Pure JAVA, a programming language developed by Sun Microsystems that operates in virtually all computing environments. We believe our solution is the only one available that allows organizations to develop, deploy, integrate and manage enterprise-scale, mission-critical applications. In particular, our solution offers the following facilities: - robust development environment and toolset that is open and highly adaptable and has many features that increase the speed and reduce the cost of systems development; - open, high-performance deployment that enables implementation of systems with high reliability, security and flexibility and supports very high volumes of interactions; - extensive integration capabilities that facilitate the integration of a business' overall computing environment; and - comprehensive management features that provide the necessary means to monitor, administer and report on a business' entire Web infrastructure. OUR GROWTH STRATEGY Our goal is to maintain and extend our position as a leading provider of Web application server technology, enterprise application integration and Internet commerce solutions. Our key growth strategies are to: - maintain and extend technological leadership; - expand product offerings; - continue to focus on enterprise-scale solutions; - increase marketing and direct sales efforts; and - further develop indirect channels, partners and alliances. OUR CUSTOMERS Our solutions are applicable to a wide variety of industries and are used by many of the world's leading businesses, including: - three of the top five FORTUNE 500 companies in the electronics industry; - five of the top ten FORTUNE 500 companies in the computer equipment industry; - four of the top five FORTUNE 500 companies in the aerospace industry; - seven out of the top ten FORTUNE 500 companies in the telecommunications industry; 2 - three of the top four FORTUNE 500 companies in the entertainment industry; and - five of the top ten FORTUNE 500 companies in the pharmaceuticals industry. We market our products and services through our direct sales force and a network of value added resellers, independent software vendors, and systems integrators. Since 1996, we have sold our Sapphire/Web software products to over 500 customers. Our customers include ARI, AT&T, Deutsche Bank, Dreyfus Corporation, Eli Lilly, Hewlett-Packard, Houghton Mifflin Company, Just For Feet, MCI WorldCom, OpenConnect and Reliance National. We were originally incorporated in 1989. Our executive offices are located at 1000 Briggs Road, Mount Laurel, New Jersey 08054. Our telephone number is (856) 727-4600. Information contained on our Web site at www.bluestone.com does not constitute a part of this prospectus. THE OFFERING Common stock offered by Bluestone............ 4,000,000 shares Common stock outstanding after this offering................................... 17,302,473 shares Use of proceeds.............................. product development, sales and marketing and working capital Proposed Nasdaq National Market symbol....... "BLSW"
Common stock outstanding after this offering is based on the number of shares outstanding as of June 30, 1999. It excludes: - 2,961,411 shares of common stock issuable upon exercise of options and warrants at a weighted average exercise price of $4.15 per share and 218,750 shares of common stock issuable upon the conversion of a convertible note at a conversion price of $2.29 per share. - 431,784 shares reserved for future grants under our stock option and directors' compensation plans. 3 SUMMARY FINANCIAL INFORMATION The following table sets forth certain of our historical, pro forma and adjusted financial data. The pro forma balance sheet data presented below assumes the conversion of all outstanding preferred stock and accrued dividends on preferred stock into common stock. The pro forma net loss per share amounts presented below reflect the outstanding preferred stock during each period presented on an as converted basis. The adjusted balance sheet data presented below gives effect to the receipt of the net proceeds from the sale of shares of common stock offered by us at an assumed offering price of $12.00 per share, after deducting the estimated underwriting discounts and commissions and our estimated offering expenses. In April 1997, in connection with our sale of Series A preferred stock, we spun off our consulting division to our then sole stockholder. The consulting division spin-off has been reported as a discontinued operation. In April 1998, we decided to focus on internally developed software products and curtail the licensing and services related to third party products. No material license revenues from third party products were recognized after March 31, 1998.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------- -------------------- 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 $ 1,192 $ 4,727 Services............................................................... 43 2,179 3,620 1,707 1,865 Third party products and related services.............................. 6,555 5,225 1,107 932 -- --------- --------- --------- --------- --------- Total revenues..................................................... 8,073 9,741 8,118 3,831 6,592 Cost of revenues: Software license fees.................................................. 113 202 259 96 156 Services............................................................... 305 2,516 4,433 2,078 2,467 Third party products and related services.............................. 4,261 2,798 643 535 -- --------- --------- --------- --------- --------- Total cost of revenues............................................. 4,679 5,516 5,335 2,708 2,623 --------- --------- --------- --------- --------- Gross profit............................................................. 3,394 4,225 2,783 1,122 3,969 Operating expenses: Sales and marketing.................................................... 3,005 5,131 9,551 3,748 6,185 Product development.................................................... 702 1,295 2,474 904 1,869 General and administrative............................................. 1,515 1,616 2,316 950 2,124 Amortization of stock-based compensation............................... -- 112 --------- --------- --------- --------- --------- Total operating expenses........................................... 5,222 8,042 14,341 5,601 10,290 --------- --------- --------- --------- --------- Loss from operations..................................................... (1,828) (3,817) (11,558) (4,479) (6,321) Interest expense, net.................................................... (50) (80) (47) (34) (1,148) --------- --------- --------- --------- --------- Loss from continuing operations.......................................... (1,878) (3,896) (11,605) (4,512) (7,469) Income (loss) from discontinued operations............................... (738) 99 -- -- -- --------- --------- --------- --------- --------- Net loss................................................................. (2,616) (3,798) (11,605) (4,512) (7,469) Accretion of preferred stock redemption value............................ -- (240) (846) (308) (779) --------- --------- --------- --------- --------- Net loss available to common stockholders................................ $ (2,616) $ (4,038) $ (12,451) $ (4,820) $ (8,247) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Basic and diluted net income (loss) per share: Continuing operations.................................................. $ (0.67) $ (1.39) $ (4.12) $ (1.60) $ (2.65) Discontinued operations................................................ (0.26) 0.04 -- -- -- Accretion of preferred stock redemption value.......................... -- (0.09) (0.30) (0.11) (0.28) --------- --------- --------- --------- --------- $ (0.93) $ (1.44) $ (4.42) $ (1.71) $ (2.93) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Shares used in computing basic and diluted net income (loss) per share... 2,813 2,813 2,814 2,814 2,815 Pro forma basic and diluted net loss per share from continuing operations............................................................. $ (0.96) $ (1.35) $ (0.67) $ (0.70) --------- --------- --------- --------- --------- --------- --------- --------- Shares used in computing pro forma basic and diluted net loss per share.................................................................. 4,046 8,572 6,789 10,688
JUNE 30, 1999 ----------------------------------- ACTUAL PRO FORMA ADJUSTED --------- ----------- ----------- (IN THOUSANDS, UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents....................................... $ 20,600 $ 20,600 $ 64,440 Working capital................................................. 16,576 16,576 60,416 Total assets.................................................... 24,969 24,969 68,809 Long-term obligations, net of current portion................... 1,654 1,654 1,654 Mandatorily redeemable convertible preferred stock.............. 40,453 -- -- Total stockholders' equity (deficit)............................ (24,180) 16,273 60,113
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 We have incurred significant net losses since 1996, MAY INCUR FUTURE LOSSES THAT including losses of approximately $3.8 million and $11.6 MAY DEPRESS OUR STOCK PRICE. million for the years ended December 31, 1997 and 1998, respectively and $7.5 million for the six months ended June 30, 1999. Our losses have resulted in an accumulated deficit of approximately $26.4 million as of June 30, 1999. Any significant shortfall of revenues in relation to our expectations or any material delay of customer orders would have an immediate adverse effect on our business, operating results and financial condition. We may not be profitable in any future period. Our future operating results will depend on many factors, including: - the overall growth rate for the markets in which we compete; - the level of market acceptance of, and demand for, our software products; - the level of product and price competition; - our ability to establish strategic marketing relationships, develop and market new and enhanced products, and control costs; - our ability to expand our direct sales force and indirect distribution channels; - our ability to integrate acquired businesses and product lines; - our ability to develop and maintain awareness of our brands; and - our ability to attract, train and retain consulting, technical and other key personnel. LACK OF GROWTH OR DECLINE IN Our products enhance companies' ability to transact INTERNET USAGE OR THE LACK OF business and conduct operations utilizing the Internet. ACCEPTANCE OF COMMERCE Therefore, our future sales and any future profits are CONDUCTED VIA THE INTERNET substantially dependent upon the widespread acceptance and COULD BE DETRIMENTAL TO OUR use of the Internet as an effective medium of commerce by FUTURE OPERATING RESULTS. 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.
5 In addition, the Internet may not be accepted as a viable commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and Web performance improvements. If the Internet continues to experience significant growth in the number of users, frequency of use or an increase in bandwidth requirements, the Internet's infrastructure may not be able to support the demands placed upon it. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation. If Congress, or other governing bodies both within and outside the United States, decides to alter materially the current approach to, and level of, regulation of the Internet, we may need to adapt our technology. Any required adaptation could cause us to spend significant amounts of time and money. If use of the Internet does not continue to grow or grows more slowly than expected, if the infrastructure for the Internet does not effectively support growth that may occur, if government regulations change, or if the Internet does not become a viable commercial marketplace, our business could suffer. WE DEPEND ON OUR SAPPHIRE/WEB Software license revenues from our Sapphire/Web software PRODUCTS AND IF THE MARKET were $3.4 million or 42% of total revenues in 1998 and FOR THESE PRODUCTS DOES NOT $4.7 million or 72% of total revenues in the first six CONTINUE TO GROW, OUR months of 1999. We expect to continue to be dependent upon BUSINESS COULD BE MATERIALLY the Sapphire/Web software products in the future, and any ADVERSELY AFFECTED. 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.
6 IF THE MARKET'S ACCEPTANCE Our Sapphire/Web product is 100% Pure JAVA. JAVA is a AND ADOPTION OF JAVA AND XML programming language developed by Sun Microsystems. SERVER TECHNOLOGIES DOES NOT Therefore, the continued acceptance of our products in the CONTINUE, OUR FUTURE RESULTS marketplace depends on JAVA's acceptance as a standard MAY SUFFER. programming language. If Sun Microsystems were to make significant changes to the JAVA language or fail to correct defects and limitations in its products, our ability to continue to improve and ship our products could be impaired. In the future, our customers may also require the ability to deploy our products on platforms for which technically acceptable JAVA implementations either do not exist or are not available on commercially reasonable terms. In January 1999, we introduced a product based on a document format for the Web called XML, or extensible mark-up language. We cannot be sure that XML technology will be adopted as a standard, that XML-based products will achieve broad market acceptance, that our XML products will be accepted or that other superior technologies will not be developed. The failure of XML technology to become a standard or the failure of our XML products to achieve broad acceptance could adversely affect our ability to generate revenues. The XML server technology is one of several competing technologies used in information exchange and Internet commerce. We intend to continue to invest substantial resources in our XML products. INTENSE COMPETITION AND The market for our products is intensely competitive, INCREASING CONSOLIDATION IN highly fragmented, characterized by rapid technological OUR INDUSTRY COULD CREATE change and significantly affected by new product STRONGER COMPETITORS AND HARM introductions. Recent acquisitions of several of our OUR BUSINESS. competitors by large software companies and other market activities of industry participants have increased the competition in our market. Our competitors consist of a number of private and public companies including, among others: BEA Systems which acquired WebLogic; IBM; Microsoft; Oracle; and Sun Microsystems, which acquired NetDynamics and the rights to Netscape's Application Server. In addition, we face competition from in-house software developers who may develop some or all of the functionality that our products provide. Many of our competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition, a broader range of products to offer and a larger installed base of customers than us, any of which could provide them with a significant competitive advantage.
7 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 Our top ten customers for the year ended December 31, 1998 CONCENTRATED AND THE LOSS OF and the six months ended June 30, 1999 in the aggregate ONE OF OUR LARGEST CUSTOMERS accounted for approximately 39% and 66%, respectively, of COULD CAUSE OUR REVENUES TO our revenues. Hewlett-Packard accounted for more than 10% DROP QUICKLY AND of our revenues for the year ended December 31, 1998 and UNEXPECTEDLY. OpenConnect accounted for more than 10% of our revenues for the six months ended June 30, 1999. We expect that a small number of customers will continue to account for a substantial portion of revenues in any given quarter in the foreseeable future, although it is unusual for the same customer to account for a substantial amount of revenues in each of several quarters. As a result, our inability to secure major customers during a given period or the loss of any one major customer could cause our revenues to drop quickly and unexpectedly. IF WE FAIL TO DEVELOP NEW Due to the recent emergence of the Internet and the Web as PRODUCTS AND SERVICES IN THE a forum for conducting business, the market for Web FACE OF OUR INDUSTRY'S application server systems in which we participate is RAPIDLY EVOLVING TECHNOLOGY, subject to rapid technological change, changing customer OUR FUTURE RESULTS MAY BE needs, frequent new product introductions and evolving ADVERSELY AFFECTED. 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.
8 Our product development and testing efforts have required, and are expected to continue to require, substantial investment. We may not possess sufficient resources to continue to make the necessary investments in technology. In addition, we may not successfully identify new software opportunities and develop and bring new software to market in a timely and efficient manner. If we are unable, for technological or other reasons, to develop and introduce new and enhanced software in a timely manner, we may lose existing customers and fail to attract new customers, resulting in a decline in revenues. OUR STOCK HAS NOT TRADED Prior to this offering, there has been no public market PUBLICLY, AND AFTER THIS for our common stock. The market price of our common stock OFFERING ITS MARKET PRICE MAY could fluctuate substantially due to: FLUCTUATE WIDELY. - quarterly fluctuations in operating results; - announcements of new products or product enhancements by us or our competitors; - technological innovations by us or our competitors; - general market conditions or market conditions specific to our or our customers' industries; and - changes in earnings estimates or recommendations by analysts. Stock prices of Internet-related companies have been highly volatile. Our initial public offering price may not be indicative of the price of our stock that will prevail in the trading market. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has at times been instituted against that company. If we become subject to securities litigation, we could incur substantial costs and experience a diversion of management's attention and resources. THE UNPREDICTABILITY OF OUR Quarterly fluctuations in operating results may be caused QUARTERLY OPERATING RESULTS by: MAY ADVERSELY AFFECT THE - changes in the growth rate of Internet usage; TRADING PRICE OF OUR COMMON - fluctuations in the demand for our products and STOCK. 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.
9 Many of these factors are not in our control. In addition, we also experience seasonality which causes us to typically recognize a disproportionately greater amount of our revenues for any fiscal year in our fourth quarter and a disproportionately lesser amount in our first quarter, due largely to sales force quota practices in the software industry and to customer budgeting processes. WE NEED TO MANAGE OUR GROWTH We are a growing company. Our ability to manage our growth EFFECTIVELY OR WE MAY NOT will depend in large part on our ability to generally SUCCEED. improve and expand our operational and sales and marketing capabilities, to develop the management skills of our managers and supervisors, many of whom have been employed by us for a relatively short time, and to train, motivate and manage both our existing employees and the additional employees that may be required. Additionally, we may not adequately anticipate all of the demands that growth may impose on our systems, procedures and structure. Any failure to adequately anticipate and respond to these demands or manage our growth effectively would have a material adverse effect on our future prospects. THE DEVELOPMENT OF We expect to expand our international operations and INTERNATIONAL OPERATIONS WILL international sales and marketing efforts, initially, by CAUSE US TO FACE ADDITIONAL opening regional sales and support offices in Europe and RISKS. Asia Pacific within the next twelve months. We have limited experience in marketing, selling and distributing our products and services internationally. International operations, including operations in those regions that we are targeting, are subject to the following risks: - recessions in foreign economies; - political and economic instability; - fluctuations in currency exchange rates; - difficulties and costs of staffing and managing foreign operations; - potentially adverse tax consequences; - reduced protection for intellectual property rights in some countries; and - changes in regulatory requirements. OUR FAILURE TO MAINTAIN We derive over 75% of our license revenues through a ONGOING SALES THROUGH A limited number of independent software vendors, systems LIMITED NUMBER OF INDIRECT integrators, distributors and resellers. Although we CHANNELS MAY RESULT IN LOWER intend to increase our marketing and direct sales efforts, REVENUES. 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.
10 IF WE LOSE OUR KEY PERSONNEL, A significant portion of our senior management team has OR FAIL TO ATTRACT AND RETAIN been in place for a relatively short period of time. Our ADDITIONAL PERSONNEL, THE success will depend to a significant extent on their SUCCESS AND GROWTH OF OUR ability to gain the trust and confidence of our other BUSINESS MAY SUFFER. employees and to work effectively as a team. Our future success will also depend significantly on our ability to attract, integrate, motivate and retain additional highly skilled technical, managerial, sales, marketing, and services personnel. Competition for skilled personnel is intense, and we may not be successful in attracting, motivating and retaining the personnel required to grow and operate profitably. Failure to attract, integrate, motivate and retain highly skilled personnel could adversely affect our business, especially our ability to develop new products and enhance existing products. THE LENGTHY AND VARIABLE Our Sapphire/Web software is generally used for SALES CYCLES OF OUR mission-critical or enterprise-wide purposes and involves SAPPHIRE/WEB PRODUCT COULD a significant commitment of resources by our customers. A CAUSE SIGNIFICANT FLUCTUATION customer's decision to license our Sapphire/Web software IN OUR QUARTERLY RESULTS. generally involves the evaluation of the available alternatives by a significant number of personnel in various functional and geographic areas, each often having specific and conflicting requirements. Accordingly, we typically must expend substantial resources educating prospective customers about the value of our Sapphire/ Web software solutions. For these reasons, the length of time between the date of initial contact with the potential customer and the execution of a software license agreement typically ranges from three to six months, and is subject to delays over which we have little or no control. As a result, our ability to forecast the timing and amount of specific sales is limited and the delay or failure to complete one or more large license transactions could cause our operating results to vary significantly from quarter to quarter. THE FAILURE TO IMPLEMENT Implementation of our Sapphire/Web software often involves SUCCESSFULLY OUR SAPPHIRE/WEB a significant commitment of financial and other resources SOFTWARE COULD RESULT IN by our customers. The customer's implementation cycle can DISSATISFIED CUSTOMERS AND be lengthy due to the size and complexity of their systems DECREASED SALES. 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.
11 WE MAY REQUIRE FUTURE Over time, we may require additional financing for our ADDITIONAL FUNDING TO STAY IN operations. Additionally, we periodically review other BUSINESS. 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 Concurrency restrictions can limit Internet deployment and REDUCE THE DEMAND AND UTILITY use capacity. The boundaries of our Sapphire/Web software OF OUR PRODUCTS. and Bluestone XML server capacity, in terms of numbers of concurrent users or interactions, are unknown because, to date, no customer or testing environment has reached these boundaries. The Sapphire/Web software's or the Bluestone XML server's capacity boundaries may, at some future time, be reached and, when reached, may be insufficient to enable our customers to achieve their desired levels of information deployment and exchange. We may lose customers or fail to gain new customers if either of the Sapphire/Web software's or the Bluestone XML server's capacity boundary limits the ability of our customers to achieve expected levels of information deployment and exchange or Internet commerce transactions. OUR LIMITED ABILITY TO Our success and ability to compete are substantially PROTECT OUR INTELLECTUAL dependent on our internally developed technologies and PROPERTY RIGHTS COULD IMPAIR trademarks, which we protect through a combination of OUR ABILITY TO COMPETE copyright, trademark and trade secret laws, EFFECTIVELY. 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.
12 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 We have in the past and may in the future, resell, under MAINTAIN THIRD PARTY LICENSES license, certain third party software that enables our COULD HARM OUR BUSINESS. 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 Many of our installations involve projects that are PRODUCT LIABILITY CLAIMS AND critical to the operations of our customers' businesses OUR PRODUCTS' REPUTATIONS MAY and provide benefits that may be difficult to quantify. SUFFER. 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.
13 YEAR 2000 PROBLEMS MAY Many currently installed computer systems and software DISRUPT OUR BUSINESS. products are coded to accept only two digit entries in the date field. Beginning in the year 2000, these date fields will need to accept four digit entries to distinguish twenty-first century dates from twentieth century dates. As a result, over the next several months, computer systems and/or software used by many companies may need to be upgraded to comply with these "Year 2000" requirements. Significant uncertainty exists in the software industry concerning the potential effects associated with compliance. While our software products are not time/date sensitive, many of the third party software applications run by our customers are time/date sensitive. In addition, we have in the past resold third party software that may not be Year 2000 compliant. We may experience unanticipated problems and costs caused by undetected errors or defects in the software used in our internal systems related to the Year 2000 transition. If our internal computer systems are not Year 2000 compliant then we or our customers may suffer system failures or miscalculations that could cause disruptions of operations. In addition, we believe that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues in a variety of ways. Many companies are expending significant resources to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by us. Our reasonable worst case scenarios include: - exposure to potential business disruption and resulting claims, whether with or without merit; - temporary inability to process transactions internally, to send invoices to vendors and customers or to engage in similar normal business activities; and - postponed or delayed sales because existing and potential customers may choose to defer purchasing, or reduce funds available to purchase, software products such as those offered by us. Our insurance coverage may not cover or be adequate to offset these and other business risks related to the Year 2000.
14 OUR EXECUTIVE OFFICERS AND Following the completion of this offering, our executive DIRECTORS AND THEIR officers, directors and their affiliates will beneficially AFFILIATES WILL OWN A LARGE own approximately 64% of the outstanding shares of common PERCENTAGE OF OUR VOTING stock, or 62% if the underwriters over allotment option is STOCK AND WILL HAVE THE exercised in full. As a result, these stockholders will be ABILITY TO MAKE DECISIONS able to control all matters requiring stockholder approval THAT COULD ADVERSELY AFFECT and, thereby, our management and affairs. Matters that OUR STOCK PRICE. 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 The anticipated initial public offering price is WILL INCUR IMMEDIATE DILUTION substantially higher than the book value of our common PER SHARE OF THE COMMON STOCK stock. At the initial offering price of $12.00 per share, BASED ON ITS BOOK VALUE AFTER the book value of the common stock after the offering will THE OFFERING. be $3.47 per share. This represents an immediate and substantial dilution per share of the common stock. The dilution per share represents the difference between the amount per share paid by the purchasers of shares of common stock in this offering and the net tangible book value per share of common stock immediately after the completion of this offering. In addition, to the extent outstanding options are exercised, there will be further dilution to new investors. OUR CHARTER AND BYLAWS AND At the time we complete this offering, our charter and our DELAWARE LAW CONTAIN bylaws, in conjunction with Delaware law, will contain PROVISIONS THAT COULD provisions that could make it more difficult for a third DISCOURAGE A TAKEOVER EVEN IF party to obtain control of Bluestone even if doing so BENEFICIAL TO STOCKHOLDERS. 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.
15 FUTURE SALES OF OUR COMMON The market price of our common stock could decline as a STOCK MAY DEPRESS OUR STOCK result of sales by our existing stockholders or the PRICE. perception that those sales may occur. These sales could also make it more difficult for us to raise funds through equity offerings in the future at a time and at a price that we think is appropriate. After completion of this offering, the current holders of most of our common stock and all of our preferred stock outstanding prior to this offering, as well as the holders of outstanding warrants, will be entitled to registration rights with respect to their common stock or the common stock underlying their convertible securities. If these holders, by exercising their registration rights, cause a large number of securities to be registered and sold in the public market, these sales could have an adverse effect on the market price for our common stock. If we were to include, in a registration statement initiated by us, shares held by these holders pursuant to the exercise of their registration rights, these sales may have an adverse effect on our ability to raise needed capital.
FORWARD-LOOKING STATEMENTS Some statements in this prospectus constitute forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Such factors include those described in "Risk Factors." The forward-looking statements included in this prospectus may prove to be inaccurate. In light of the significant uncertainties inherent in these forward-looking statements, you should not consider this information to be a guarantee by us or any other person that our objectives and plans will be achieved. USE OF PROCEEDS The net proceeds to us from the sale of 4,000,000 shares of common stock, at an assumed initial public offering price of $12.00 per share, will be approximately $43.8 million, or $47.2 million if the underwriters' over-allotment option is exercised in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. While we have not determined the specific allocation of the net proceeds of this offering, we currently intend to use the net proceeds for product development, sales and marketing and working capital. Pending their application as described above, we intend to invest the net proceeds in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY We intend to retain any future earnings to support operations and to finance the growth and development of our business, and we do not anticipate paying cash dividends for the foreseeable future. Under our current credit facility, we are prohibited from paying dividends except those accruing to outstanding preferred stock. As of June 30, 1999, there were $1.7 million in accrued dividends on our convertible preferred stock. Upon the conversion of the preferred stock into common stock, we are required to pay to the holders of the preferred stock being converted all accumulated and unpaid cash dividends, whether or not declared, with respect to the preferred stock. However, if requested by any holder of the shares of preferred stock being converted and approved by the holders of a majority of the then outstanding shares of common stock, the holder may exchange all or any portion of the accumulated and unpaid cash dividends into shares of common stock at the then fair market value of the common stock. 16 CAPITALIZATION The following table sets forth our unaudited total capitalization as of June 30, 1999: - on an actual basis; - on a pro forma basis assuming the conversion of all outstanding shares of preferred stock and accrued dividends on preferred stock into 10,482,518 shares of common stock; and - on an adjusted basis to give effect to the receipt of the net proceeds from our sale of 4,000,000 shares of common stock in this offering at an assumed public offering price of $12.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. In the following table, stockholders' equity excludes: - 218,750 shares of common stock issuable upon the conversion of a convertible note payable to Mark Baiada, a former director, in the principal amount of $500,000; - 2,663,589 shares of common stock issuable upon the exercise of outstanding stock options granted as of June 30, 1999 under our Amended and Restated 1996 Incentive and Non-Qualified Stock Option Plan and 275,534 shares reserved for issuance under such plan; - 156,250 shares reserved for issuance under our Director Compensation Plan; - 9,766 shares of common stock issuable upon the exercise of a warrant to purchase common stock issued to Silicon Valley Bank; - 150,448 shares of common stock issuable upon the exercise of a warrant to purchase common stock issued to Deutsche Bank Securities Inc.; and - 137,608 shares of common stock issuable upon the exercise of warrants issued to certain holders of the preferred stock. You should read this information together with our financial statements and the corresponding notes included elsewhere in this prospectus.
JUNE 30, 1999 --------------------------------- ACTUAL PRO FORMA ADJUSTED --------- ----------- --------- (IN THOUSANDS) Short-term borrowings, including current portion of long-term debt........................................................ $ 1,108 $ 1,108 $ 1,108 Long-term debt, less current portion.......................... 1,654 1,654 1,654 --------- ----------- --------- Total debt.................................................. 2,762 2,762 2,762 --------- ----------- --------- Mandatorily redeemable convertible preferred stock............ 40,453 -- -- --------- ----------- --------- Stockholders' equity (deficit): Common Stock, par value $0.001; 53,800,000 shares authorized, 2,819,955 shares issued and outstanding actual; 13,302,473 shares issued and outstanding pro forma; 17,302,473 shares issued and outstanding adjusted.................................................. 3 13 17 Common stock warrants....................................... 1,900 1,900 1,900 Deferred compensation....................................... (1,303) (1,303) (1,303) Additional paid-in capital.................................. 1,630 42,073 85,909 Accumulated deficit......................................... (26,410) (26,410) (26,410) --------- ----------- --------- Total stockholders' equity (deficit)........................ (24,180) 16,273 60,113 --------- ----------- --------- Total capitalization........................................ $ 19,035 $ 19,035 $ 62,875 --------- ----------- --------- --------- ----------- ---------
17 DILUTION Our pro forma net tangible book value as of June 30, 1999 was $16.3 million or $1.22 per share of common stock. We determined our pro forma net tangible book value per share by subtracting our total liabilities from our total tangible assets and dividing that number by 13,302,473 pro forma shares of common stock outstanding as of June 30, 1999. The pro forma information provided immediately above and in the two tables below gives effect to: - the conversion of all outstanding shares of preferred stock into common stock; and - the assumed conversion of accrued dividends on preferred stock into common stock. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately following this offering. Assuming an initial offering price of $12.00 per share after giving effect to our sale of shares of common stock in this offering and after deducting the estimated underwriting discount and commissions and our estimated offering expenses, our pro forma net tangible book value as of June 30, 1999 would have been $60.1 million or $3.47 per share of common stock. This represents an immediate increase in net tangible book value of $2.25 per share to existing stockholders and an immediate dilution of $8.53 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share.............. $ 12.00 Pro forma net tangible book value per share as of June 30, 1999..................................................... $ 1.22 Increase per share attributable to new investors........... 2.25 --------- Adjusted pro forma net tangible book value per share as of June 30, 1999.............................................. 3.47 --------- Dilution per share to new investors.......................... $ 8.53 --------- ---------
The following table summarizes on a pro forma basis as of June 30, 1999 the difference between the existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid. The information presented is based upon an assumed initial public offering price of $12.00 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------------- -------------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ------------ ----------- ------------- ----------- ----------- Existing stockholders.................................. 13,302,473 77% $ 43,297,000 47% $ 3.25 New investors.......................................... 4,000,000 23% 48,000,000 53% $ 12.00 ------------ ----- ------------- ----- Total.................................................. 17,302,473 100% $ 91,297,000 100% $ 5.28 ------------ ----- ------------- ----- ------------ ----- ------------- -----
The tables above assume no exercise of outstanding stock options or warrants and exclude: - 218,750 shares of common stock issuable upon the conversion of a convertible note payable to Mark Baiada, a former director, in the principal amount of $500,000; - 2,663,589 shares of common stock issuable upon the exercise of outstanding stock options granted as of June 30, 1999 under our option plan with a weighted average exercise price of $4.01 per share and 275,534 shares reserved for issuance under the option plan; - 156,250 shares reserved for issuance under our director compensation plan; - 9,766 shares of common stock issuable upon the exercise of a warrant to purchase common stock issued to Silicon Valley Bank with an exercise price of $2.56 per share; - 150,448 shares of common stock issuable upon the exercise of a warrant to purchase common stock issued to Deutsche Bank Securities Inc. exercisable at $8.70 per share; and - 137,608 shares of common stock issuable upon the exercise of warrants issued to certain holders of the preferred stock with a weighted average exercise price of $2.06 per share. To the extent that outstanding options or warrants are exercised or the convertible note is converted, there will be further dilution to new investors. 18 SELECTED FINANCIAL DATA The selected financial data set forth below as of December 31, 1997 and 1998 and for each of the three years in the period ended December 31, 1998 have been derived from our audited financial statements included elsewhere in this prospectus. The selected financial data set forth below as of December 31, 1995 and 1996 and for the year ended December 31, 1995 have been derived from our audited financial statements not included in this prospectus. The selected financial data as of and for the year ended December 31, 1994, and as of and for the six months ended June 30, 1998 and 1999 have been derived from unaudited financial statements which, in the opinion of management, include all adjustments necessary for a fair presentation of our financial position and results of operations. The pro forma balance sheet data assumes the conversion of all outstanding preferred stock and accrued dividends on preferred stock into common stock. The pro forma net loss per share amounts reflect the outstanding preferred stock during each period presented and corresponding accrued dividends through June 30, 1999, on an as converted basis. The selected financial data are not necessarily indicative of results to be expected for any future period and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements, including the notes thereto included elsewhere in this prospectus.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ----------------------------------------------------- -------------------- 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 $ 1,192 $ 4,727 Services........................................ -- -- 43 2,179 3,620 1,707 1,865 Third party products and related services....... 6,074 6,950 6,555 5,225 1,107 932 -- --------- --------- --------- --------- --------- --------- --------- Total revenues.............................. 6,074 6,950 8,073 9,741 8,118 3,831 6,592 Cost of revenues: Software license fees........................... -- -- 113 202 259 96 156 Services........................................ -- -- 305 2,516 4,433 2,078 2,467 Third party products and related services....... 3,502 3,975 4,261 2,798 643 535 -- --------- --------- --------- --------- --------- --------- --------- Total cost of revenues...................... 3,502 3,975 4,679 5,516 5,335 2,708 2,623 --------- --------- --------- --------- --------- --------- --------- Gross profit...................................... 2,572 2,975 3,394 4,225 2,783 1,122 3,969 Operating expenses: Sales and marketing............................. 1,226 1,836 3,005 5,131 9,551 3,748 6,185 Product development............................. 246 458 702 1,295 2,474 904 1,869 General and administrative...................... 724 841 1,515 1,616 2,316 950 2,124 Amortization of stock-based compensation........ -- -- -- -- -- -- 112 --------- --------- --------- --------- --------- --------- --------- Total operating expenses.................... 2,196 3,135 5,222 8,042 14,341 5,601 10,290 --------- --------- --------- --------- --------- --------- --------- Income (loss) from operations..................... 376 (160) (1,828) (3,817) (11,558) (4,479) (6,321) Interest expense, net............................. (30) (41) (50) (80) (47) (34) (1,148) --------- --------- --------- --------- --------- --------- --------- Income (loss) from continuing operations.......... 346 (201) (1,878) (3,896) (11,605) (4,512) (7,469) Income (loss) from discontinued operations........ 300 497 (738) 99 -- -- -- --------- --------- --------- --------- --------- --------- --------- Net income (loss)................................. 646 296 (2,616) (3,798) (11,605) (4,512) (7,469) Accretion of preferred stock redemption value..... -- -- -- (240) (846) (308) (779) --------- --------- --------- --------- --------- --------- --------- Net income (loss) available to common stockholders.................................... $ 646 $ 296 $ (2,616) $ (4,038) $ (12,451) $ (4,820) $ (8,247) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Basic and diluted net income (loss) per share: Continuing operations........................... $ 0.12 $ (0.07) $ (0.67) $ (1.39) $ (4.12) $ (1.60) $ (2.65) Discontinued operations......................... 0.11 0.18 (0.26) 0.04 -- -- -- Accretion of preferred stock redemption value... -- -- -- (0.09) (0.30) (0.11) (0.28) --------- --------- --------- --------- --------- --------- --------- $ 0.23 $ 0.11 $ (0.93) $ (1.44) $ (4.42) $ (1.71) $ (2.93) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Shares used in computing net income (loss) per share........................................... 2,813 2,813 2,813 2,813 2,814 2,814 2,815 Pro forma basic and diluted net loss per share from continuing operations...................... $ (0.96) $ (1.35) $ (0.67) $ (0.70) --------- --------- --------- --------- --------- --------- --------- --------- Shares used in computing pro forma basic and diluted net loss per share...................... 4,046 8,572 6,789 10,688
AS OF DECEMBER 31, AS OF JUNE 30, 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 $ 20,600 $ 20,600 Working capital (deficit)..................... 1,119 1,205 (640) (48) (340) 16,576 16,576 Total assets.................................. 3,303 4,888 6,734 5,815 7,536 24,969 24,969 Long-term obligations, net of current portion..................................... 519 184 191 1,270 1,876 1,654 1,654 Mandatorily redeemable convertible preferred stock....................................... -- -- -- 5,331 17,415 40,453 -- Total stockholders' equity (deficit).......... 1,098 1,375 (1,269) (5,703) (18,147) (24,180) 16,273
19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We were incorporated in New Jersey in 1989 as Bluestone Consulting, Inc. Our primary business initially consisted of general information technology consulting on the UNIX platform and information technology staffing. In January 1991, we entered the software business and became a value added reseller of third party software products. We also began to develop software internally for sale to customers as part of our software business. In October 1995, our proprietary product, Sapphire/Web 1.0, was released. In March 1997, we reincorporated in Delaware and changed our name to "Bluestone Software, Inc." In April 1997, we spun off our consulting business to Bluestone Consulting, Inc. a newly formed Delaware corporation ("BCI"). Immediately after the spin-off, our business consisted of two product lines: - Sapphire/Web, our proprietary software product; and - third party graphical user interface software products, which we resold to our customers. For the year ended December 31, 1997, the Sapphire/Web products and related services generated approximately $4.5 million in revenues, while third party products and related services contributed approximately $5.2 million. In 1998, we decided to focus on internally developed software products and curtail the licensing and services related to third party products. Beginning in March 1998, we increased our sales and marketing efforts and hired new management. We hired a significant number of sales personnel throughout the country in order to develop a nationwide presence and generate increased revenue. The positioning and feature set of the Sapphire/Web product was shifted from a low-cost development tool to an enterprise-wide software solution for Internet applications. For the year ended December 31, 1998, the Sapphire/Web products and related services generated approximately $7.0 million in revenues, while third party products and related services contributed approximately $1.1 million. In January 1999, we released Bluestone XML-Server, which represents a new generation of specialized Web application server focused on Internet commerce. In May 1999, Release 6 of Sapphire/Web was made generally available. OVERVIEW Our fiscal year end is December 31. References to 1996, 1997 or 1998 mean the fiscal year ended December 31 unless otherwise indicated. We generate revenue from two principal sources: - license fees for our software products; and - professional services and support revenue derived from consulting, training and maintenance services related to our software products. In 1998, one customer accounted for 11% of our total product and services revenues and in the six months ended June 30, 1999, one customer accounted for 29% of our total product and services revenues. Our top 10 customers represented 34%, 39% and 66% of total revenues in 1997, 1998 and in the six months ended June 30, 1999, respectively. SOFTWARE LICENSE FEES. Typically, our customers pay an up-front, one-time fee for a perpetual license of our software. The amount of the fee is based on the number of developer seats and server interactions. A pricing model based on the number of processors within a server is also available. We also sell annual and multi-year licenses, primarily to independent software vendors. We generally require a written license contract that typically provides for an initial payment within 30-60 days of contract signing. Certain multi-year license contracts contain payment terms that extend beyond one 20 year. Pursuant to the American Institute of Certified Public Accountants' Statement of Position 97-2, any amounts due under contract beyond one year are not deemed to be fixed and determinable and therefore are deferred and recognized as revenue when the payments become due. Prior to 1998, software licenses were principally the result of direct sales to end-users. Beginning in 1998, we began to focus on channel marketing. This has resulted in significant sales of products sold through independent software vendors, resellers and systems integrators. We believe that these alliances have helped to maximize our exposure in the marketplace. Furthermore, we have experienced, and expect to continue to experience, significant variation in the size of individual licensing transactions, ranging from small sales of perpetual developer licenses to large, multi-year licensing arrangements with independent software vendors. We generally recognize license fee revenue when a formal agreement exists, delivery of the product has occurred, no production, modification, customization or implementation obligations remain, the license fee is deemed fixed and determinable and collectibility is probable. Revenue from arrangements with distributors and resellers is not recognized until our product is delivered to the end-user. SERVICES REVENUE. Services revenue consists principally of revenue derived from consulting services provided to customers during implementation and integration of our software products, training of customers' employees and fees for ongoing maintenance, which consists of customer technical support services and unspecified product upgrades/enhancements on a when-and-if-available basis. Consulting and training services are typically delivered on a time and material basis and are typically completed within one month following license contract signing. Consulting services generally consist of simple installations and configurations. We recognize services revenue as the services are performed. Maintenance revenue is generally invoiced in advance and is recognized ratably over the term of the maintenance agreement, which is generally 12 months. COST OF SOFTWARE LICENSE FEES. Cost of software license fees consists primarily of the costs associated with the purchase of product CDs and related documentation and duplication costs. COST OF SERVICES. Cost of services consist primarily of salary and benefit costs of our consulting, support and training organizations, and are expensed when incurred. Additionally, from time to time we engage outside consultants to meet peaks in customer demand. SALES AND MARKETING. We license our products primarily through our indirect channels and direct sales force. Sales and marketing expenses consist primarily of personnel costs, commissions to employees, office facilities, travel and promotional events such as trade shows, advertising and public relations programs. PRODUCT DEVELOPMENT. We maintain an in-house development staff to enhance our existing products and to develop new ones. Product development expenditures are generally charged to operations as incurred. Statement of Financial Accounting Standards No. 86 requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. We establish technological feasibility upon the completion of a working model. To date, we have expensed all software development costs due to the minimal level of development costs incurred subsequent to the establishment of technological feasibility. GENERAL AND ADMINISTRATIVE. General and administrative expenses include our personnel and other costs of our finance, human resources and information services activities. STOCK BASED COMPENSATION. The amount by which the fair market value of our common stock exceeded the exercise price of stock options on the date of grant is recorded as deferred compensation and is amortized to stock based compensation expense as the options vest. 21 RESULTS OF OPERATIONS The following table sets forth statement of operations data for the periods indicated as a percentage of total revenues:
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, --------------------------- ----------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- (AS A PERCENTAGE OF TOTAL REVENUES) Revenues: Software license fees........................... 18% 24% 42% 31% 72% Services........................................ 1 22 44 45 28 Third party products and related services....... 81 54 14 24 -- ------- ------- ------- ------- ------- Total revenues.............................. 100 100 100 100 100 Cost of revenues: Software license fees........................... 1 2 3 3 2 Services........................................ 4 26 55 54 37 Third party products and related services....... 53 29 8 14 -- ------- ------- ------- ------- ------- Total cost of revenues...................... 58 57 66 71 40 ------- ------- ------- ------- ------- Gross profit...................................... 42 43 34 29 60 Operating expenses: Sales and marketing............................. 37 53 118 98 94 Product development............................. 9 13 30 24 28 General and administrative...................... 19 17 29 25 32 Amortization of stock-based compensation........ -- 2 ------- ------- ------- ------- ------- Total operating expenses.................... 65 83 177 146 156 ------- ------- ------- ------- ------- Loss from operations.............................. (23) (39) (142) (117) (96) Interest expense, net............................. (1) (1) (1) (1) (17) ------- ------- ------- ------- ------- Loss from continuing operations................... (23)% (40)% (143)% (118)% (113)% ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 SOFTWARE LICENSE FEES Sapphire/Web license fees were $4.7 million and $1.2 million for the six months ended June 30, 1999 and 1998, respectively. This increase of 296.6% was primarily due to a shift in our product position from a low-priced development tool to a high-end, high-priced enterprise software solution. This change in product position has resulted in increased revenues per customer. Additionally, we were able to concentrate solely on our Sapphire/Web products and services once we curtailed our graphical user interface product line in April 1998. In addition, we received payment under an extended license fee arrangement with one customer in February 1999, which accounted for approximately $1.9 million of our license fee revenue during the six months ended June 30, 1999. SERVICES REVENUE Sapphire/Web services revenue was $1.9 million and $1.7 million for the six months ended June 30, 1999 and 1998, respectively, an increase of 9.3%. Services revenue remained relatively constant between the two periods due to a strategic change in the use of our professional staff. By the beginning of 1999, the main focus of the services organization had shifted to concentrate on short-term, installation-type engagements, usually 2-3 days in duration, rather than long-term implementation activities. These implementation activities are now performed primarily by systems integrators with which we have strategic alliances. 22 THIRD PARTY PRODUCTS AND RELATED SERVICES REVENUE Third party products and related services revenue was zero and $932,000 for the six months ended June 30, 1999 and 1998, respectively. This decrease was due to our decision in 1998 to curtail the licensing and services related to third party products so that we could focus on our proprietary products. GROSS MARGIN--LICENSE FEES Our license fee gross margin increased to 96.7% for the six months ended June 30, 1999 from 91.9% for the same period in 1998. This increase was primarily due to the increase in revenue per customer. Our focus on positioning the product as an enterprise-wide solution has increased the revenue associated with each sale, while the cost of sales for the product has remained relatively constant. GROSS MARGIN--SERVICES REVENUE Our services gross margin decreased to (32.3)% for the six months ended June 30, 1999 from (21.8)% for the same period in 1998. This was primarily due to the hiring and training of additional services personnel in advance of anticipated services revenue growth. SALES AND MARKETING Sales and marketing expenses were $6.2 million and $3.7 million for the six months ended June 30, 1999 and 1998, respectively, an increase of 65.0%. Of this increase, $1.1 million was due to increases in payroll and related costs, recruiting costs and travel costs as a result of the growth in the number of sales personnel, $600,000 was due to increased advertising and trade show expenses, and $256,000 was due to increased commissions expense as a result of higher sales volume. We have increased our spending on sales and marketing because we believe that our sales and marketing efforts are essential for us to increase our market position and our product acceptance. The average number of sales and marketing employees for the six months ended June 30, 1999 was 54 compared to 42 for the six months ended June 30, 1998. We also incurred increases in variable marketing expenses due to increased trade show participation, direct mail campaigns and advertising in order to increase market awareness and gain market acceptance of our products. These costs as a percentage of revenue were 93.8% and 97.8% for the six months ended June 30, 1999 and 1998, respectively. PRODUCT DEVELOPMENT Product development expenses were $1.9 million and $904,000 for the six months ended June 30, 1999 and 1998, respectively, an increase of 106.3%. These costs as a percentage of revenue were 28.3% and 23.6% for the six months ended June 30, 1999 and 1998, respectively. These increases were associated with the development of our new products, Sapphire/Web Release 6 and the Bluestone XML Suite. We believe that our product development investment is essential for us to maintain our market and technological competitiveness. Average development headcount for the six months ended June 30, 1999 and 1998 was 30 and 22, respectively. GENERAL AND ADMINISTRATIVE General and administrative expenses were $2.1 million and $950,000 for the six months ended June 30, 1999 and 1998, respectively. Included in expenses for the six months ended June 30, 1999 were $604,000 for severance and consulting costs. The severance costs were related to the termination of certain executives, and the consulting costs were based upon the fair value of options issued to outside consultants. Excluding these costs, our general and administrative expenses were $1.5 million, an increase of 62.8% over the six months ended June 30, 1998. This increase was primarily due to payroll and related costs resulting from the addition of personnel to support the growth of our business. General and administrative expenses as a percentage of revenue were 32.6% and 24.8% for the six 23 months ended June 30, 1999 and 1998, respectively. Excluding these severance and consulting costs, the expenses as a percentage of revenue decreased to 23.5%. AMORTIZATION OF STOCK-BASED COMPENSATION Amortization of stock-based compensation was $112,000 and zero for the six months ended June 30, 1999 and 1998, respectively. Deferred compensation of $1.4 million arose due to the issuance of stock options at exercise prices below the fair market value of our common stock for accounting purposes relative to the hiring of key employees and directors during the three months ended June 30, 1999. Deferred compensation is included as a component of stockholders' equity and is being amortized by charges to operations over the vesting periods of the options. As of June 30, 1999, we had an aggregate of $1.3 million of deferred compensation to be amortized through June 30, 2003. INTEREST EXPENSE Net interest expense was $1.1 million and $34,000 for the six months ended June 30, 1999 and 1998, respectively. This increase was due to the issuance of warrants to purchase 137,608 shares of common stock at the weighted exercise price of $2.06 per share in connection with the issuance of convertible subordinated bridge notes. Original issue discount interest cost of $1.1 million was recorded during the three months ended June 30, 1999 based upon the fair value of the warrants at the dates of issuance. The warrants are recorded as a component of stockholders' equity. 1998 COMPARED TO 1997 SOFTWARE LICENSE FEES Sapphire/Web license fees were $3.4 million and $2.3 million for 1998 and 1997, respectively. The increase of 45.1% was due to increased market acceptance of the Sapphire/Web software suite. SERVICES REVENUE Sapphire/Web services revenue was $3.6 million and $2.2 million for 1998 and 1997, respectively. This increase of 66.1% was due to the increase in the number of consulting and training engagements associated with our growing customer base. THIRD PARTY PRODUCTS AND RELATED SERVICES REVENUE Third party products and related services revenue was $1.1 million and $5.2 million for 1998 and 1997, respectively. This decrease was due to our decision in 1998 to curtail the sale of third party products and services. GROSS MARGIN--LICENSE FEES Our license fee gross margin was 92.4% in 1998 and 91.4% in 1997, remaining relatively constant. GROSS MARGIN--SERVICES REVENUE Our services gross margin decreased to (22.5)% in 1998 from (15.5)% in 1997. This decrease in the gross margin was primarily due to the hiring and training of additional personnel to support our growing installed base of customers and anticipated increase in future revenues. SALES AND MARKETING Sales and marketing expenses were $9.6 million and $5.1 million in 1998 and 1997, respectively, an increase of 86.1%. These costs as a percentage of revenue increased to 117.7% in 1998 from 52.7% in 1997. These increases were primarily due to an increase in the number of sales and marketing personnel between March and September 1998, including the addition of a new Senior Vice President, Sales and a Senior Vice President, Marketing, as well as three Sales Vice Presidents. In 1998, we 24 opened seven new remote sales offices in Georgia, California, Texas, Colorado and Illinois. Beginning in March 1998, we focused our marketing efforts on achieving market awareness of Bluestone and acceptance of our products, and subsequently incurred significant costs for trade show participation, advertising and direct mail campaigns. PRODUCT DEVELOPMENT Product development expenses were $2.5 million and $1.3 million for 1998 and 1997, respectively, an increase of 91.0%. These costs as a percentage of revenue increased to 30.5% in 1998 from 13.3% in 1997. These increases were primarily due to an increase of $948,000 in payroll and related costs related to the hiring of additional developers, and $115,000 for additional rent and depreciation expense related to capital expenditures for software, hardware and equipment. GENERAL AND ADMINISTRATIVE General and administrative expenses were $2.3 million and $1.6 million for 1998 and 1997, respectively. This increase of 43.3% was primarily due to increases in staff to support our growth. These costs as a percentage of revenue increased to 28.5% in 1998 from 16.6% in 1997. 1997 COMPARED TO 1996 SOFTWARE LICENSE FEES Sapphire/Web license revenue was $2.3 million and $1.5 million for 1997 and 1996, respectively. The increase of 58.4% was due to increased market acceptance of the Sapphire/Web software suite. SERVICES REVENUE Sapphire/Web services revenue was $2.2 million and $43,000 for 1997 and 1996, respectively. This increase of $2.1 million was primarily due to an increase in the number of consulting and training engagements associated with our growing customer base. THIRD PARTY PRODUCTS AND RELATED SERVICES REVENUE Third party products and related services revenue was $5.2 million and $6.6 million for 1997 and 1996, respectively. This decrease was due to a shift in our attention from third party products and services towards proprietary products and services. GROSS MARGIN--LICENSE FEES Our license fee gross margin was 91.4% in 1997 and 92.3% in 1996, remaining relatively constant. GROSS MARGIN--SERVICES REVENUE Our services gross margin increased to (15.5%) in 1997 from (609.3%) in 1996. This increase was primarily due to a significant increase in the sales of our product and the related consulting, training and maintenance services. We began to offer our maintenance services in 1996. SALES AND MARKETING Sales and marketing expenses were $5.1 million and $3.0 million for 1997 and 1996, respectively. This increase of 70.7% was primarily due to increases in the number of sales and marketing personnel. These costs as a percentage of revenue increased to 52.7% in 1997 from 37.2% in 1996. PRODUCT DEVELOPMENT Product development expenses were $1.3 million and $702,000 for 1997 and 1996, respectively, an increase of 84.5%. These costs as a percentage of revenue increased to 13.3% in 1997 from 8.7% in 1996. These increases were primarily due to the costs of hiring of additional developers. 25 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 ------------------------------------------------------------------------------------ 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 ------- ------- -------- ------- ------- ------- -------- ------- ------- (IN THOUSANDS) Revenues: Software license fees................. $ 530 $ 523 $ 854 $ 432 $ 760 $ 1,354 $ 845 $ 2,257 $ 2,470 Services.............................. 563 624 708 937 769 1,029 885 1,020 845 Third party software and related services............................ 1,176 1,181 1,272 785 147 114 61 -- -- ------- ------- -------- ------- ------- ------- -------- ------- ------- Total revenues.................... 2,269 2,328 2,834 2,154 1,676 2,497 1,791 3,277 3,315 Cost of revenues: Software license fees................. 23 67 78 39 57 113 50 57 99 Services.............................. 624 682 865 985 1,093 1,192 1,163 1,338 1,129 Third party software and related services............................ 647 621 683 436 98 73 35 -- -- ------- ------- -------- ------- ------- ------- -------- ------- ------- Total cost of revenues............ 1,294 1,370 1,626 1,460 1,248 1,378 1,248 1,395 1,228 ------- ------- -------- ------- ------- ------- -------- ------- ------- Gross profit............................ 975 958 1,208 694 428 1,119 543 1,882 2,087 Operating expenses: Sales and marketing................... 1,099 1,398 1,598 1,545 2,203 2,930 2,874 2,826 3,360 Product development................... 299 338 376 360 544 704 866 904 964 General and administrative............ 381 434 439 447 502 666 701 635 1,489 Amortization of stock-based compensation........................ -- -- -- -- -- -- -- -- 112 ------- ------- -------- ------- ------- ------- -------- ------- ------- Total operating expenses.......... 1,779 2,170 2,413 2,352 3,249 4,300 4,441 4,365 5,925 ------- ------- -------- ------- ------- ------- -------- ------- ------- Loss from operations.................... (804) (1,212) (1,205) (1,658) (2,821) (3,181) (3,898) (2,483) (3,838) Interest income (expense), net.......... (22) 12 (29) (41) 8 42 (56) (48) (1,100) ------- ------- -------- ------- ------- ------- -------- ------- ------- Loss from continuing operations......... $ (826) $(1,200) $(1,234) $(1,699) $(2,813) $(3,139) $(3,954) $(2,531) $(4,938) ------- ------- -------- ------- ------- ------- -------- ------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
QUARTER ENDED ----------------------------------------------------------------------------------------- 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 ------- ------- -------- ------- ------- ------- -------- ------- ------- (AS A PERCENTAGE OF TOTAL REVENUES) Revenues: Software license fees.............. 23% 22% 30% 20% 45% 54% 47% 69% 75% Services........................... 25 27 25 44 46 41 49 31 25 Third party software and related services......................... 52 51 45 36 9 5 3 -- -- ------- ------- --- ------- ------- ------- --- ------- ------- Total revenues................. 100 100 100 100 100 100 100 100 100 Cost of revenues: Software license fees.............. 1 3 3 2 3 5 3 2 3 Services........................... 28 29 31 46 65 48 65 41 34 Third party software and related services......................... 29 27 24 20 6 3 2 -- -- ------- ------- --- ------- ------- ------- --- ------- ------- Total cost of revenues......... 57 59 57 68 74 55 70 43 37 ------- ------- --- ------- ------- ------- --- ------- ------- Gross profit......................... 43 41 43 32 26 45 30 57 63 Operating expenses: Sales and marketing................ 48 60 56 72 131 117 160 86 101 Product development................ 13 15 13 17 32 28 48 28 29 General and administrative......... 17 19 15 21 30 27 39 19 45 Amortization of stock-based compensation..................... -- -- -- -- -- -- -- -- 3 ------- ------- --- ------- ------- ------- --- ------- ------- Total operating expenses....... 78 93 85 109 194 172 248 133 179 ------- ------- --- ------- ------- ------- --- ------- ------- Loss from operations................. (35) (52) (43) (77) (168) (127) (218) (76) (116) Interest income (expense), net....... (1) 1 (1) (2) -- 2 (3) (1) (33) ------- ------- --- ------- ------- ------- --- ------- ------- Loss from continuing operations...... (36)% (52)% (44)% (79)% (168)% (126)% (221)% (77)% (149)% ------- ------- --- ------- ------- ------- --- ------- ------- ------- ------- --- ------- ------- ------- --- ------- -------
26 Our comparisons of operating results from 1996 to 1997 and from 1997 to 1998, and for the six months ended June 30, 1998 to the six months ended June 30, 1999, generally apply to the comparison of the results of operations for the nine quarters in the period ended June 30, 1999. Our third party products and related services revenue decreased during the four quarters of 1998 due to our decision to curtail the licensing of third party products so that we could focus our resources on our proprietary products. Our gross profit margin increased over the three quarters ended June 30, 1999 due to the increase in our proprietary software license revenue. The increase in general and administrative expenses for the three months ended June 30, 1999 resulted primarily from $577,000 of severance and consulting costs. Net interest expense increased during the three months ended June 30, 1999 due to the issuance of warrants with an original issue discount interest cost of $1.1 million in connection with the issuance of convertible bridge notes. See "Certain Transaction--Bridge Financing." Our quarterly operating results have varied in the past and may vary significantly in the future depending on many factors including, among others: - the size, timing and recognition of revenue from significant orders; - increases in operating expenses required for product development and marketing; - the timing and market acceptance of new products and product enhancements; - customer budget constraints; - our success in expanding our sales and marketing programs; and - general economic conditions. We believe that the purchase of our products is relatively discretionary and generally involves a significant commitment of capital. As a result, purchases of our products may be deferred or canceled in the event of a downturn in any potential customer's business or the economy in general. Accordingly, we believe that, while the quarterly period-to-period comparisons furnish important information about our revenues and expenses, they are not necessarily meaningful and should not be relied upon as indicators of future performance. LIQUIDITY AND CAPITAL RESOURCES From our incorporation in 1989 through 1996, we primarily financed our operations and met our capital expenditure requirements through funds generated from operations and funds borrowed from lending institutions. From April 1997 through May 1999, we raised approximately $41.6 million of venture capital funding in order to expand the sales and marketing and product development efforts of the business. As of June 30, 1999 our primary sources of liquidity consisted of cash in excess of $20.6 million and $1.0 million of available borrowings under our $1.75 million revolving line of credit, which is secured by substantially all of our assets. As of June 30, 1999, the balance outstanding on our line of credit was $671,000. Borrowings under the line of credit are subject to a borrowing base of 80% of eligible accounts receivable. Interest on our line of credit is payable monthly at rates of prime plus .75%. We believe that our existing capital resources are sufficient to meet our capital requirements for the next 12 months. Net cash used for operating activities was $3.0 million in 1997, $10.3 million in 1998 and $4.7 million for the six months ended June 30, 1999. The cash used for operating activities was attributable primarily to net losses of $3.8 million, $11.6 million and $7.5 million in 1997, 1998 and the six months ended June 30, 1999, respectively. Net cash used in investing activities was $872,000 in 1997, $1.2 million in 1998 and $164,000 for the six months ended June 30, 1999. The cash used in investing activities related primarily to purchases of computers and software for internal use. 27 Net cash provided by financing activities amounted to $5.1 million in 1997, $11.7 million in 1998 and $23.0 million for the six months ended June 30, 1999. In 1997, $4.8 million was provided from the sale of Series A preferred stock to certain venture capital investors, $920,000 was provided from borrowings under the available credit lines and $250,000 was provided from borrowings from a related party. In April 1998, approximately $11.2 million was provided from the sale of Series B preferred stock to certain venture capital investors. In May 1999, we sold 9,191,176 shares of Series C preferred stock for gross proceeds of $25.0 million, $1.35 million of which was comprised of the conversion of indebtedness under bridge financing incurred earlier in 1999. For more information on the bridge financing, see "Certain Transactions--Bridge Financing." YEAR 2000 ISSUES GENERAL. Year 2000 issues relate to computer programs or hardware that have date-sensitive software or embedded chips that may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruption of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in other normal business activities. The term "computer programs and hardware" includes accounting, data processing and telephone/ PBX systems, in addition to other miscellaneous systems. These systems may contain imbedded technology, which complicates our identification, assessment, remediation and testing efforts. STATE OF READINESS. We have designed the current versions of our software products to be Year 2000 compliant, and do not anticipate any Year 2000 issues related to these products. However, some older versions of our software products that we no longer sell may not be Year 2000 compliant. Any customer using an older version of one of our products that is not Year 2000 compliant may need to upgrade to a newer, compatible version or discontinue using the software prior to January 1, 2000. We have performed an assessment of the Year 2000 readiness of our information technology systems, including the hardware and software we use to provide and deliver our products. Our testing to date has included our major infrastructure items, hardware platforms, telephone, voice mail and operating systems. All of the tested systems are compliant. Desktop computing, servers, switching and routing platforms have been inventoried and tested with only minor upgrades necessary to one router family. All personal computer systems have been tested and, where necessary, upgraded. By July 1999, we had largely completed the implementation of Year 2000 compliant internal computer applications for our main financial and order processing systems. We completed a Year 2000 simulation on our internal systems and software during the first quarter of 1999. Any discrepancies noted were corrected. Another testing cycle will be completed during the third quarter of 1999 to ensure that systems then not compliant or systems that are newly discovered to be non-compliant are remedied. No information technology projects have been delayed or deferred by our Year 2000 compliance program. As of January 1999, all third party vendors who provide us with systems or software were contacted and provided us with written assurances of their product's compliance. We have incorporated any recommended changes and upgrades wherever necessary. We have not used any independent verification or validation processes to verify the Year 2000 compliance of our third party vendors. In the event that one or more of our significant vendors or service providers are not Year 2000 compliant, due to undetected or embedded system components or technology, we believe that our results of operations will not be materially adversely affected and that our relationships with customers, vendors and others will not be materially adversely affected. We have also sought assurances of Year 2000 compliance from our material providers of items other than information technology. To date we have received approximately 95% of the necessary 28 responses and will complete this portion of our investigations by the end of the third quarter 1999. We have not received notification from any vendor indicating that they are not Year 2000 compliant. COST AND RISK. We have funded our Year 2000 compliance efforts from our cash flow from operations and we have not incurred any significant costs to date related to Year 2000 issues and do not expect the cost of future Year 2000 issues to be material. Furthermore, we believe that Year 2000 issues will not pose significant operational problems for us. However, if all Year 2000 issues are not properly identified or if Year 2000 issues that are identified are not assessed, remediated and tested in a timely fashion, the Year 2000 issue may adversely impact our results of operations or adversely affect our relationships with customers, vendors or others. Also, we may experience operational difficulties caused by undetected errors or defects in embedded technologies that we use in our internal systems. Additionally, we cannot predict whether the Year 2000 issues of third parties will have a material adverse impact on our systems or results of operations. The costs and completion dates of our Year 2000 identification, assessment, remediation and testing efforts are based upon management's best estimates, which were derived using numerous assumptions regarding future events. We have not used any independent verification or validation process to assure the reliability of our risks and costs estimates. These estimates may prove to be inaccurate and actual results could differ materially from those currently anticipated. Specific factors that could cause these material differences include, but are not limited to, the ability to identify, assess, remediate and test all relevant products and services purchased from or by third parties and other similar uncertainties. In addition, variability of definitions of "compliance with Year 2000," and the myriad of different products and services and combinations thereof, used by our customers in connection with our products may lead to claims against us which we cannot currently estimate. The aggregate cost of defending and resolving such claims, if any, may adversely impact our results of operations. Year 2000 issues may affect the purchasing patterns of current and potential customers in a variety of ways. Many companies are expending significant resources to replace or remedy their current hardware and software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by us. Furthermore, our customers could be forced to postpone installations of our products due to dedication of resources to their own Year 2000 issues. We do not believe that there is any practical way to ascertain the extent of, and have no plan to address problems associated with, any reduction in purchasing resources of our customers. Any resulting reduction could have a material adverse effect on our business. To date, there has been no material negative impact on our financial condition or operations as a result of our Year 2000 compliance program. CONTINGENCIES. We have not yet completed an analysis of the operational problems and costs, including loss of revenues, that would be reasonably likely to result from our failure and the failure of certain third parties to complete efforts necessary to achieve Year 2000 compliance on a timely basis. We plan to identify the most likely worst case scenario and, if a contingency plan is required, finalize our plan by September 1999. 29 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. 30 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 to support high volumes of users and interactions. Our flagship product, Sapphire/Web, is a framework for JAVA Web application servers and is currently in Release 6. A Web application server is a software product that allows broad access to stored corporate information and applications to a variety of users, including customers, suppliers and employees, via the Web. We believe that our JAVA Web application server is the leading solution of its kind based on the breadth of its functionality. We believe that ours is the only product to adequately address the four defining elements of enterprise interaction management--development, deployment, integration and management--and therefore provides the most complete overall solution to our customers. In December 1998 at the Giga Information Group's Emerging Technology Conference, we demonstrated that our solution can meet the needs of virtually any enterprise by conducting a live simulation of an Internet commerce site running at a rate of over 100 million interactions per day. In January 1999, we released Bluestone XML-Server, which represents a new generation of specialized Web application server focused on commerce via the Internet. We participate in the following three separate markets: - THE MARKET FOR JAVA WEB APPLICATION SERVERS. In this market sector, enterprises employ our solutions to deploy their existing information technology assets for use in a Web environment, and to create new enterprise applications that are used via the Web. - THE MARKET FOR eXTENDING THE SUPPLY CHAIN. In this market sector, our products enable the "virtual corporation," which means they allow an enterprise to integrate its information assets with those of its partners, vendors and customers to improve collaboration utilizing Web technology in a highly secure and scalable environment. - THE MARKET FOR ENTERPRISE APPLICATION INTEGRATION. In this market sector, our products facilitate the integration of disparate computer systems within an enterprise. We believe we are particularly well positioned in this market, since the necessary capabilities, including standardizing corporate data formats and providing access to existing information systems, are two of the core strengths of our JAVA Web application server software. Our solutions are used by some of the world's leading companies, including ARI, AT&T, Deutsche Bank, Dreyfus Corporation, Eli Lilly, Hewlett-Packard, Houghton Mifflin Company, Just For Feet, MCI WorldCom, OpenConnect and Reliance National. OUR INDUSTRY GROWTH IN INTERNET RELATED SOFTWARE The Internet has experienced dramatic growth, both in terms of the number of users and as a means of conducting commercial transactions, and is expected to continue to grow rapidly. According to a report prepared by the Computer Industry Almanac Inc., the number of Internet users was over 150 million in 1998, and is expected to grow to over 720 million by the end of 2005. The increase of users and business activities on the Web has created a large and growing market for Web application software as existing businesses and new Web-based enterprises foster new revenue streams, significantly broaden information deployment, enable inter-enterprise collaboration and strive to reduce the cost of maintaining an ever-changing technology infrastructure. An International Data Corporation report estimates that Internet-centric software, which accounted for $4.0 billion in revenue in 1997, will approach $16.0 billion by 2000 due to aggressive corporate adoption. 31 THE RISE OF THE ENTERPRISE APPLICATION SERVER To date, most companies' use of Internet technology has consisted of employing Internet software products called Web servers to provide marketing material through their Web sites. This technology allows the presentation of relatively simple information to users, such as pictures and text, through static documents. This static information must be preformatted with the information to be displayed, then manually changed when information is to be updated. This technology is still heavily in use today, but cannot sufficiently meet the quickly growing needs of companies to provide complex and dynamic information to their users. The existing information technology infrastructure of most companies leaves them unable to utilize, integrate or deploy existing information technology assets for Internet commerce or use over the Web. These companies are recognizing that a broader set of facilities is required to capture the substantial benefits offered by Internet computing. These facilities include development capabilities that are specifically geared to a Web-based environment, interaction environments that are scalable and reliable, integration faculties that allow seamless linkages between the Internet and an enterprise's existing information infrastructure, and the ability to effectively monitor and manage Web-based applications and infrastructure. Web application servers such as our software have emerged to provide these facilities. Web application servers, by design, allow scalable, secure real time, interactive access to complex information through the Web that is otherwise only available internally in an organization through its own applications and existing databases. They do this by providing the following capabilities: - load balancing--spreading the workload across multiple processors; - transaction management--tracking and assuring the completion of transactions; - integration to multiple back-end sources--making all enterprise information available for use; - an integrated development environment--a graphical tool to assist software developers; - application management--monitoring and reporting on all application server activity; and - multiple user support--the ability to individually serve a community of disparate users. Demand for these capabilities has resulted in significant growth in the market for Web application servers. In an August 1998 report, Forrester Research estimated that the market for Application Server software would be approximately $700 million in 1999 and would grow to approximately $1.8 billion by 2001, representing a compound annual growth rate of approximately 60%. Another independent technology research organization, Ovum, estimated in June 1999 that the market for application server technologies, which they define in a manner that more closely resembles our addressable market, will grow to $17 billion by 2004. OUR SOLUTION We provide a comprehensive framework that enables businesses to deploy information across the Internet, or their proprietary company networks called intranets and extranets, to employees, customers, suppliers and partners. Our solution furnishes businesses with the ability to Web-enable existing information systems, develop new Web-based applications, and enable Internet commerce. Our deployment solution is certified by Sun Microsystems as 100% Pure JAVA and therefore operates in all enterprise computing environments. We have recently introduced the capability to support Hot Swapping, which enables the movement of applications from one computer to another, and Hot Versioning, which enables software programs to be updated between user clicks. These features allow businesses to upgrade or fix their hardware and software without interrupting user interactions permitting true 24x7 operations. This is particularly critical for companies engaged in Internet commerce where down time can be very costly. We believe our solution is the only one available that 32 provides the features and capabilities necessary for use in enterprise-scale, mission-critical applications. In particular, our solution offers the following facilities: ROBUST DEVELOPMENT ENVIRONMENT AND TOOLSET. Our solution includes an integrated development environment, which can be thought of as a programmer's toolkit, that uses industry-standard programming components to easily assemble applications and provides improved support for users with varying skill levels. This toolkit includes automated routines to generate user interfaces and the ability to import existing user interfaces from other sources, which increases a programming staff's development speed. The environment is open and highly adaptable, which allows programmers to increase their productivity by selecting the most appropriate tools for a given task. SCALABLE, OPEN, HIGH-PERFORMANCE DEPLOYMENT. The Web application server framework within our solution enables businesses to make their information available with a high degree of reliability, security and flexibility. Our Web application server supports very high volumes of interactions and high numbers of concurrent users with caching, load balancing and fault-tolerance features, which optimize response times and ensure the integrity of applications. In addition, our standards-based, 100% Pure JAVA architecture allows for a high level of flexibility in operating systems, programming languages, and database access and communication protocols, with no dependence on proprietary technology. EXTENSIVE INTEGRATION CAPABILITIES. Our solution goes beyond application programming interfaces, or APIs, to facilitate communications between a business' computing systems with pre-built modules for Web-enabling today's dominant business applications, such as those from SAP and PeopleSoft. Our solution also includes tools that allow programmers to rapidly build new integration modules for other applications, and generally enable complex information answers to be generated from any data source within the enterprise, no matter how remote or proprietary. These capabilities allow businesses to marry existing systems to new information delivery platforms, thereby preserving legacy investments. COMPREHENSIVE MANAGEMENT. Our solution provides the necessary means to monitor, administer and report on a business' entire Web infrastructure. These advanced features provide the means to perform administrative and management tasks easily and quickly, allow for real time reconfiguration of the information infrastructure, assure minimum and/or differentiated levels of service, and integrate with leading systems management utilities such as those from Computer Associates, IBM Tivoli, BMC and Hewlett-Packard. Our solution automatically generates alarms, alerts and reports, which allows for optimal performance of, and powerful insight into, a business' Web infrastructure. OUR GROWTH STRATEGY Our goal is to maintain and extend our position as a leading provider of Web application server technology, enterprise application integration and Internet commerce solutions. Our key growth strategies are to: MAINTAIN AND EXTEND TECHNOLOGICAL LEADERSHIP. We believe that our technology, solution and features represent a significant competitive advantage and provide customer benefits that are not available from other solutions. Highly advanced technological elements incorporated in our solutions collectively contribute to the speed, scalability, reliability, manageability, flexibility and extensibility of our product set. For more information on these technological elements, see "--Technology." We believe that our consistent record of technological industry firsts, as demonstrated recently by the release of our Bluestone XML-Server, will continue into the future. EXPAND PRODUCT OFFERINGS. We intend to continue to develop new products and enhancements to existing products to fuel continued growth. Recently, we introduced our XML suite of products, which expands the markets and applications for our technology, with a focus on Internet commerce and inter-enterprise information exchange. Upcoming enhancements to the Sapphire/Web suite consist of 33 enhanced Internet commerce services including the ability to provide differentiated service levels based on user profiles, improved content and presentation management capabilities, and significantly increased bandwidth, transaction processing and security. Additional upcoming enhancements will include improved high-end management features like reporting and control systems, new business application capabilities and increased ease of use. We expect to continue to make considerable investments in product development to maintain this pace of innovation. CONTINUE TO FOCUS ON ENTERPRISE-SCALE SOLUTIONS. An April 5, 1999 article in PCWEEK ONLINE reported on an independent evaluation of our Web application server framework against two competitive products. The evaluation employed a simulated E-commerce site developed by Doculabs, an independent information advisory company. In this evaluation, our solution posted throughput and response time results that were 50% higher than our nearest competitor. In addition, our solution was the only product able to meet the fault-tolerance requirements of mission-critical and E-commerce applications. At the December 1998 Emerging Technology Conference sponsored by Giga Information Group, we performed a live demonstration based on a PCWEEK Labs-designed benchmark and successfully processed a variety of complex transactions at a rate of over 100 million interactions per day. Consequently, we believe that we are uniquely positioned as a performance leader in our industry and will benefit as an increasing number of large mission-critical systems move to the Web and as Internet commerce grows. INCREASE MARKETING AND DIRECT SALES EFFORTS. We intend to leverage our previous customer successes by devoting significant marketing and direct sales resources to specific industry verticals, including telecommunications, insurance, brokerage, pharmaceuticals and E-commerce. We intend to increase the number of field sales offices and field sales representatives over the next 12 months. Our direct sales organization is organized around named accounts, geographic regions and, increasingly, industry verticals. As of June 30, 1999, we had 52 employees in sales and marketing, 18 of which were quota-carrying field sales representatives. FURTHER DEVELOP INDIRECT CHANNELS, PARTNERS AND ALLIANCES. Our sales efforts are leveraged by indirect channels and partners, and we intend to continue to foster these relationships to fuel additional growth. These channels, partners and alliances significantly extend our market reach and overall opportunity set, and include the following: - independent software vendors, including Hewlett-Packard, Sanchez Computer Associates and Platinum technology; - systems integrators, including American Management Systems, Grant Thornton, KPMG, PricewaterhouseCoopers and approximately 65 others; and - value added distributors (VADs) and value added resellers (VARs), including Intraware and Merisel. OUR PRODUCTS SAPPHIRE/WEB SUITE SAPPHIRE/DEVELOPER. Sapphire/Developer is a software product that delivers the capability to build applications that are used through the Web to find, access and deliver enterprise-class information to users. It connects any back-end data source to any front-end data user. It supports a wide variety of industry standard data formats and programming languages, such as HTML and ActiveX, and enables the delivery of information to any database, flat file or other enterprise application. Sapphire/ Developer's ability to incorporate new technology, tools and development approaches allows increased productivity and faster deployment of Web applications. 34 SAPPHIRE/DEVELOPER ENTERPRISE EDITION. Sapphire/Developer Enterprise Edition is a bundle of software products which includes the Sapphire/Developer Enterprise Deployment Kit (EDK) and Sapphire/Developer. EDK is a software tool kit that extends Sapphire/Developer to enable the use of any combination of operating systems, programming languages and data definitions such as those from Microsoft, Sun and IBM. SAPPHIRE/UNIVERSAL BUSINESS SERVER (UBS). UBS is the Web application server that creates a real time, Web-enabled environment that scales applications to meet fluctuating needs, balances loads to prevent system downtime, crashes or poor performance and manages transactions across the Web infrastructure. UBS delivers scalability and consistent 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 programs that are used to access all of a company's information resources and make them easily available to programmers and users. 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 data from existing sources into XML documents and then uses the XML documents to communicate with other applications. XML is a highly flexible document format for structuring data on the Web. Our XML server enables businesses to conduct Internet commerce, integrate their supply chains and generally share information across software applications and with other businesses in an automated fashion. BLUESTONE VISUAL-XML. Our Bluestone Visual-XML product, announced in February 1999 and released in May 1999, is a tool kit designed to allow business users to develop applications based on XML with a graphical drag-and-drop environment. XWINGML. Our XwingML product is an open source application that was released in February 1999 and is used to create JAVA graphical user interfaces based on XML documents. BLUESTONE XML-CONTACT. Our Bluestone XML-Contact is open source software that lets devices using 3Com's Palm operating system exchange contact information with any corporate database, turning personal productivity tools into corporate information resources with the power of XML. SERVICES AND SUPPORT We offer short-term mentoring, consulting and customer training services through our Advanced Technology Group. We use our Advanced Technology Group resources to assist our partners and clients in the early implementation efforts, which tend to be less than one month in duration, and rely on our systems integration partners to deliver longer-term professional integration services. This strategy allows 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. 35 We have a Customer Support Group that provides ongoing maintenance and support to customers through maintenance contracts. We furnish support through the telephone and e-mail, as well as through a portion of our Web site called Explore Web, which provides users with access to a comprehensive knowledge base of the Sapphire/Web and XML suite solutions. We offer extensive training and certification for Sapphire/Web products as well as course training in related topics, such as JAVA, XML and the Web in general. Additionally, we also offer formal instruction through interactive distance learning, which furnishes instruction through an innovative mix of video, computer-based training and e-mail. We provide ongoing technical support on a contractual basis to our licensees with annual maintenance agreements. SALES AND MARKETING As of June 30, 1999, our sales and marketing organization consisted of 52 individuals, all of whom were based in North America. We had 18 field sales representatives and 11 inside sales representatives, all of whom carry quotas. The sales force is comprised of three primary organizations: Named Accounts, Direct Sales and Indirect Sales. We have diversified our sales activities to support a target distribution of 70% indirect and 30% direct. We have sales offices in Sacramento, Los Angeles, Atlanta, Dallas, Chicago, Boulder, San Francisco, Toronto and Mount Laurel, New Jersey. Sales outside North America are generated by third party resellers in London, Seoul and Sydney. We expect to open regional sales support offices in Europe and Asia Pacific within the next twelve months. We support our sales efforts through corporate and field marketing initiatives in North America. Our marketing organization focuses on creating market awareness, generating leads, promoting our technology leadership and educating independent research analysts. These efforts include public relations, advertising, trade shows, alliance programs, seminars, direct mail, telemarketing and marketing collateral that includes a Web site, brochures, white papers and demonstrations. STRATEGIC ALLIANCES We are building and maintaining significant working relationships with complementary vendors that we believe will contribute to our ongoing success. These relationships fall into four categories: strategic technology alliances, independent software vendors, systems integrators and value added distributors and resellers. Within our strategic technology alliances, we engage in collaborative technology exchanges with BEA Systems, Computer Associates, Informix, IBM, Level III Communications/PKS SI, Microsoft, Netscape, OpenConnect, Oracle, Platinum technology, Sanchez Computer Associates and Sun Microsystems, among others. We have relationships with independent software vendors, including Hewlett-Packard, Platinum technology, OpenConnect, Sanchez Computer Associates and Foundation Technologies. These partners deliver their application software products with some element of our technology embedded therein. We maintain a close working relationship with these partners and will continue to develop relationships of this nature. We also maintain relationships with third party systems integrators who deliver services to our end-user clients. These companies have been recruited to deliver long term project support and are required to maintain a level of proficiency in our products. These relationships include American Management Systems, KPMG, Grant Thornton, PricewaterhouseCoopers and Level III Communications/PKS SI. 36 We have entered into formal two-tier distribution agreements with Intraware and Merisel to deliver our suite of software products. These agreements provide Intraware and Merisel with the right to distribute our products in North America. We are a member in good standing of the Enterprise JAVA Bean Council, the World Wide Web Consortium (W3C), the Object Management Group (OMG) and the Enterprise Integration Council. CUSTOMERS From 1996 through 1998, we licensed copies of our Sapphire/Web software to more than 500 customers. Most of these customers began using our Sapphire/Web products to Web-enable separate departmental systems and many of them are now expanding their usage of Sapphire/Web to a company-wide basis. Accordingly, we have observed a recent shift by our customers from creating Web applications to creating enterprise applications that are Web-enabled. Our solutions are applicable to a wide variety of industries and are used by many of the world's leading businesses. For example, Sapphire/Web users include: - three of the top five FORTUNE 500 companies in the electronics industry; - five of the top ten FORTUNE 500 companies in the computer equipment industry; - four of the top five FORTUNE 500 companies in the aerospace industry; - seven out of the top ten FORTUNE 500 companies in the telecommunications industry; - three of the top four FORTUNE 500 companies in the entertainment industry; and - five of the top ten FORTUNE 500 companies in the pharmaceuticals industry. Our customers include ARI, AT&T, Deutsche Bank, Dreyfus Corporation, Eli Lilly, Hewlett-Packard, Houghton Mifflin Company, Just For Feet, MCI WorldCom, OpenConnect and Reliance National. Each of these customers accounted for at least $100,000 in revenue. Examples of successful Sapphire/Web implementations with representative customers of ours include the following: - We helped ARI, a large international leasing company, establish its first Web application in 1998. That application enabled ARI's customers to inquire directly into ARI's leasing system to manage delivery and maintenance information for ARI's fleet. - Reliance National, a major insurance company, has been using Sapphire/Web software since 1997. Reliance National began with small departmental solutions. In 1998, Reliance National expanded its usage to include a system that decentralized its operations by communicating its risk management system to all of its associated brokers, thereby significantly expanding the speed in which the broker can prepare premium quotes and the manner in which Reliance National serves its customers. - AT&T and MCI WorldCom have each chosen our products to be used in customer loyalty and retention programs. These companies have engaged in projects to Web-enable their billing and reporting systems, thereby allowing their customers to review and approve bills through their Web site. - Several major publishers have used our products to further their Internet commerce initiatives. For example, Time, Inc. has utilized the Sapphire/Web solution to Web-enable the acquisition of pictures from its large database so that its customers can search for and purchase the images from its Web site. In another example, Houghton Mifflin Company, a text book publisher, has 37 utilized the Sapphire/Web solution to provide an index of products available on its Web site, thereby considerably enhancing its customer service capabilities. - Several independent software vendors have entered into licensing arrangements with us in which our Sapphire/Web software becomes a core component for the next generation of their respective software products. For example, Platinum technology uses Sapphire/Web software as its next generation technology to move beyond the Web extension of legacy applications. In another example, Sanchez Computer Associates, a banking software provider, uses the Sapphire/ Web software as a foundation for its voice response and ATM systems. Additionally, Hewlett-Packard, a workflow and process management software vendor, uses Sapphire/Web software as its application integration engine, thereby giving it access to back-end legacy applications. COMPETITION The market for our products is intensely competitive, highly fragmented and characterized by rapid technological change and new product introductions. Recently, several of our competitors have been acquired by large software companies. Our competitors consist of a number of private and public companies including, among others: - BEA Systems, which acquired WebLogic; - IBM; - Microsoft; - Oracle; and - Sun Microsystems, which acquired NetDynamics and the rights to Netscape's Application Server. In addition, we face competition from in-house software developers. Many of our competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition, a broader product range and a larger base of installed customers than us. We expect to face increased competition in the future from our current competitors. In addition, new competitors, or alliances among existing and future competitors, may emerge and rapidly gain significant market share. We may also face increased competition in the future from existing large business application and Internet software vendors that may broaden their product offerings to include Web application server software. To the extent these vendors are able to offer systems that are functionally comparable or superior to our products, their significant installed customer bases, ability to offer a broad solution and ability to price their products as incremental add-ons to existing systems could provide them with a significant competitive advantage over us. TECHNOLOGY Our technology is based upon two concepts: - binding front-end objects to back-end objects which connects sources of data to users of data; and - protecting users from changes in technology. Specific technology features of the Bluestone solution include: 100% PURE JAVA APPLICATION SERVER. The JAVA platform offers enormous benefits to us and our customers. Our products run on any platform where JAVA is available and has been verified on operating systems such as Windows95, Windows98, WindowsNT, Linux, all UNIX platforms including Sun, IBM and HP, as well as the operating systems for IBM's mainframes and AS400 computers. JAVA 38 has also brought large productivity gains to our development team by decreasing development time, eliminating porting costs and speeding time to market. LOAD BALANCING. This is the fundamental technology that provides the high performance and scalability for large applications and contributes to the fault tolerant, or continuous operation, of the applications. A Load Balance Broker runs in any number of Web servers in a Web server farm and manages the load across any number of copies of Sapphire/UBS in that server farm. In addition, the Load Balance Broker can be deployed as a portable mini-application, such as a JAVA Bean or an Enterprise JAVA Bean, to allow utilization of the application server from non-Web based applications. The Load Balance Broker has a unique competitive advantage with a zero-feedback loop, a sophisticated technique to direct work to non-busy resources that provides maximum speed and no practical limits in terms of numbers of Load Balance Brokers and Web application servers deployed. PERSISTENT STATE SERVER. The persistent state server is also a key component of fault tolerance. State servers are where "shopping cart" information is held on Internet commerce sites while a user is shopping. It is important that even if one of the application servers fails, the state information is still available. A recent PCWEEK test substantiated Sapphire/Web's significant lead in this high performance implementation of fault tolerance. FAULT TOLERANT DESIGN. Sapphire/Web has been designed to provide fault tolerance, or nonstop operation, in a Web environment. There are two key pieces to this technology. First, in the event of an application server failure, the Load Balance Broker will redirect any requests from Web browsers to other application servers. Second, the Persistent State Server will make a user's state information continuously available, even if the application servers fail. LIVE OBJECT CACHE. The Live Object Cache provides very high performance for Internet commerce applications. The Live Object Cache holds data and programs within the memory of the application server, reducing the time required for accessing frequently used data. It is also contributes to fault tolerance by working in conjunction with the persistent state server. CONTENT GENERATION OBJECTS. Sapphire/Web has a powerful template processing facility to generate Web pages dynamically. Content Generation Objects are reusable JAVA classes, or computer programs, that can create content in a consistent manner. This increases programmer productivity and provides Web developers a simple mechanism to maintain a consistent look and feel to their Web pages. SAPPHIRE/DEVELOPER DESIGN ENVIRONMENT. This provides developers a highly productive design environment for binding front-end objects to back-end objects. Sapphire/Developer also maintains an open environment for integrating other industry leading programming tools. BLUESTONE XML-SERVER COMMUNICATIONS SERVICES. This program recognizes the protocol of incoming communications and translates it to a request for service to the XML-Server. XML documents can be passed to and from the XML server from any combination of industry standard protocols. This separates the communications from the processing of XML documents, so additional communications services can be added without changing any code. BLUESTONE XML-SERVER DOCUMENT HANDLER SERVICES. Bluestone's Document Handlers are the JAVA programs that process XML documents. The Bluestone XML-Server is unique in its ability to handle any XML document type via this mechanism and its ability to dynamically load new document handler classes. BLUESTONE VISUAL-XML DESIGN ENVIRONMENT. This open tool provides easy to use creation of Bluestone XML-Server applications and creates XML documents in a stand-alone mode. This tool is available on all platforms including Linux, UNIX and Windows. We believe this tool expands the XML market to non-programmers. 39 HOT VERSIONING AND HOT SWAPPING. These new capabilities of Sapphire/Web Release 6 are unique in providing companies the ability to run a full 24x7 Web site. Hot Versioning allows Web applications to be upgraded between user clicks with no session interruption. It includes testing in a production environment and roll-forward and roll-back capabilities for versions of an application. Sapphire/Web Release 6 also supports Hot Swapping so that applications can be moved from server to server without interrupting service to the user. INTERNET QUALITY OF SERVICE. This innovative capability provides for differentiation of service based on each particular user. This allows for priority customers to always get performance preference over other visitors to a Web site. PRODUCT DEVELOPMENT Historically, we have invested heavily in product development. Our future success depends in large part on our ability to enhance existing products and create new products that maintain and expand our technology lead. Accordingly, we intend to continue to invest heavily in product development. As of June 30, 1999, we had 31 people in the product development group, which includes a core group of senior developers and product development leaders, junior developers, quality assurance and documentation personnel. Our development team is located at our headquarters in Mount Laurel, New Jersey. Almost all of our software is being developed in JAVA, thereby improving productivity and reducing porting and testing costs. In an attempt to move our products at Internet-speed, we employ a small-team approach with an interactive design/development/testing methodology that has evolved over the past five years. To date, our product development group has benefitted from a very low turnover rate. We are currently developing new releases to our Sapphire/Web and XML product families. We anticipate that these new releases will bring even stronger Internet commerce, high-end management, and ease of use capabilities, together with integrated Internet commerce solutions for SAP and PeopleSoft in joint development with our systems integration partners. We expect these new releases to continue to position our products as the most "feature-rich" in the market. EMPLOYEES As of June 30, 1999, we had 152 employees, of which 52 were employed in sales and marketing, 38 were employed in services, 31 were employed in product development and 31 were employed in general and administrative positions. None of our employees are represented by unions. We believe that our relations with our employees are good. PROPERTIES Our principal executive and administrative offices are located in approximately 41,000 square feet of office space in Mount Laurel, New Jersey. We also maintain sales offices in Sacramento, Los Angeles, Atlanta, Dallas, Chicago, Boulder, San Francisco, Toronto and Mount Laurel, New Jersey. Annual lease payments on the Mount Laurel facility are approximately $480,000. This lease expires in November 2003. We do not own any real property. LEGAL PROCEEDINGS We are from time to time a party to litigation arising in the ordinary course of our business. We are not currently a party to any material litigation. 40 TRADEMARKS AND COPYRIGHTS 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. 41 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION - --------------------------------------- --- ------------------------------------------------------------------ P. Kevin Kilroy........................ 45 President, Chief Executive Officer and Director S. Craig Huke.......................... 38 Senior Vice President and Chief Financial Officer Robert W. Bickel....................... 42 Senior Vice President, Products John H. Capobianco..................... 47 Senior Vice President, Marketing Joseph K. Krivickas.................... 37 Senior Vice President, Worldwide Sales Mel Baiada............................. 41 Chairman of the Board of Directors and Founder Gregory M. Case........................ 36 Director William C. Hulley...................... 40 Director Anton Simunovic........................ 33 Director Andrew J. Filipowski................... 48 Director Paul E. Blondin........................ 48 Director
P. KEVIN KILROY has served as our President since January 5, 1999 and our Chief Executive Officer since June 10, 1999. From March 1998 to January 4, 1999, Mr. Kilroy served as our Senior Vice President, Worldwide Sales. Before joining Bluestone, Mr. Kilroy served as the Senior Vice President of Worldwide Distribution for Seer Technologies, Inc., an application development software company, from March 1996 to March 1998. From April 1993 to October 1995, Mr. Kilroy served as President of Mantech Systems Corporation and Mantech Solutions Corporation and Vice President of Mantech International Corporation. S. CRAIG HUKE has served as our Senior Vice President and Chief Financial Officer since April 15, 1999. Before joining Bluestone, Mr. Huke was Vice President, Finance of MetroNet Communications Corp., a broadband telecommunications services provider, from April 1998 to April 1999. Prior to joining MetroNet he was Vice President and Corporate Controller of Seer Technologies, Inc. from November 1994 to April 1998. From September 1991 through October 1994, Mr. Huke held several positions with Legent Corporation, a publicly held software development company, including Director of Financial Planning and Analysis and Assistant Controller. ROBERT W. BICKEL has served as our Senior Vice President, Products since January 1998. From April 1997 to January 1998, Mr. Bickel served as our Chief Operating Officer, and from May 1992 to April 1997, as the Director of Products at Bluestone Consulting, Inc., a New Jersey corporation and our predecessor. JOHN H. CAPOBIANCO has served as our Senior Vice President, Marketing since February 1998. Before joining Bluestone, Mr. Capobianco served as a Senior Vice President of Marketing at SAP America from March 1997 to February 1998. From 1996 to March 1997, Mr. Capobianco served as the Vice President, Corporate Marketing of Sybase, Inc., from 1995 to 1996 as Vice President, Marketing of PRIMAVERA Systems, Inc. and from 1985 to 1995 as Vice President, Marketing of Computer Associates International, Inc. JOSEPH K. KRIVICKAS has served as our Senior Vice President, Worldwide Sales since May 1999. From August 1998 to May 1999, Mr. Krivickas was Vice President, Sales and Service for E-commerce products at Sanga International. From January 1996 to July 1998, Mr. Krivickas was co-founder and 42 served as Chief Technology Officer for Kazz Digital Studios. From 1988 to 1995, Mr. Krivickas held various sales and marketing management positions within SunSoft, Sun Technology Enterprises and Sun Microsystems Computer Corporation. MEL BAIADA has served as our Chairman of the Board of Directors since our incorporation. From April 1997 to January 1999, Mr. Baiada served as our President and Chief Executive Officer. From April 1989 to April 1997, Mr. Baiada served as the President and Chief Executive Officer of Bluestone Consulting Inc., a New Jersey corporation and our predecessor. Mr. Baiada also serves as the President and a director of Bluestone Consulting, Inc., a Delaware corporation spun off from us in April 1997. GREGORY M. CASE has served as a director of Bluestone since April 1997. Mr. Case has been a Managing Director of Patricof & Co. Ventures, Inc. since May 1995 and a Vice President of Patricof & Co. Managers, Inc. since May 1996. From January 1994 through May 1995, Mr. Case served as a Vice President of Patricof & Co. Ventures, Inc. WILLIAM C. HULLEY has served as a director of Bluestone since April 1997. Mr. Hulley co-founded Adams Capital Management, Inc. in 1994 and is a Vice President and General Partner. Adams Capital Management, Inc. is a Managing Partner of several venture capital partnerships, including Adams Capital Management, L.P. and the P/A Fund. From 1989 through December 1994, Mr. Hulley was employed by Fostin Capital Corp and has been a General Partner of Fostin Capital Partners II, L.P. since 1993. Mr. Hulley is a director of On Technology Corporation, a publicly traded company. ANTON SIMUNOVIC has served as director of Bluestone since April 1998. Mr. Simunovic is a Senior Vice President of the Equity Capital Group at General Electric Capital Corporation and has served as such since September 1996. From June 1993 through August 1996, Mr. Simunovic served as Manager at Barents Group LLC. ANDREW J. FILIPOWSKI has served as director of Bluestone since June 1999. Mr. Filipowski is currently the Chief Executive Officer of Divine Interventures, Inc. Mr. Filipowski was the co-founder, Chairman of the Board, President and Chief Executive Officer of Platinum technology, inc. since its formation in April 1987 until its sale to Computer Associates in May 1999. Mr. Filipowski is a director of System Software Associates, Inc., Blue Rhino and Platinum Entertainment, Inc., all publicly traded companies. PAUL E. BLONDIN has served as a director of Bluestone since June 1999. Mr. Blondin has been the President and Chief Executive Officer of IP Highway since February 1999. From January 1998 until February 1999, Mr. Blondin was President and Chief Executive Officer of Netect, Ltd., an Israeli Company. Prior thereto, he served as Chairman of the Board of Open Development Corporation until October 1997. From March 1993 until May 1997, Mr. Blondin served as the Vice President, Finance and Administration, Chief Financial Officer and Treasurer of Cascade Communications. KEY EMPLOYEE MARK S. NIGRO, age 41, has served as our Senior Vice President and Chief Technology Officer since October 1997. From September 1996 to October 1997, Mr. Nigro served as Chief Technology Officer for us and our predecessor, Bluestone Consulting Inc., a New Jersey corporation. From June 1993 to September 1996 he served as our predecessor's Lead Product Developer. CLASSIFICATION OF DIRECTORS Following the closing of this offering, our certificate of incorporation will classify the board of directors into three classes. The directors' terms will be staggered by class. 43 BOARD COMMITTEES The Audit Committee consists of Mel Baiada, Paul E. Blondin and Gregory M. Case. The Audit Committee makes recommendations to the board of directors regarding the selection of independent public accountants, reviews the results and scope of the audit and other services provided by our independent public accountants and reviews and evaluates our control functions. The Compensation Committee consists of Andrew J. Filipowski, William C. Hulley and P. Kevin Kilroy. The Compensation Committee administers the issuance of stock options under our stock option plan, makes recommendations regarding nonqualified stock options and various incentive compensation and benefit plans and determines salaries for the executive officers and incentive compensation for our employees and consultants. DIRECTOR ELECTION RIGHTS Pursuant to our certificate of incorporation, the board of directors is required to consist of seven members. General Electric Capital Corporation, a holder of preferred stock, is entitled to designate one member to the board of directors. The holders of Series A preferred stock, as a class, are entitled to designate two members to the board of directors. The holders of common stock, as a class, are entitled to designate one member to the board of directors. The holders of common stock and preferred stock, as a class, are entitled to designate three members to the board of directors. These director election rights are in effect until immediately prior to the closing of this offering, after which time the board of directors will be elected by the holders of common stock. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mel Baiada, our chairman and former chief executive officer, was a member of our compensation committee in 1998. Mr. Baiada is a director, executive officer and a member of the compensation committee of Bluestone Consulting, Inc. For additional information regarding Bluestone Consulting, Inc., its spin-off from, and relationship with, us and Mr. Baiada's transactions with us and Bluestone Consulting, Inc., see "Certain Transactions." DIRECTOR COMPENSATION On June 10, 1999, the board of directors adopted the Directors' Compensation Plan and reserved 156,250 shares of common stock to be used in connection with the plan. The plan provides that non-employee directors will receive options at the intervals and for the number of shares of common stock as follows: - 6,250 shares upon the initial election to the board of directors; - 3,125 shares upon the anniversary date each year after their election, provided there is continuous service; - 781 shares upon appointment to serve on the Compensation, Audit or other duly constituted committee of the board of directors, plus an additional 781 shares on each anniversary date of their appointment, provided there is continuous service on the committee; and - 3,125 shares upon appointment to serve as the chairperson of the board of directors. The options will be fully vested upon issuance. In addition to these option grants, non-employee directors shall be entitled to compensation as follows: - $4,000 for in-person board meetings, of which four are anticipated each year; - $1,000 for telephone board meetings, of which six are anticipated each year; and 44 - $500 for Audit and Compensation Committee meetings, if held independently of an in-person board meeting. In addition, reasonable travel and related expenses shall be paid to non-employee directors for attending board of director meetings or while on Bluestone approved business. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table summarizes the compensation paid to or earned by Bluestone's Chief Executive Officer and all other executive officers whose salary and bonus for services rendered in all capacities to Bluestone for the fiscal year ended December 31, 1998 exceeded $100,000. We will use the term "named executive officers" to refer collectively to these individuals later in this prospectus. Other annual compensation represents commissions paid in 1998. All other compensation includes amounts paid by us in 1998 with respect to life insurance premiums for the benefit of the named executive officers and our contributions to the 401(k) accounts of these officers as follows: - Mr. Kilroy, $260 for life insurance premiums; - Mr. Baiada, $2,715 for life insurance premiums; - Mr. Capobianco, $218 for life insurance premiums; - Mr. Bickel, $600 in 401(k) contributions and $196 for life insurance premiums; and - Mr. Ballezzi, $600 in 401(k) contributions.
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------- --------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION - --------------------------------------- ---------- --------- ---------------- ------------- ------------------- P. Kevin Kilroy, President and Chief Executive Officer (1)................ $ 148,077 $ 9,140 $ 83,509 146,257 $ 260 Mel Baiada, Chairman of the Board (2).................................. 158,654 22,215 -- -- 2,715 John H. Capobianco, Senior Vice President, Marketing................. 170,077 74,294 -- 142,716 218 Robert W. Bickel, Senior Vice President, Products.................. 151,730 19,554 -- 56,778 796 Enrico J. Ballezzi (3)................. 123,557 19,992 -- 40,108 600
- ------------------------ (1) During 1998, Mr. Kilroy served as our Senior Vice President, Worldwide Sales. He became President on January 5, 1999 and Chief Executive Officer on June 10, 1999. (2) During 1998, Mr. Baiada served as our Chairman, President and Chief Executive Officer. (3) During 1998, Mr. Ballezzi served as our Chief Financial Officer. OPTION GRANTS IN LAST FISCAL YEAR The following table summarizes the options granted to each of our named executive officers during the fiscal year ended December 31, 1998. The potential realizable value set forth below is calculated based on the term of the option at the time of the grant (10 years). Assumed stock price appreciation of 5% and 10% is based on the assumed initial public offering price. The assumed stock price appreciation rates used to determine the 45 potential realizable value are prescribed by the Securities and Exchange Commission rules for illustrative purposes only and are not intended to forecast or predict future stock prices.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ANNUAL ---------------------------------------------------------------------------- RATES OF STOCK PRICE PERCENT OF TOTAL APPRECIATION FOR NUMBER OF OUR SHARES OPTIONS GRANTED TO OPTION TERM UNDERLYING OPTIONS OUR EMPLOYEES IN EXERCISE PRICE EXPIRATION -------------------------- NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10% - ------------------------ --------------------- ----------------------- --------------- ----------- ------------ ------------ P. Kevin Kilroy......... 62,500 8% $ 2.24 2/28/08 $ 1,081,671 $ 1,805,307 49,294 6 3.07 5/18/08 812,106 1,382,840 17,813 2 3.07 10/13/08 293,464 499,706 16,650 2 3.07 12/31/08 274,304 467,081 Mel Baiada.............. -- -- -- -- -- -- John H. Capobianco...... 93,750 12 2.24 2/21/08 1,622,506 2,707,960 48,966 6 3.07 5/18/08 806,702 1,373,639 Robert W. Bickel........ 48,966 6 3.07 5/18/08 806,702 1,373,639 7,813 1 3.07 10/13/08 128,717 219,177 Enrico J. Ballezzi...... 40,108 5 3.07 5/18/08 660,769 1,125,146
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table presents information with respect to stock options owned by the named executive officers at December 31, 1998 and with respect to stock options exercised by the named executive officers during the fiscal year ended December 31, 1998. There was no public trading market for the common stock as of December 31, 1998. Accordingly, the values of unexercised options set forth below have been calculated on the basis of the assumed initial public offering price of $12.00 per share, less the applicable exercise price per share, multiplied by the number of shares underlying these options.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT DECEMBER 31, 1998 AT DECEMBER 31, 1998 -------------------------- -------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------------------------------- ----------- ------------- ----------- ------------- P. Kevin Kilroy........................................... -- 146,257 $ -- $ 1,357,950 Mel Baiada................................................ -- -- -- -- John H. Capobianco........................................ -- 142,716 -- 1,352,266 Robert W. Bickel.......................................... 75,264 75,264 710,958 710,958 Enrico J. Ballezzi........................................ 35,679 35,679 331,543 331,543
46 EMPLOYMENT AGREEMENTS We entered into an employment agreement with Mel Baiada in April 1997 which was modified in January 1999 and which expired without being renewed on June 30, 1999. Under this agreement, in 1998 we paid Mr. Baiada a salary of $158,654 and a $22,215 bonus. This agreement imposes a one year period after termination in which Mr. Baiada may not compete against us. This agreement also provides that Mr. Baiada will retain a position on the board of directors until the later of: - the date his ownership interest in our outstanding common stock, assuming conversion of all outstanding convertible securities, drops below 10%; and - June 30, 2000. For the twelve months commencing on July 1, 1999, Mr. Baiada will receive $150,000 plus customary benefits as severance under his agreement. As of June 30, 1999, we recorded $154,200 in general and administrative expense associated with this severance agreement. On July 1, 1999, Mr. Baiada's shares of common stock deemed to be contingent under his stock repurchase agreement dated April 18, 1997 became vested. For more information about Mr. Baiada's stock repurchase agreement see "Certain Transactions--Stock Repurchase Agreement." We also entered into an employment agreement with Robert Bickel in April 1997 which may be terminated by us or Mr. Bickel at any time, with or without cause. Under this agreement, in 1998 we paid Mr. Bickel a base salary of $155,330 and a bonus of $19,554. Future increases to these amounts are at the discretion of the board of directors. This employment agreement calls for the payment of customary fringe benefits. Under this employment agreement, Mr. Bickel has agreed not to compete against us for a period of one year after the termination of his employment. In addition, as part of this employment agreement, we granted to Mr. Bickel an option to purchase 93,750 shares of common stock at an exercise price of $2.24 per share, the fair market value of the common stock on the date of grant. The option vests in 16 equal installments on a quarterly basis over a four-year period beginning as of the date of grant. SEVERANCE AGREEMENTS Messrs. Kilroy, Bickel, Capobianco and Ballezzi are parties to separate severance agreements with us which call for the following payments and benefits to be received upon the termination of their employment other than for cause: - 12 months of salary and benefits plus an additional month of salary and benefits for each year of service; - accrued vacation; - 6 months of outplacement services up to $12,000; and - 50% vesting on all outstanding unvested options and the extension of the exercise period on all vested options to five years. Mr. Ballezzi's employment with us will terminate effective September 30, 1999. As of June 30, 1999, we recorded $208,700 in general and administrative expense associated with his severance agreement. EMPLOYEE CONFIDENTIALITY AGREEMENTS We enter into agreements with all of our employees containing provisions regarding confidentiality and assignment of inventions. 47 EXECUTIVE BONUS POOL Our board of directors has established an executive bonus pool of 384,794 shares of common stock issuable to our chairman, executive and certain other officers under our stock option plan. Grants of awards under the bonus pool are contingent upon our meeting predetermined revenue and profit goals on a quarterly and annual basis in 1999. Our chairman and officers will receive grants of immediately vested options from the pool on a quarterly and annual basis if we determine that we have met our profit and revenue goals. The following table sets forth the total amount of shares that each of our chairman and executive officers may receive under the bonus pool: P. Kevin Kilroy.................................................... 131,250 S. Craig Huke...................................................... 16,071 Robert W. Bickel................................................... 44,237 John H. Capobianco................................................. 47,125 Joseph K. Krivickas................................................ 36,735 Mel Baiada......................................................... 39,063
We met our quarterly revenue and profit goals in each of our first two quarters of 1999 and options covering 52,650 shares of common stock were granted in May 1999 and options to purchase 60,259 shares will be granted in August 1999. STOCK OPTION PLAN On July 1, 1998, the board of directors adopted the Amended and Restated Bluestone Software, Inc. 1996 Incentive and Non-Qualified Stock Option Plan, which replaced all of our previous plans. Our option plan is administered by our board of directors or a committee of at least two persons appointed by the board of directors. The option plan permits the payment of the exercise price to be in the form of cash, check, cashless exercise and such other consideration and method of payment as the administrator of the plan may, from time to time determine. Optionees are required to execute a stock purchase and restriction agreement at the time he or she exercises any options. As of June 30, 1999, a total of 2,946,578 shares of common stock were authorized for issuance to directors, officers, employees and consultants selected by the administrator of the option plan. Of these shares, 2,663,589 shares of common stock were issuable upon the exercise of stock options granted under the option plan. The following table summarizes the option holdings of our chairman and executive officers as of June 30, 1999:
SHARES OF COMMON STOCK SHARES OF COMMON STOCK EXECUTIVE OFFICER UNDER VESTED OPTIONS UNDER UNVESTED OPTIONS - -------------------------------------------- ----------------------- ----------------------- P. Kevin Kilroy............................. 237,534 649,438 S. Craig Huke............................... -- 76,500 Robert W. Bickel............................ 164,808 52,663 John H. Capobianco.......................... 63,661 168,304 Joseph K. Krivickas......................... -- 156,250 Mel Baiada.................................. 6,266 --
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 48 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. In July 1998, our board of directors authorized us to grant options to employees with a vesting period that commences on the later of: - their date of hire; or - March 1, 1996 (the inception date of the option plan). Generally, all employee stock option grants made after July 1998 contain this modified vesting arrangement. The number of shares of common stock covered by ISOs granted to any optionee is limited so that the total fair market value of stock, determined as of the date of grant, with respect to which 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: - with respect to those options that are vested as of the date of the sale of Bluestone, pay an amount equal to the amount over which the fair market value of a share of common stock, exceeds the underlying exercise price for those options; - arrange for the exchange of all options for options to purchase common stock in the successor entity; or - distribute to each optionee other property in an amount equal to and in the same form as the optionee would have received from the successor entity if the optionee had owned the shares of common stock underlying options that were vested as of the date of the sale of Bluestone rather than the option at the time of the sale of Bluestone. In this instance, the fair market value will be determined as of the termination date of the option plan. The form of payment or distribution to the optionee is to be determined by the board of directors, in its sole discretion. 49 401(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. 50 CERTAIN TRANSACTIONS SPIN-OFF OF CONSULTING BUSINESS In April 1997, we had two operating businesses, the software products business and the professional consulting services business. At that time and after our reincorporation from a New Jersey corporation into a Delaware corporation, all of our issued and outstanding common stock was owned by Mel Baiada. In order to enable investors to provide capital in connection with the software products business, we separated the consulting business and the products business by spinning off the consulting business to Mel Baiada. To accomplish the spin-off, we created BCI and entered into a contribution and distribution agreement dated April 17, 1997 with BCI. Under the contribution and distribution agreement, 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. TRANSACTIONS IN CONNECTION WITH THE SPIN-OFF MARK BAIADA CONVERTIBLE SUBORDINATED NOTE To achieve an equal distribution of debt between us and BCI in connection with the spin-off, we agreed to assume one-half of the $1.0 million principal amount of a convertible note payable by Bluestone Consulting, the former New Jersey corporation, to Mark Baiada, formerly a director of ours and the brother of Mel Baiada. BCI assumed the liability for the other one-half of the note. At the time we borrowed the $1.0 million, the proceeds were used for general working capital purposes. We effected this assumption by issuing an amended and restated convertible subordinated note dated April 17, 1997 to Mark Baiada in the principal amount of $500,000. The note payable to Mark Baiada bears interest at a rate of 10% per annum, compounded annually. We are required to make interest payments in arrears on each anniversary date of this note until paid in full. The principal amount of the note is payable in full on December 31, 2002. We are permitted to prepay the note in whole or in part without penalty or premium. The amount outstanding under the note is convertible into 218,750 shares of our common stock at any time prior to the time it matures or the date paid in full at a rate equal to $2.29 per share, subject to proportionate adjustment in the event we pay out stock dividends in shares of common stock or subdivide or combine our outstanding common stock. MEL BAIADA PROMISSORY NOTE AND PURCHASE OF SERIES A PREFERRED STOCK As part of the spin-off, Mel Baiada agreed to cancel a promissory note in the principal amount of $403,066 originally issued by Bluestone Consulting, the former New Jersey corporation, in exchange for (1) our issuance to him of a promissory note in the principal amount of $250,000 and (2) BCI's issuance to him of a promissory note in the principal amount of $107,495. The promissory notes were allocated between BCI and us as part of the negotiated distribution of net assets in the spin-off. Bluestone Consulting, the former New Jersey corporation, used the $403,066 for general working capital purposes. Concurrently with our issuance of the Series A preferred stock on April 18, 1997, Mel Baiada contributed our note payable to him to our capital in exchange for 263,158 shares of Series A preferred stock. PROMISSORY NOTE TO BCI To achieve an equal distribution of debt between BCI and us as part of the spin-off, we issued a subordinated promissory note dated April 17, 1997 to BCI in the principal amount of $500,000 that bears interest at a rate of 10% per annum. We are required to make interest payments in arrears on 51 each anniversary date of the note until paid in full. The principal amount of the note is payable in full on December 31, 2005. We are permitted to prepay the note in whole or in part without penalty or premium. SERVICE MARK LICENSE AGREEMENT As part of the spin-off, we entered into a service mark license agreement dated April 17, 1997 with 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: - certain events of default by BCI; or - 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. ISSUANCE OF SERIES A PREFERRED STOCK AND STOCK REPURCHASE AGREEMENT On the day immediately after the date of the spin-off, and pursuant to a stock purchase agreement dated April 18, 1997, we issued 5,526,316 shares of Series A preferred stock for a total cash purchase price of $5.25 million or $0.95 per share, including 263,158 shares of Series A preferred stock to Mel Baiada and 5,263,158 shares of Series A preferred stock to the entities affiliated with Patricof & Co. Ventures, Inc. and Fostin Capital Partners II, L.P. Holders of Series A preferred stock are entitled to receive annual dividends of $0.57 per share. Proceeds of the issuance of the Series A preferred stock were used for general working capital purposes. Each share of our Series A preferred stock was initially convertible into one share of our common stock, subject to some anti-dilution protections. As a result of the stock split, each share of our Series A preferred stock will convert into 0.3125 shares of our common stock. We entered into a stock repurchase agreement dated April 18, 1997 with Mel Baiada as an incentive for Mr. Baiada to remain with us and devote his full-time and efforts to us. To this end, we also entered into an employment agreement with Mr. Baiada which is more fully described in this prospectus under the heading "Management--Employment Agreements." Under the repurchase agreement, 421,875 shares of the 2,812,500 shares of common stock then held by Mr. Baiada were designated as "contingent shares" which were subject to repurchase at our option if Mr. Baiada ceased to be employed by us at a purchase price equal to the fair market value as determined by our board of directors. At the beginning of each calendar quarter, beginning with the third calendar quarter of 1997 and until the second calendar quarter of 2001, 26,367 of the contingent shares were to be reclassified as "vested shares," reducing the total number of "contingent shares" by 26,367 at the beginning of each calendar quarter. Because Mr. Baiada's employment agreement was not renewed on July 1, 1999, all outstanding contingent shares automatically became vested shares. TAX ALLOCATION AND INDEMNITY AGREEMENT As a result of the spin-off, we, BCI and Mel Baiada needed to decide how our taxes, and the taxes of BCI would be determined for the year of the spin-off, and how we would deal with any adjustment to taxes to us and Mel Baiada that resulted after the spin-off because of a tax audit. These matters are addressed in the tax allocation and indemnity agreement dated April 18, 1997. The agreement provides that: - with respect to federal income taxes, we closed our books as of the day before the issuance of the preferred stock, so that the income and expenses earned in the year of the spin-off, before the issuance of the preferred stock, were not included in our corporate income tax return for the year of the spin-off. They were included in our final federal income tax return for the period 52 that we had elected to be an S corporation for federal income tax purposes, and flowed through to the tax return of Mel Baiada; - with respect to state income taxes and taxes that were not imposed on income, such as property taxes, we allocated them between us and BCI based on the reasonable determination of the boards of directors BCI and us; - if we undergo a tax audit that results in us increasing our tax liability for the period after the spin-off, Mr. Baiada will reimburse us for the additional tax cost, if there is a corresponding reduction in income in an open tax return in a year when we were an S corporation, and he realizes a tax benefit because of the decrease in income in the S corporation year; - if we undergo a tax audit that results in an increase in our income while we were an S corporation, and also results in a decrease in our income for a period after the spin-off, we will reimburse Mr. Baiada any additional tax cost he incurs because of the increase in the income in the S corporation return; and - if our election to be treated as an S corporation is deemed invalid or terminated for a reason other than the issuance of the preferred stock, Mr. Baiada will reimburse us for any tax costs that we incur, to the extent he receives a tax benefit from the change in our status, and if Mr. Baiada has additional tax liability imposed on him because of the termination, we will indemnify him for the costs. There have been no claims made under the agreement, by either party, for reimbursement. RESELLER AGREEMENT WITH BCI We are a party to a reseller agreement with BCI, dated January 1, 1998. Under the reseller agreement, BCI is a non-exclusive reseller of our products in the United States and Canada. BCI may purchase products from us at our then current list prices less our standard quantity discounts. The material terms and conditions contained in the reseller agreement are similar to those contained in our standard reseller agreement. SUBLEASE AGREEMENT WITH 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. The rental charges to BCI were determined on a pro-rata square footage basis at the same rate and under the same terms that we have with our landlord. 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. SALE OF MEL BAIADA SERIES A PREFERRED STOCK On April 22, 1998, Mel Baiada sold all 263,158 of his shares of Series A preferred stock to certain of the then existing holders of Series A preferred stock for a total purchase of $341,053 or $1.296 per share. ISSUANCE OF SERIES B PREFERRED STOCK Pursuant to a stock purchase agreement dated April 22, 1998, we issued 8,782,695 shares of Series B preferred stock for a total purchase price of $11.4 million or $1.296 per share, including 3,858,025 shares of Series B preferred stock to General Electric Capital Corporation and 4,924,670 53 shares of Series B preferred stock to the entities affiliated with Patricof & Co. Ventures, Inc. and Fostin Capital Partners II, L.P. Holders of Series B preferred stock are entitled to annual dividends of $0.078 per share. The proceeds of the issuance of the Series B preferred stock were used for general working capital purposes. Each share of our Series B preferred stock was initially convertible into one share of our common stock. Under the terms of our Series B issuance, the conversion ratio changed as of December 31, 1998 so that each share of our Series B preferred stock became convertible into 2.09 shares of our common stock. As a result of the stock split, each share of our Series B preferred stock will convert into 0.6541 shares of our common stock. BRIDGE FINANCING On January 21, 1999, we entered into the Note and Warrant Purchase Agreement with substantially all of the holders of the Series B preferred stock. Under the Note and Warrant Purchase Agreement, the Series B preferred stockholders agreed to provide subordinated secured debt financing of up to $5.0 million for general working capital purposes. To the extent this financing was utilized, we would have been obligated to issue 10% convertible subordinated secured notes and warrants to purchase up to 504,032 shares of common stock at an exercise price equal to $1.98 per share to the Series B preferred stockholders. We were permitted to draw on the Committed Principal Amount at any time until May 30, 1999. As of May 25, 1999, we had drawn down approximately $1.35 million of the $5.0 million available to fulfill general working capital needs and issued 137,609 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 a warrant issued to Silicon Valley Bank were readjusted from 8,224 to 9,766 shares of our common stock and the exercise price under the Silicon Valley Bank warrant was readjusted from $3.04 to $2.56 per share. ISSUANCE OF SERIES C PREFERRED STOCK Pursuant to a stock purchase agreement dated May 25, 1999, we issued 9,191,176 shares of Series C preferred stock for a total purchase price of $25.0 million or $2.72 per share, including 676,524 shares of Series C preferred stock to General Electric Capital Corporation and 1,161,709 shares of Series C preferred stock to the entities affiliated with Patricof & Co. Ventures, Inc. and Fostin Capital Partners II, L.P. Holders of Series C preferred Stock are entitled to annual dividends of $0.1632 per share. The proceeds of the issuance of the Series C preferred stock were used for general working capital purposes. Each share of our Series C preferred stock was initially convertible into one share of our common stock. As a result of the stock split, each share of our Series C preferred stock will convert into 0.3125 shares of our common stock. REGISTRATION RIGHTS Under the second restated investors' rights agreement dated May 25, 1999 by and among us and our preferred stockholders, the holders of preferred stock are entitled to certain rights with respect to the registration under the Securities Act for resale to the public of our common stock issuable upon the conversion of preferred stock. The second restated investors' rights agreement permits the preferred stockholders to twice require us, whether or not we propose to register our common stock for sale, to register all or part of those preferred stockholders' common stock, issued upon conversion of the preferred stock, so long as the securities that would be covered by the registration statement 54 have an aggregate gross offering price of at least $20.0 million. If any registration involves an underwritten offering, preferred stockholders that wish to participate in that offering must enter into customary agreements with us and the underwriter. The underwritten offering will be subject to certain limitations and restrictions that may be imposed by the underwriters thereof, including, the right of the underwriters to exclude a portion of the securities owned by the preferred stockholders from the offering. The second restated investors' rights agreement also provides demand registration rights to the preferred stockholders requiring us to register all or part of the registrable securities on Form S-3, provided, that, among other things: - Form S-3 is available to us and the preferred stockholders for this offering; - the offering price of the securities to be registered by the preferred stockholders, together with securities held by other persons entitled to participate in the registration, is at least $1.0 million in the aggregate, net of any underwriters' discounts or commissions; and - the board of directors determines that the registration would not be seriously detrimental to us and our stockholders at that time. In this event, the registration of these securities may be delayed for up to 60 days. Under the second restated investors' rights agreement, the preferred stockholders have the right, subject to several exceptions, to have their registrable securities included in any registration statement filed by us. Each preferred stockholder that wishes to participate in the offering must enter into a customary agreement with us and the underwriter, which may limit in whole or in part the inclusion of that preferred stockholder's registrable securities in the registration statement, as determined by the underwriters in their sole discretion. We are required to pay all expenses relating to any of these registrations other than underwriting discounts and commissions relating to shares sold by the preferred stockholders. The registration rights provided in the second restated investors' rights agreement extend for a period of five years following this offering. FILIPOWSKI CONSULTING AGREEMENT We entered into a consulting agreement with Andrew Filipowski in May 1999 under which Mr. Filipowski will provide strategic and general business consulting services to us from that date until May 2001. In consideration of these consulting services, we granted to Mr. Filipowski a fully vested option to purchase 21,875 shares of our common stock at an exercise price of $4.13 per share. We recorded general and administrative expenses of $165,784 in the three months ended June 30, 1999 in connection with this option. FUTURE AFFILIATE TRANSACTIONS We believe that all of the transactions described above were made on terms no less favorable to us than would have been obtained from unaffiliated third parties. All future transactions, including loans, between us and our officers, directors, principal stockholders and their affiliates, will be approved by a majority of the board of directors, including a majority of the independent and disinterested outside directors on the board of directors, and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 55 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information as of July 31, 1999 regarding the beneficial ownership of our common stock by: (1) each person, entity or group known by us to own beneficially more than 5% of our outstanding common stock; (2) each director; (3) each of the named executive officers; and (4) all directors and executive officers as a group. The ownership amounts are calculated as if the outstanding preferred stock and accrued dividends on preferred stock were fully converted into common stock as of June 30, 1999. Unless otherwise indicated, the address of each person identified is c/o Bluestone Software, Inc., 1000 Briggs Road, Mount Laurel, New Jersey 08054. The percentages shown are based on 13,302,473 shares of common stock outstanding prior to the offering and 17,302,473 shares of common stock outstanding after the offering. Pursuant to Rule 13d-3 under the Exchange Act, shares of common stock which a person has the right to acquire pursuant to the exercise of stock options and warrants held by that holder that are exercisable within 60 days are deemed outstanding for the purpose of computing the percentage ownership of that person, but are not deemed outstanding for computing the percentage ownership of any other person.
PERCENT SHARES BENEFICIALLY BENEFICIALLY OWNED OWNED PRIOR TO OFFERING ------------------- ------------------- BEFORE AFTER NAME AND ADDRESS NUMBER OFFERING OFFERING - -------------------------------------------------------------------------------- ------------------- -------- -------- Mel Baiada (1).................................................................. 2,807,277 21.2% 16.3% General Electric Capital Corporation(2)......................................... 2,820,134 21.1% 16.2% Entities affiliated with Patricof & Co. Ventures, Inc. (3)...................... 5,493,691 40.7% 31.4% Fostin Capital Partners II, L.P. (4)............................................ 1,671,505 12.5% 9.6% P. Kevin Kilroy (5)(6).......................................................... 237,534 1.8% 1.4% Enrico J. Ballezzi (5).......................................................... 51,492 * * Robert W. Bickel (5)............................................................ 164,808 1.2% 1.0% John H. Capobianco (5).......................................................... 63,661 * * Gregory M. Case (7)............................................................. 5,493,691 40.7% 31.4% William C. Hulley (8)........................................................... 1,671,505 12.5% 9.6% Anton Simunovic (9)............................................................. 2,820,134 21.1% 16.2% Andrew J. Filipowski (5)(10).................................................... 28,125 * * Paul E. Blondin (5)(11)......................................................... 6,250 * * All directors and executive officers as a group (11 persons) (12)............... 11,672,972 82.7% 64.4%
- ------------------------ * Represents less than 1% of the outstanding shares of Common Stock. (1) Includes 562,500 shares of common stock owned directly by Mr. Baiada and 159,966 shares of common stock owned by four trusts for which Mr. Baiada or his wife act as trustees. Mr. Baiada intends to grant the underwriters the right to purchase shares pursuant to the underwriters' over-allotment option. (2) The address for General Electric Capital Corporation is 260 Long Ridge Road, Stamford, CT 06927. Includes 3,953,662 shares of Series B preferred stock which is convertible into 2,553,348 shares of common stock, 691,654 shares of Series C preferred stock convertible into 216,142 of common stock, and 50,644 shares of common stock underlying warrants. General Electric Capital Corporation is a subsidiary of the General Electric Company. General Electric Capital Corporation intends to grant the underwriters the right to purchase shares pursuant to the underwriters' over-allotment option. The Directors of General Electric Company are James I. Cash, Jr., Silas S. Cathcart, Dennis D. Dammerman, Paolo Fresco, Claudio X. Gonzalez, Andrea Jung, Kenneth G. Langone, Gertrude G. Michelson, Eugene F. Murphy, Sam Nunn, John D. Opie, Roger S. Penske, Frank H. T. Rhodes, Andrew C. Sigler, Douglas A. Warner III, and John F. Welch, Jr. 56 (3) The address for Patricof & Co. Ventures, Inc. is 445 Park Avenue, New York, NY 10022. The directors and managing directors of Patricof & Co. Ventures, Inc. are Alan Patricof-Director, Co-Chairman, Patricia Cloherty-Director, Co-Chairman, Ronald Cohen-Director, Maurice Tchenio-Director, Robert Chefitz-Managing Director, Salem Shuchman-Managing Director, David Landau-Managing Director, Thomas Hirschfeld-Managing Director, George Jenkins-Managing Director, Greg Case-Managing Director, Paul Vais-Managing Director, George Phipps-Managing Director, and Janet Effland-Managing Director. The share amount is comprised of: (A) shares held by the P/A Fund, L.P., consisting of 2,451,454 shares of Series A preferred stock convertible into 766,079 shares of common stock, 1,278,511 shares of Series B preferred stock convertible into 825,686 shares of common stock, 206,727 shares of Series C preferred stock convertible into 64,602 shares of common stock, and 15,137 shares of common stock underlying warrants. Fostin Capital Partners II, L.P. and APA Pennsylvania Partners II, L.P. (a Patricof affiliate) are the general partners of The P/A Fund, L.P. The address of the P/A Fund, L.P. is 455 South Gulph Road, Suite 410, King of Prussia, PA 19406. The P/A Fund intends to grant the underwriters the right to purchase shares pursuant to the underwriters' over- allotment option. (B) shares held by APA Excelsior IV, L.P., consisting of 2,717,475 shares of Series A preferred stock convertible into 849,211 shares of common stock, 3,145,140 shares of Series B preferred stock convertible into 2,031,190 shares of common stock, 820,477 shares of Series C preferred stock convertible into 256,399 shares of common stock and 60,076 shares of common stock underlying warrants. Patricof & Co. Managers, Inc. is the general partner of APA Excelsior IV Partners, which is the general partner of APA Excelsior IV, L.P. The address of APA Excelsior IV, L.P. is 445 Park Avenue, New York, NY 10022. APA Excelsior IV, L.P. intends to grant the underwriters the right to purchase shares pursuant to the underwriters' over- allotment option. (C) shares held by APA Excelsior IV/Offshore, L.P., consisting of 479,555 shares of Series A preferred stock convertible into 149,861 shares of common stock, 555,025 shares of Series B preferred stock convertible into 358,445 shares of common stock, 144,790 shares of Series C preferred stock convertible into 45,247 shares of common stock and 10,602 shares of common stock underlying warrants. Patricof & Co. Managers, Inc. is the general partner of APA Excelsior IV Partners, which is the general partner of APA Excelsior IV/Offshore, L.P. The address of APA Excelsior IV/Offshore, L.P. is c/o Patricof & Co. Ventures, Inc. 445 Park Avenue, New York, NY 10022. APA Excelsior IV/Offshore, L.P. intends to grant the underwriters the right to purchase shares pursuant to the underwriters' over-allotment option. (D) shares held by Patricof Private Investment Club, L.P. including 51,984 shares of Series A preferred stock convertible into 16,245 shares of common stock, 60,165 shares of Series B preferred stock convertible into 38,856 shares of common stock, 15,695 shares of Series C preferred stock convertible into 4,905 shares of common stock and 1,149 shares of common stock underlying warrants. Patricof & Co. Managers, Inc. is the general partner of APA Excelsior IV Partners, which is the general partner of Patricof Private Investment Club, L.P. The address of Patricof Private Investment Club, L.P. is 445 Park Avenue, New York, NY 10022. Patricof Private Investment Club, L.P. intends to grant the underwriters the right to purchase shares pursuant to the underwriters' over-allotment option. (4) Fostin Capital Partners II, L.P. is a general partner of The P/A Fund, L.P. The address for Fostin Capital Partners II, L.P. is 518 Broad Street, Sewickley, PA 15143. William C. Hulley and Joel P. Adams are general partners of Fostin Capital Partners II, L.P. 57 (5) Represents the total number of shares of our common stock issuable upon exercise of stock options which are currently exercisable and which are exercisable within 60 days after June 30, 1999. (6) Mr. Kilroy intends to grant the underwriters the right to purchase shares pursuant to the underwriters' over-allotment option. (7) The address for Mr. Case is c/o Patricof & Co. Ventures, Inc., 455 South Gulph Road, Suite 410, King of Prussia, PA 19406. Mr. Case is a Vice President of Patricof & Co. Managers, Inc., the general partner of each of APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P. and Patricof Private Investment Club, L.P. Mr. Case is a Managing Director of Patricof & Co. Ventures, Inc., the investment advisor of APA Excelsior IV/Offshore, L.P. Mr. Case is a general partner of APA Pennsylvania Partners II, L.P., a general partner of The P/A Fund, L.P. Mr. Case shares voting and investment powers with respect to the shares owned by these funds. Mr. Case does not own any of our outstanding securities as an individual. (8) The address for Mr. Hulley is c/o The P/A Fund, L.P., 578 Broad Street, Sewickley, PA 15143. Mr. Hulley is a general partner of Fostin Capital Partners II, L.P., which is a general partner of The P/A Fund L.P. Mr. Hulley shares voting and investment powers with respect to the shares owned by The P/A Fund L.P. Mr. Hulley does not own any of our outstanding securities as an individual. (9) The address for Mr. Simunovic is c/o General Electric Capital Corporation, 260 Long Ridge Road, Stamford, CT 06927. Mr. Simunovic is a Senior Vice President of the Equity Capital Group at General Electric Capital Corporation, a subsidiary of General Electric Company. Mr. Simunovic shares voting and investment powers with respect to the shares owned by General Electric Capital Corporation. Mr. Simunovic does not own any of our outstanding securities as an individual. (10) Mr. Filipowski was appointed as a director on June 10, 1999. The address for Mr. Filipowski is c/o Platinum technology, inc., 1815 South Meyers Road, Oakbrook Terrace, IL 60181. (11) Mr. Blondin was appointed as a director on June 16, 1999. The address for Mr. Blondin is 50 Battery Street, Boston, MA 02109. (12) Includes 551,870 shares of our common stock issuable upon the exercise of stock options which are currently exercisable and which are exercisable within 60 days after June 30, 1999. 58 DESCRIPTION OF SECURITIES Our authorized capital stock as of June 30, 1999 consisted of 53,800,000 shares of common stock, par value $0.001 per share, and 23,500,187 shares of preferred stock, par value $0.001 per share, of which 5,526,316 shares were designated as "Series A preferred stock," 8,782,695 shares were designated as "Series B preferred stock," and 9,191,176 shares were designated as "Series C preferred stock." Immediately prior to the closing of this offering, we will authorize additional shares of common and preferred stock and all of the outstanding preferred stock will automatically convert to common stock. The following is a summary of certain provisions of our common stock, our preferred stock and our third amended and restated certificate of incorporation. COMMON STOCK As of June 30, 1999, there were 2,819,955 shares of common stock held of record by 11 stockholders. Holders of common stock, together with the holders of the preferred stock, who are entitled to vote on an "as converted" basis as described below, are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Subject to the applicable provisions of the Delaware General Corporation Law, stockholders holding a majority of the issued and outstanding shares entitled to vote constitute a quorum for the purposes of convening a stockholders' meeting. Accordingly, a majority of a quorum may elect directors standing for election, subject to the director election rights of the stockholders described below. Holders of common stock are entitled to receive ratably any dividends as may be declared on the common stock by the board of directors. Upon liquidation, dissolution or winding up of Bluestone, holders of common stock are entitled to receive ratably the net assets of Bluestone available for distribution after the payment of all debts and other liabilities subject to the prior and superior liquidation preference rights of holders of preferred stock, if any are outstanding. Holders of common stock have no preemptive or subscription rights with respect to other issuances of securities. Our common stock has no conversion rights and is not redeemable. PREFERRED STOCK All of our presently authorized preferred stock is outstanding. Immediately prior to this offering's closing, all outstanding preferred stock will automatically convert into common stock as follows: - Series A: one share of Series A preferred stock for 0.3125 shares of common stock; - Series B: one share of Series B preferred stock for 0.6541 shares of common stock; and - Series C: one share of Series C preferred stock for 0.3125 shares of common stock. Holders of our outstanding preferred stock are entitled to receive annual dividends as follows: - Series A: $0.057 per share; - Series B: $0.078 per share; and - Series C: $0.1632 per share. The Series A preferred stock dividends have accrued since April 17, 1997, the Series B preferred stock dividends have accrued since April 22, 1998 and the Series C preferred stock dividends have accrued since May 25, 1999. Aggregate accrued dividends on the preferred stock as of June 30, 1999 amounted to approximately $1.7 million. We are required to pay any federal or state income taxes to which the holders of preferred stock may be subject with respect to the accrued and unpaid cash dividends, whether or not earned or declared. Accumulated but unpaid dividends will be reduced by these tax payments. Upon the 59 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 60 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 StockTrans, Inc. LISTING We have applied for listing our common stock on the Nasdaq National Market under the trading symbol "BLSW." 61 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 17,302,473 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 13,302,473 shares of common stock to be held by existing preferred stockholders will be "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act, which rules are summarized below. As a result of the lock up agreements described below and the provisions of Rule 144, additional shares will be available for sale in the public market as follows: - 2,070 shares of common stock currently outstanding will be available for sale into the public market following the effectiveness of this registration statement; - 2,663,589 shares of common stock issuable upon exercise of 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 173,025 shares immediately after this offering; or - the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 of the sale with the SEC. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. 62 RULE 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell their shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. RULE 701 In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchases shares from us in connection with a compensatory stock or option plan or other written agreement are eligible to resell their shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with some restrictions, including the holding period, contained in Rule 144. REGISTRATION RIGHTS After this offering, the holders of 10,482,518 shares of our common stock and warrants exercisable for 288,056 shares of our common stock will be entitled to demand registration of their shares under the Securities Act. All of these holders have agreed not to demand registration of their common stock for one year after the date of this offering. After this one year period, the holders of a majority of the shares eligible for demand rights may require us, on not more than two occasions, to use our best efforts to file a registration statement under the Securities Act with respect to their shares eligible for demand rights if the gross offering amount would be expected to exceed $20.0 million. In addition, if at any time after this offering we propose to register any of our securities under the Securities Act in a public offering in excess of $1.0 million, for ourselves or for other holders, we will send notice of this registration to holders of the shares eligible for demand rights, as well as to Mel Baiada with respect to his shares of our common stock and Silicon Valley Bank with respect to its warrants exercisable for 9,766 shares of our common stock. Subject to limitations and conditions set forth in the agreements governing their registration rights, they may elect to register their eligible shares. Further, if we propose to file a registration statement on Form S-3, a short form registration statement, when we become eligible therefor, for an offering in excess of $1.0 million, the holders of shares eligible for demand rights and "piggyback" rights may register their common stock along with that registration. We will be responsible for the expenses incurred in connection with these registrations, other than underwriters' discounts or commissions, except that we will pay expenses of only one registration on Form S-3 at a holder's request per year. All registration rights expire five years from the date of this offering. STOCK OPTIONS Shortly after completion of this offering, we plan to file a registration statement on Form S-8 under the Securities Act covering shares of common stock reserved for issuance under our stock option and director compensation plans. As of June 30, 1999, options to purchase 2,663,589 shares of common stock were issued and outstanding, 1,028,050 of which are vested. This registration statement is expected to be filed and become effective as soon as practicable after the date of this prospectus. Accordingly, shares registered under the S-8 registration statement will, subject to lock-up agreements, vesting provisions and Rule 144 volume limitations applicable to our affiliates, be available for sale in the open market immediately after the registration statement becomes effective. 63 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 have requested that, of the 4,000,000 shares of common stock to be sold in this offering, up to 200,000 shares be offered at the price to the public set forth on the cover page of this prospectus to our directors, officers, employees and business associates. Additionally, under certain circumstances, our certificate of incorporation provides for a right of first offer to be made to certain eligible preferred stockholders of an amount of this offering that would enable these preferred stockholders to maintain their proportionate interest in our capital stock after giving effect to the exercise of all outstanding warrants and options. These preferred stockholders have the right, but not the obligation, to acquire shares of common stock in this offering on the same terms as the other investors. If a preferred stockholder does not accept the offer to acquire its portion of the shares offered, its portion will be offered ratably to the other eligible preferred stockholders. As a result, the number of shares of common stock available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. The underwriters will offer to the general public, on the same basis as the other shares to be sold in this offering, any reserved shares that were not purchased. We and certain stockholders have granted the underwriters an option, exercisable not later than 30 days after the date of this prospectus, to purchase up to 600,000 additional shares of common stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of the option shares that the number of shares of common stock to be purchased by it in the above table bears to 4,000,000. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the common stock offered in this offering. If purchased, the underwriters 64 will offer the additional shares on the same terms as those on which the 4,000,000 shares are being offered. We and the selling stockholders have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act. We have agreed not to offer, sell, sell short, transfer, hypothecate, pledge or otherwise dispose of any shares of our common stock or other securities convertible into or exchangeable or exercisable for shares of our common stock or derivatives of our common stock, or enter into an agreement for our common stock, for a period of 180 days after the date of our registration statement, of which this prospectus is a part, directly or indirectly, by us or otherwise, except as consideration for business acquisitions, on exercise of currently outstanding stock options or on the issuance of options to key employees and directors under our stock option plans and the exercise of such options, without the prior written consent of Deutsche Bank Securities Inc. All of our officers and directors and certain of our stockholders intend to enter into lock-up agreements under which they agreed not to transfer or otherwise dispose of, directly or indirectly, without the consent of Deutsche Bank Securities Inc. any shares of our common stock or any securities convertible into or exchangeable or exercisable for shares of our common stock for a period of 180 days following the date of this registration statement. Transfers or dispositions can be made during the lock-up periods in the case of gifts for estate planning purposes where the donee signs a lock-up agreement. The representatives of the underwriters have advised us that the underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. To facilitate this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of our common stock. Specifically, the underwriters may over-allot shares of our common stock in connection with this offering, creating a short position in the underwriters' syndicate account. Additionally, to cover the over-allotments or to stabilize the market price of our common stock, the underwriters may bid for, and purchase, shares of our common stock in the open market. Any of these activities may maintain the market price of our common stock at a level above that which might otherwise prevail in the open market. The underwriters are not required to engage in these activities and may end any of these activities at any time. The representatives of the underwriters, on behalf of the syndicate of underwriters, also may reclaim selling concessions allowed to an underwriter or dealer if the syndicate repurchases shares distributed by that underwriter or dealer. We paid $1.4 million and issued a warrant, exercisable for five years, to purchase up to 150,448 shares of common stock at an exercise price of $8.70 per share to Deutsche Bank Securities Inc. for providing placement agent services to us in connection with the offering of Series C preferred stock that was consummated on May 25, 1999. The amount paid for these services was determined by arms' length negotiations between us and Deutsche Bank Securities Inc. We believe that this amount is within standard industry parameters for a transaction of that nature. The underwriters and their respective affiliates may, in the future, be lenders to, engage in transactions with and perform services for us in the ordinary course of business. No transactions with the underwriters are presently contemplated. Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for our common stock will be determined by negotiations between us and the representatives of the underwriters. Among the factors to be considered in these negotiations will be prevailing market conditions, the results of our operations in recent periods, the market capitalizations and stages of development of other companies which we and the representatives of the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. 65 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. 66 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. 67 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 Convertible Preferred Stock and Stockholders' Equity (Deficit)........ F-5 Statements of Cash Flows................................................................................... F-6 Notes to Financial Statements.............................................................................. F-7
F-1 After the 1-for-3.2 reverse stock split of each outstanding share of common stock, as discussed in Note 13 to the financial statements, is effected, we expect to be in a position to render the following audit report. /s/ Arthur Andersen LLP Philadelphia, PA March 31, 1999 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Bluestone Software, Inc.: We have audited the accompanying balance sheets of Bluestone Software, Inc. (a Delaware corporation), formerly Bluestone Consulting, Inc., as of December 31, 1997 and 1998, and the related statements of operations, mandatorily redeemable convertible preferred stock and stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bluestone Software, Inc. as of December 31, 1997 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Philadelphia, PA March 31, 1999 (except with respect to matters discussed in Note 2, as to which the date is May 25, 1999) and Note 13, as to which the date is .) F-2 BLUESTONE SOFTWARE, INC. BALANCE SHEETS
DECEMBER 31, JUNE 30, 1999 ------------------------- --------------------------- 1997 1998 ACTUAL PRO FORMA ---------- ------------ ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents... $2,330,372 $ 2,534,819 $ 20,600,454 $ 20,600,454 Restricted certificate of deposit................... 400,000 -- -- -- Accounts receivable, net of allowance of $37,012, $44,473 and $210,314...... 1,747,672 3,369,514 2,757,076 2,757,076 Prepaid expenses and other..................... 312,011 149,318 259,878 259,878 Due from related party...... 79,011 -- -- -- ---------- ------------ ------------ ------------ Total current assets.... 4,869,066 6,053,651 23,617,408 23,617,408 ---------- ------------ ------------ ------------ Property and equipment: Equipment................... 1,465,570 2,418,590 2,577,672 2,577,672 Furniture and fixtures...... 86,852 183,767 185,704 185,704 Leasehold improvements...... 20,552 131,845 134,445 134,445 ---------- ------------ ------------ ------------ 1,572,974 2,734,202 2,897,821 2,897,821 Less--Accumulated depreciation and amortization.............. (640,741) (1,284,921) (1,585,649) (1,585,649) ---------- ------------ ------------ ------------ Net property and equipment............. 932,233 1,449,281 1,312,172 1,312,172 ---------- ------------ ------------ ------------ Deposits...................... 13,744 32,997 38,981 38,981 ---------- ------------ ------------ ------------ $5,815,043 $ 7,535,929 $ 24,968,561 $ 24,968,561 ---------- ------------ ------------ ------------ ---------- ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Line of credit.............. $1,610,561 $ 473,365 $ 671,366 $ 671,366 Current portion of long-term debt...................... 83,971 356,728 436,648 436,648 Accounts payable............ 781,703 1,094,286 1,294,176 1,294,176 Accrued wages............... 478,970 579,371 1,604,540 1,604,540 Other accrued expenses...... 401,468 477,246 1,228,117 1,228,117 Due to related parties...... -- 188,898 29,103 29,103 Deferred revenues........... 1,560,632 3,223,338 1,777,584 1,777,584 ---------- ------------ ------------ ------------ Total current liabilities........... 4,917,305 6,393,232 7,041,534 7,041,534 ---------- ------------ ------------ ------------ Long-term debt................ 269,676 875,642 654,169 654,169 ---------- ------------ ------------ ------------ Subordinated notes due to related parties............. 1,000,000 1,000,000 1,000,000 1,000,000 ---------- ------------ ------------ ------------ Mandatorily redeemable Series A convertible preferred stock....................... 5,330,727 5,672,339 5,841,856 -- ---------- ------------ ------------ ------------ Mandatorily redeemable Series B convertible preferred stock....................... -- 11,742,212 12,102,550 -- ---------- ------------ ------------ ------------ Mandatorily redeemable Series C convertible preferred stock....................... -- -- 22,508,745 -- ---------- ------------ ------------ ------------ Commitments and contingencies (Note 12) Stockholders' equity (deficit): Common stock, $.001 par value, 53,800,000 shares authorized, 2,812,500, 2,815,039, 2,819,955 and 13,302,473 shares issued and outstanding........... 2,813 2,816 2,821 13,304 Common stock warrants....... -- -- 1,900,000 1,900,000 Deferred stock-based compensation.............. -- -- (1,303,344) (1,303,344) Additional paid-in capital................... 6,187 11,871 1,629,797 42,072,465 Accumulated deficit......... (5,711,665) (18,162,183) (26,409,567) (26,409,567) ---------- ------------ ------------ ------------ Total stockholders' equity (deficit)...... (5,702,665) (18,147,496) (24,180,293) 16,272,858 ---------- ------------ ------------ ------------ $5,815,043 $ 7,535,929 $ 24,968,561 $ 24,968,561 ---------- ------------ ------------ ------------ ---------- ------------ ------------ ------------
The accompanying notes are an integral part of these statements. F-3 BLUESTONE SOFTWARE, INC. STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------- ------------------------- 1996 1997 1998 1998 1999 ----------- ----------- ------------ ----------- ----------- (UNAUDITED) Net revenues: Software license fees............ $ 1,475,368 $ 2,337,199 $ 3,391,226 $ 1,192,117 $ 4,726,889 Services.......... 42,908 2,178,664 3,619,997 1,706,506 1,865,096 Third party products and related services........ 6,555,095 5,225,429 1,106,688 932,162 -- ----------- ----------- ------------ ----------- ----------- Total revenues.... 8,073,371 9,741,292 8,117,911 3,830,785 6,591,985 Cost of revenues: Software license fees............ 112,732 202,219 258,572 96,047 156,232 Services.......... 305,109 2,516,451 4,433,309 2,077,872 2,466,660 Third party products and related services........ 4,261,078 2,797,656 643,120 534,522 -- ----------- ----------- ------------ ----------- ----------- Total cost of revenues.... 4,678,919 5,516,326 5,335,001 2,708,441 2,622,892 ----------- ----------- ------------ ----------- ----------- Gross profit.... 3,394,452 4,224,966 2,782,910 1,122,344 3,969,093 Operating expenses: Sales and marketing....... 3,004,760 5,130,799 9,551,284 3,747,872 6,185,414 Product development..... 701,789 1,295,148 2,473,771 903,833 1,868,554 General and administrative... 1,515,456 1,615,787 2,316,017 949,520 2,124,128 Amortization of stock-based compensation.... -- -- -- -- 112,204 ----------- ----------- ------------ ----------- ----------- Total operating expenses.... 5,222,005 8,041,734 14,341,072 5,601,225 10,290,300 ----------- ----------- ------------ ----------- ----------- Operating loss........ (1,827,553) (3,816,768) (11,558,162) (4,478,881) (6,321,207) Interest expense, net............... (50,458) (79,701) (46,520) (33,575) (1,147,676) ----------- ----------- ------------ ----------- ----------- Loss from continuing operations........ (1,878,011) (3,896,469) (11,604,682) (4,512,456) (7,468,883) Income (loss) from discontinued operations........ (737,699) 98,898 -- -- -- ----------- ----------- ------------ ----------- ----------- Net loss............ (2,615,710) (3,797,571) (11,604,682) (4,512,456) (7,468,883) Accretion of preferred stock redemption value............. -- (240,399) (845,836) (307,768) (778,501) ----------- ----------- ------------ ----------- ----------- Net loss available to common stockholders...... $(2,615,710) $(4,037,970) $(12,450,518) $(4,820,224) $(8,247,384) ----------- ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- Basic and diluted net loss per share: Continuing operations...... $ (0.67) $ (1.39) $ (4.12) $ (1.60) $ (2.65) Discontinued operations...... (0.26) 0.04 -- -- -- Accretion of preferred stock redemption value........... -- (0.09) (0.30) (0.11) (0.28) ----------- ----------- ------------ ----------- ----------- $ (0.93) $ (1.44) $ (4.42) $ (1.71) $ (2.93) ----------- ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- Shares used in computing net loss per share........... 2,812,500 2,812,500 2,814,105 2,813,612 2,815,488 ----------- ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- -----------
The accompanying notes are an integral part of these statements. F-4 BLUESTONE SOFTWARE, INC. STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'BLUESTONE SOFTWARE, INC. STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
STOCKHOLDERS' DEFICIT ------------------------------------------------ SERIES A SERIES B SERIES C CONVERTIBLE CONVERTIBLE CONVERTIBLE COMMON STOCK PREFERRED PREFERRED PREFERRED ----------------- COMMON STOCK DEFERRED STOCK STOCK STOCK SHARES AMOUNT WARRANTS COMPENSATION ----------- ----------- ------------ --------- ------ -------------- ------------- Balance, December 31, 1995.............. $ -- $ -- $ -- 2,812,500 $2,813 $ -- $ -- Distribution of foreign tax credits... -- -- -- -- -- -- -- Net loss.............................. -- -- -- -- -- -- -- ----------- ----------- ------------ --------- ------ -------------- ------------- Balance, December 31, 1996.............. -- -- -- 2,812,500 2,813 -- -- Spin-off of consulting division to majority stockholder................ -- -- -- -- -- -- -- Issuance of Preferred stock, net of financing costs..................... 5,090,328 -- -- -- -- -- -- Accretion of Preferred stock redemption value.................... 240,399 -- -- -- -- -- -- Net loss.............................. -- -- -- -- -- -- -- ----------- ----------- ------------ --------- ------ -------------- ------------- Balance, December 31, 1997.............. 5,330,727 -- -- 2,812,500 2,813 -- -- Issuance of Preferred stock, net of financing costs..................... -- 11,237,988 -- -- -- -- -- Accretion of preferred stock redemption value.................... 341,612 504,224 -- -- -- -- -- Exercise of common stock options...... -- -- -- 2,539 3 -- -- Net loss.............................. -- -- -- -- -- -- -- ----------- ----------- ------------ --------- ------ -------------- ------------- Balance, December 31, 1998.............. 5,672,339 11,742,212 -- 2,815,039 2,816 -- -- Issuance of preferred stock, net of financing costs..................... -- -- 22,260,099 -- -- -- -- Accretion of preferred stock redemption value (unaudited)........ 169,517 360,338 248,646 -- -- -- -- Issuance of options to purchase common stock below fair market value (unaudited)......................... -- -- -- -- -- -- (1,415,548) Amortization of stock-based compensation (unaudited)............ -- -- -- -- -- -- 112,204 Issuance of common stock options to non-employees (unaudited)........... -- -- -- -- -- -- -- Issuance of common stock warrants (unaudited)......................... -- -- -- -- -- 1,900,000 -- Exercise of common stock options (unaudited)......................... -- -- -- 4,916 5 -- -- Net loss (unaudited).................. -- -- -- -- -- -- -- ----------- ----------- ------------ --------- ------ -------------- ------------- Balance, June 30, 1999 (unaudited)...... $ 5,841,856 $12,102,550 $ 22,508,745 2,819,955 $2,821 $ 1,900,000 $(1,303,344) ----------- ----------- ------------ --------- ------ -------------- ------------- ----------- ----------- ------------ --------- ------ -------------- ------------- ADDITIONAL PAID-IN- ACCUMULATED CAPITAL DEFICIT TOTAL ---------- ------------ ------------ Balance, December 31, 1995.............. $ 6,187 $ 1,366,254 $ 1,375,254 Distribution of foreign tax credits... -- (28,501) (28,501) Net loss.............................. -- (2,615,710) (2,615,710) ---------- ------------ ------------ Balance, December 31, 1996.............. 6,187 (1,277,957) (1,268,957) Spin-off of consulting division to majority stockholder................ -- (395,738) (395,738) Issuance of Preferred stock, net of financing costs..................... -- -- -- Accretion of Preferred stock redemption value.................... -- (240,399) (240,399) Net loss.............................. -- (3,797,571) (3,797,571) ---------- ------------ ------------ Balance, December 31, 1997.............. 6,187 (5,711,665) (5,702,665) Issuance of Preferred stock, net of financing costs..................... -- -- -- Accretion of preferred stock redemption value.................... -- (845,836) (845,836) Exercise of common stock options...... 5,684 -- 5,687 Net loss.............................. -- (11,604,682) (11,604,682) ---------- ------------ ------------ Balance, December 31, 1998.............. 11,871 (18,162,183) (18,147,496) Issuance of preferred stock, net of financing costs..................... -- -- -- Accretion of preferred stock redemption value (unaudited)........ -- (778,501) (778,501) Issuance of options to purchase common stock below fair market value (unaudited)......................... 1,415,548 -- -- Amortization of stock-based compensation (unaudited)............ -- -- 112,204 Issuance of common stock options to non-employees (unaudited)........... 190,954 -- 190,954 Issuance of common stock warrants (unaudited)......................... -- -- 1,900,000 Exercise of common stock options (unaudited)......................... 11,424 -- 11,429 Net loss (unaudited).................. -- (7,468,883) (7,468,883) ---------- ------------ ------------ Balance, June 30, 1999 (unaudited)...... 1$,629,797 $(26,409,567) $(24,180,293) ---------- ------------ ------------ ---------- ------------ ------------
The accompanying notes are an integral part of these statements. F-5 BLUESTONE SOFTWARE, INC. STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------- ------------------------ 1996 1997 1998 1998 1999 ----------- ----------- ------------ ----------- ----------- (UNAUDITED) Operating activities: Net loss.................................................. $(2,615,710) $(3,797,571) $(11,604,682) $(4,512,456) $(7,468,883) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization........................... 302,010 239,835 656,654 273,388 304,522 Provision for doubtful accounts......................... 94,217 95,883 32,800 7,462 140,000 Accrued interest on subordinated notes.................. 30,048 103,109 109,352 49,799 (57,278) Issuance of Bridge loan warrants........................ -- -- -- -- 1,100,000 Amortization of stock-based compensation................ -- -- -- -- 112,204 Issuance of common stock options to non-employees....... -- -- -- -- 190,954 Changes in operating assets and liabilities-- Accounts receivable................................... (975,630) (310,896) (1,654,641) 322,865 409,827 Prepaid expenses and other assets..................... (81,801) (84,169) 130,619 188,325 (57,729) Accounts payable and accrued expenses................. 1,308,129 408,822 379,410 118,871 2,033,208 Deferred revenues..................................... 221,186 314,263 1,662,706 (464,804) (1,445,754) ----------- ----------- ------------ ----------- ----------- Net cash used in operating activities............... (1,717,551) (3,030,724) (10,287,782) (4,016,550) (4,738,929) ----------- ----------- ------------ ----------- ----------- Investing activities: Purchases of property and equipment....................... (273,936) (871,717) (1,160,882) (500,959) (163,617) ----------- ----------- ------------ ----------- ----------- Financing activities: Net proceeds from (repayments of) line of credit.......... 2,190,000 604,311 (1,137,196) (1,610,424) 198,001 Proceeds from long-term debt.............................. 54,000 315,620 919,481 -- -- Proceeds from subordinated notes.......................... 750,000 250,000 -- -- -- Repayments of long-term debt.............................. (63,030) (122,056) (40,758) (35,239) (141,553) Proceeds from issuance of preferred stock, net............ -- 4,840,328 11,237,988 11,237,988 23,060,099 Restricted cash........................................... -- (400,000) 400,000 400,000 -- Spin-off of consulting division to sole stockholder....... -- (274,538) -- -- -- Net advances from (repayments to) related party........... -- (66,532) 267,909 192,453 (159,795) Proceeds from exercise of common stock options............ -- -- 5,687 -- 11,429 ----------- ----------- ------------ ----------- ----------- Net cash provided by financing activities........... 2,930,970 5,147,133 11,653,111 10,184,778 22,968,181 ----------- ----------- ------------ ----------- ----------- Net increase in cash and cash equivalents................... 939,483 1,244,692 204,447 5,667,269 18,065,635 Cash and cash equivalents, beginning of period.............. 146,197 1,085,680 2,330,372 2,330,372 2,534,819 ----------- ----------- ------------ ----------- ----------- Cash and cash equivalents, end of period.................... $ 1,085,680 $ 2,330,372 $ 2,534,819 $ 7,997,641 $20,600,454 ----------- ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- Supplemental cash flow information: Cash paid for interest.................................... $ 169,870 $ 133,409 $ 170,232 $ 93,033 $ 204,965 ----------- ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- -----------
The accompanying notes are an integral part of these statements. F-6 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) 1. BACKGROUND: Bluestone Software, Inc. (the "Company"), formerly Bluestone Consulting, Inc., was incorporated in New Jersey on March 17, 1989. The Company develops, markets and supports web application server software products that enable its customers to deploy information across the Internet, intranets and extranets. On April 17, 1997, in connection with the sale of Series A Convertible Preferred Stock (see Note 7), the Company spun off its consulting division to its then sole stockholder for no consideration. The Company reincorporated in Delaware as Bluestone Software, Inc. The consulting division, Bluestone Consulting, Inc. ("BCI") provides its clients information technology staffing resources and in 1997 provided the Company with certain administrative services under a shared services agreement (see Note 11). The consulting division spin-off is reported in the accompanying financial statements as a discontinued operation (see Note 3). 2. LIQUIDITY: The Company has recurring operating losses that have continued subsequent to year-end. The losses are primarily due to product development costs, marketing expenditures and administrative infrastructure costs related to the expansion of the Company's business. On January 21, 1999, the Company and substantially all of the Series B Preferred stockholders (collectively, the "Investors") entered into the Note and Warrant Purchase Agreement, whereby the Company could, from time to time before May 30, 1999, request that the Investors purchase 10% convertible subordinated secured notes totaling an aggregate of $5 million. Upon the purchase of a note, the Investors would be granted a warrant to purchase the number of shares of the Company's Common stock equal to the note amount multiplied by .1008, at an exercise price of $1.98 per share. The Company issued warrants to purchase an aggregate of 136,088 shares of common stock in connection with notes purchased in April 1999 and May 1999. The Company also issued warrants to purchase an aggregate of 1,520 shares of common stock at an exercise price of $8.70 per share related to interest on the notes. The warrants issued in connection with the notes and related interest thereon were valued at $1,100,000 using the black-scholes option pricing model and the following assumptions: volatility of 70%, risk-free interest rates of 5.2% to 5.3%, fair market value of a share of common stock of $8.70 and a term of 10 years. The value of the warrants was charged to operations during the three months ended June 30, 1999. The notes were converted into 496,322 shares of Series C Preferred stock on May 25, 1999 (see below). On March 31, 1999, the Company amended its bank loan agreement, which had expired on February 7, 1999. The amendment extended the Company's credit facility through April 1, 2000 and reset certain financial covenants. The amended agreement provides for the interest rate on the credit facility to increase by 0.50% and for certain quarterly fees to be paid if the Company does not meet certain quarterly net revenue requirements, as defined in the amendment. On May 25, 1999, the Company sold 9,191,176 shares of Series C Convertible Preferred Stock to certain venture capital investors, including certain Series B Preferred investors for $25 million in cash. The Series C Preferred will be senior to the Series A Preferred and Series B Preferred and is automatically convertible into Common stock upon a public stock offering, as defined. Dividends on the Series C Preferred are cumulative at $0.1632 per share per annum. The Series C Preferred stockholders participate in Common stock dividends and have Common stock voting rights on an as converted basis. F-7 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) 2. LIQUIDITY: (CONTINUED) In conjunction with the sale of the Series C Preferred, the Company issued a warrant to purchase 150,448 shares of common stock at $8.70 to the placement agent, valued at $800,000 using the black-scholes option pricing model and the following assumptions: volatility of 70%, a risk-free interest rate of 5.2%, fair market value of a share of common stock of $8.70 and a term of 5 years. The value of the warrant was recorded as a cost of the Series C Preferred Stock sale and, accordingly, deducted from the proceeds of the Series C Preferred Stock. The Company believes that the proceeds from the sale of the Series C Convertible Preferred Stock and borrowing availability under its amended credit facility will provide adequate funding to sustain the Company's operations through 1999. However, there is no assurance that the funding will be sufficient to sustain operations until the Company begins generating positive cash flows. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: INTERIM FINANCIAL STATEMENTS The financial statements as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 are unaudited and, in the opinion of management, include adjustments necessary for a fair presentation of results for those interim periods. The results of operations for the six months ended June 30, 1998 and 1999 are not necessarily indicative of the results to be expected for the entire year. PRO FORMA FINANCIAL INFORMATION The unaudited pro forma balance sheet as of June 30, 1999 reflects the conversion of all outstanding preferred stock and all accrued preferred stock dividends as of June 30, 1999 into common stock immediately before the completion of the contemplated public offering. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting periods. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. PREPAID EXPENSES AND OTHER Prepaid expenses and other at December 31, 1997 includes $243,834 of deferred costs related to support contracts purchased from third parties for resale in connection with the sale of third party product. F-8 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation is provided using the double declining balance method over the estimated useful lives of the related assets, generally three to seven years. Leasehold improvements are amortized on a straight-line basis over the lease term. PRODUCT DEVELOPMENT Product development expenditures are charged to operations as incurred. Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. The Company has determined that technological feasibility for its products is generally achieved upon completion of a working model. Since software development costs have not been significant after the completion of a working model, all such costs have been charged to product development expense. REVENUE RECOGNITION The Company sells perpetual licenses to end-users and annual and multi-year licenses primarily to independent software vendors. The Company also sells its software through value added resellers and system integrators. The Company derives its services revenues from annual maintenance agreements, which consist of customer technical support services and unspecified product upgrades/enhancements on a when-and-if-available basis, and consulting and training services. License fee revenue is generally recognized when a formal agreement exists, delivery of the product has occurred, the license fee is deemed fixed and determinable and collectibility is probable. License revenue from arrangements with resellers and system integrators is not recognized until the product is delivered to end-users. Maintenance revenue is recognized on a straight-line basis over the term of the contract. Revenues from training and consulting services are recognized as services are performed. Deferred revenues generally consist of advance customer payments on maintenance contracts. Certain of the Company's multi-year license agreements provide for payment terms that extend beyond 12 months. Revenue on such long-term arrangements are recognized when payments become due. Included in accounts receivable and deferred revenues at December 31, 1998 is $1,865,294 related to an extended term license fee where the Company received payment and recorded revenue in February 1999. CONCENTRATION OF CREDIT RISK One customer accounted for approximately 11% of the Company's net revenues for the year ended December 31, 1998 and one customer accounted for approximately 55% of net accounts receivable at December 31, 1998. One customer accounted for approximately 29% of net revenues for the six months ended June 30, 1999. No one customer accounted for greater than 10% of net revenues for the years ended December 31, 1996 and 1997 or greater than 10% of net accounts receivable at December 31, 1996 and 1997 and June 30, 1999. F-9 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising expense for continuing operations for the years ended December 31, 1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999 was $781,634, $615,374, $882,761, $199,910 and $793,921, respectively, including $394,808, $251,640, $549,487, $184,094 and $307,352, respectively, related to attending trade shows. INCOME TAXES Prior to April 17, 1997, the Company was taxed as a subchapter S corporation under the Internal Revenue Code for federal and state income tax purposes. Accordingly, all S Corporation taxable income or losses were included in the sole stockholder's tax return. In connection with the Series A Convertible Preferred Stock sale (see Note 7), the Company's subchapter S election was terminated. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates. The Company accounts for certain income and expense items for financial reporting purposes differently than for income tax purposes. The principal differences relate to the Company's conversion to the accrual basis of accounting for income taxes and certain financial statement reserves that are not currently deductible for income tax purposes. STOCK COMPENSATION The Company has elected to follow Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock options. Under APB No. 25, if the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of the grant, no compensation expense is recognized. If the exercise price of an option is below the market price of the underlying stock on the date of grant, compensation cost is recorded and is recognized in the statements of operations over the vesting period (see Note 9). EARNINGS PER SHARE The Company follows SFAS No. 128, "Earnings Per Share," which requires a dual presentation of "basic" and "diluted" earnings per share ("EPS") on the face of the statements of operations. Basic EPS is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted EPS includes the dilutive effect, if any, from the potential exercise or conversion of securities like stock options, which would result in the issuance of additional shares of common stock. For each of the three years in the period ended December 31, 1998 and the six months ended June 30, 1998 and 1999, the impact of stock options was not considered as their effect on EPS would be anti-dilutive. FAIR VALUE OF FINANCIAL INSTRUMENTS Cash, accounts receivable, prepaid expenses, accounts payable and accrued expenses are reflected in the accompanying financial statements at fair value due to the short-term nature of those F-10 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) instruments. The carrying amount of long-term debt obligations approximate fair value at the balance sheet dates. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal years beginning December 31. 1997, SFAS No. 130 establishes standards for the reporting and display of comprehensive income in a set of financial statements. Comprehensive income is defined as the change in net assets of a business enterprise during a period from transactions generated from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company has no other comprehensive income items, therefore, the adoption of SFAS No. 130 had no impact on the financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 applies to all public companies and is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires that business segment financial information be reported in the financial statements utilizing the management approach. The management approach is defined as the manner in which management organizes the segments within the enterprise for making operating decisions and assessing performance. Subsequent to the spin-off of the consulting segment, management believes the Company operates in one business segment, therefore, the adoption of SFAS No. 131 had no impact on the financial statements. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company adopted SOP 98-1 in January 1999. The adoption had no material effect on the Company's financial position or results of operations. DISCONTINUED OPERATIONS On April 17, 1997, in connection with the sale of Series A Convertible Preferred Stock (see Note 7), the Company spun off its consulting division, which operated as a separate segment, to its then sole stockholder for no consideration. The spin-off, which included cash of $274,538, has been recorded as a deemed distribution in the accompanying financial statements. The discontinued operation generated net revenues of $13,369,459 and $4,537,147 for the years ended December 31, 1996 and 1997, respectively. The spin-off was treated as a tax-free reorganization for federal and state income tax purposes. RECLASSIFICATIONS Prior year financial statements have been reclassified to conform with the current year presentation. F-11 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) 4. LINE OF CREDIT: On December 8, 1997, the Company entered into an agreement with a bank that provides for a $1,750,000 revolving line of credit and a $500,000 equipment line (see Note 5). The revolver is collateralized by substantially all of the Company's assets and a $400,000 certificate of deposit at December 31, 1997. Borrowings under the line are subject to a borrowing base of 80% of eligible accounts receivable, as defined. The restricted certificate of deposit was sold in 1998 as it was no longer required collateral. The line bore interest at prime plus 1.5%, through August 16, 1998 at which date the interest rate was changed to prime plus .75% in conjunction with the equipment line modification (see Note 5), and expired on December 7, 1998. In December 1998, the Company and the bank agreed to extended the term of the credit facility to February 7, 1999. The line is cross-defaulted and cross-collateralized with the equipment line with the bank (see Note 5). The loan agreement also requires the Company to maintain certain financial and nonfinancial covenants, as defined. On March 31, 1999, the Company amended its bank loan agreement. The amendment extended the Company's credit facility through April 1, 2000 and reset certain financial covenants. The amended agreement provides for the interest rate on the credit facility to increase to prime plus 1.25% and for certain quarterly fees to be paid if the Company does not meet certain quarterly net revenue requirements, as defined in the amendment. At June 30, 1999, borrowings of $1,023,463 were available under the line. A warrant to purchase 9,766 shares of the Company's Common stock at $2.56 per share, as adjusted was issued to the bank in December 1997 in conjunction with the loan agreement. The warrant is fully exercisable, has a seven-year term and is subject to an anti-dilution provision, as defined. No value has been assigned to the warrant as it is not material to the Company's financial statements. 5. LONG-TERM DEBT:
DECEMBER 31, ------------------------ JUNE 30, 1997 1998 1999 ---------- ------------ ------------ Equipment line with bank.................................................. $ 237,620 $ 1,157,101 $ 1,037,461 Capital leases............................................................ 116,027 75,269 53,356 ---------- ------------ ------------ 353,647 1,232,370 1,090,817 Less- Current portion..................................................... (83,971) (356,728) (436,648) ---------- ------------ ------------ $ 269,676 $ 875,642 $ 654,169 ---------- ------------ ------------ ---------- ------------ ------------
At December 31, 1997, the Company's equipment line provided for borrowings of up to $500,000 for approved capital expenditures, as defined and interest payable monthly on the outstanding balance at a rate of prime plus 1.5%. In June 1998, the outstanding borrowings as of that date of $237,620 converted to a term note payable in 36 monthly installments. On August 16, 1998, the Company and the bank modified the equipment line to provide for additional borrowings of up to $1,762,380 for approved capital expenditures, as defined. Interest is payable monthly on the outstanding balance at a rate of prime plus 1.25%. On March 31, 1999, in connection with the loan agreement amendment, the then outstanding balance of $959,086 was converted to a term note payable in 36 monthly installments F-12 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) 5. LONG-TERM DEBT: (CONTINUED) and no additional borrowings are available under the equipment line. The equipment line is secured by equipment and is cross-defaulted and cross-collateralized with the Company's line of credit (see Note 4). At December 31, 1997, 1998 and June 30, 1999, property under capital leases totaled $130,897 with corresponding accumulated amortization of $30,908, $90,900 and $104,232, respectively. 6. SUBORDINATED NOTES DUE TO RELATED PARTIES: 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 BCI to assume $500,000 of the convertible note with the Company assuming the remaining $500,000 of the convertible note. To achieve an equal distribution of debt between BCI and the Company as part of the spin-off, the Company issued BCI a $500,000, 10% note. Interest on both notes is payable annually. Principal on the convertible note is due on December 31, 2002 and principal on the note with BCI is due on December 31, 2005. At December 31, 1997 and 1998 and June 30, 1999 other accrued expenses includes $97,526, $206,878 and $149,600, respectively, related to interest on the notes. The $500,000 convertible subordinated note is convertible into 218,750 shares of the Company's Common stock at the option of the holder. 7. MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK: On April 18, 1997, the Company sold 5,526,316 shares of $0.001 par value Series A Convertible Preferred Stock to certain venture capital investors, an individual investor and the Company's former sole shareholder for $5,250,000. This includes 263,158 shares sold to the former sole stockholder in exchange for canceling a $250,000 note payable due him. The Series A Preferred stock is convertible into 0.3125 shares of Common stock, subject to adjustment, as defined, and is automatically convertible upon a public stock offering, as defined. Dividends on the Series A Preferred are cumulative at $0.057 per share per annum and the Series A Preferred has a liquidation preference of $0.95 per share. At December 31, 1997 and 1998 cumulative dividends accrued but not declared were $222,658 and $537,658, respectively. Beginning in April 2003, the holders may require the Company to redeem the Preferred at $0.95 per share plus accrued dividends over a three-year period. The Series A Preferred stockholders participate in Common stock dividends and have Common stock voting rights on an as converted basis. F-13 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) 8. MANDATORILY REDEEMABLE SERIES B CONVERTIBLE PREFERRED STOCK: On April 23, 1998, the Company sold 8,782,695 shares of Series B Convertible Preferred Stock to certain venture capital investors, including its original investors (see Note 7) for approximately $11.4 million in cash. The Series B Preferred is senior to the Series A Preferred and was originally convertible into 0.3125 shares of Common stock. In 1998, in accordance with the original terms of the Series B Preferred stock purchase agreement, the conversion ratio was adjusted so that each share of Series B Preferred is convertible into 0.6541 shares of Common stock. In addition, the Series B Preferred is automatically convertible upon a public stock offering, as defined. Dividends on the Series B Preferred are cumulative at $0.078 per share per annum and the Series B Preferred has a liquidation preference of $1.296 per share. At December 31, 1998, cumulative dividends accrued but not declared were $476,720. Beginning in October 2001, the holders may require the Company to redeem the Preferred at $1.296 per share plus accrued dividends over an eighteen-month period. The Series B Preferred stockholders participate in Common stock dividends and have Common stock voting rights on an as converted basis. 9. STOCK OPTION AND EMPLOYEE BENEFIT PLANS: STOCK OPTION PLANS In 1996, the Company adopted the 1996 Incentive and Non-Qualified Stock Option Plan (the "1996 Plan") under which incentive and nonstatutory stock options to acquire shares of the Company's Common stock may be granted to officers, employees and consultants of the Company. Incentive stock options must be issued at an exercise price not less than the fair market value of the underlying shares on the date of grant. Options granted under the 1996 Plan are exercisable over a period of time, not to exceed ten years, and are subject to other terms and conditions specified in the individual option grants. In April 1997, in connection with the sale of Series A Convertible Preferred Stock (see Note 7), the 1996 Plan was amended and restated, increasing the total shares available under the plan to 781,250. On August 7, 1997, all outstanding options granted under the 1996 Plan were canceled and 151,219 were reissued at an exercise price of $2.24 per share. In April 1998, in connection with the sale of Series B Convertible Preferred Stock (see Note 8), the 1996 Plan was amended and restated, increasing the total shares available under the plan to 1,406,250. In June 1999, the 1996 Plan was amended to increase the total shares available under the plan to 2,946,578. F-14 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) 9. STOCK OPTION AND EMPLOYEE BENEFIT PLANS: (CONTINUED) Information relative to the 1996 Plan is as follows:
WEIGHTED RANGE OF AGGREGATE AVERAGE EXERCISES EXERCISE EXERCISE SHARES PRICES PRICE PRICE ----------- ------------- ------------- ----------- Outstanding January 1, 1996................................ -- $ -- $ -- $ -- Granted at fair market value........................... 238,156 6.40 1,524,200 6.40 ----------- ------------- ------------- ----- Outstanding December 31, 1996.............................. 238,156 6.40 1,524,200 6.40 Granted at fair market value........................... 512,545 2.24-9.60 1,279,200 2.50 Canceled............................................... (334,688) 2.24-9.60 (1,871,530) 5.59 ----------- ------------- ------------- ----- Outstanding December 31, 1997.............................. 416,013 2.24 931,870 2.24 Granted at fair market value........................... 787,118 2.24-3.07 2,249,416 2.86 Exercised.............................................. (2,539) 2.24 (5,688) 2.24 Canceled............................................... (18,523) 2.24 (41,493) 2.24 ----------- ------------- ------------- ----- Outstanding December 31, 1998.............................. 1,182,069 2.24-3.07 3,134,105 2.65 Granted at fair market value........................... 1,215,045 3.07-8.70 6,441,779 5.30 Granted below fair market value........................ 309,313 3.07-8.70 1,224,108 3.96 Exercised.............................................. (4,916) 2.24-3.07 (11,429) 2.32 Canceled............................................... (37,922) 2.24-3.07 (105,020) 2.77 ----------- ------------- ------------- ----- $ Outstanding June 30, 1999.................................. 2,663,589 2.24-$8.70 $ 10,683,543 $ 4.01 ----------- ------------- ------------- ----- ----------- ------------- ------------- -----
The options under the 1996 Plan generally vest over a four year period. At June 30, 1999 there were options to purchase 1,028,050 shares of common stock exercisable and options to purchase 275,534 shares of common stock were available for future grant under the 1996 Plan. The weighted average remaining contractual life of the outstanding options at June 30, 1999 was 9.23 years. In connection with certain options granted to employees during the six months ended June 30, 1999, the Company recorded $1,415,548 of deferred compensation. This amount represents the difference between the fair market value of the Company's common stock on the date of grant and the exercise price of options to purchase 284,313 shares of the Company's common stock. Deferred compensation is amortized over the vesting periods of the options, which range from immediate vesting to periods of up to four years. For the six months ended June 30, 1999 $112,204 of deferred compensation was charged to expense. At June 30, 1999, the Company had $1,303,344 of deferred compensation to be amortized over the remaining vesting periods of four years. Included in options granted below fair market value during the six months ended June 30, 1999 are options to purchase 25,000 shares of common stock issued to non-employees for consulting services. The Company recorded $190,954 in general and administrative expenses during the six months ended June 30, 1999 related to these options. In 1999 the Company established an executive bonus pool for issuance of common stock options to the Chairman and to certain officers of the Company under the 1996 Plan. Grants of stock option awards under the bonus pool are contingent upon the Company meeting certain performance goals. F-15 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) 9. STOCK OPTION AND EMPLOYEE BENEFIT PLANS: (CONTINUED) The Company granted 52,650 options relating to the bonus pool in May 1999 for the Company's operating results during the three months ended March 31, 1999. In August 1999 the Company will grant 60,259 options relating to the bonus pool for the Company's operating results for the three months ended 6/30/99. Options granted in connection with the bonus pool vest immediately. In June 1999, the Company adopted the Directors' Compensation Plan under which non-qualified options to acquire shares of the Company's common stock may be granted to non-employee directors of the Company. Options granted under the Directors Compensation Plan vest immediately and are exercisable over a period of time not to exceed five years. The total number of shares available under the Directors Compensation Plan is 156,250. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and the related interpretations, in accounting for its stock option plan. Had compensation cost for the 1996 Plan been determined based upon the fair value of the options at the date of grant, as prescribed under SFAS 123, the Company's net loss for the years ended December 31, 1997 and 1998 would have increased to the following pro forma amount:
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, $14,351 and $22,688 for the years ended December 31, 1996, 1997 and 1998, and the six months ended June 30, 1998 and 1999, respectively. F-16 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) 10. INCOME TAXES: The income tax provision consists of the following:
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) ----------- ----------- $ -- $ -- ----------- ----------- ----------- -----------
The Company has established a valuation allowance for the full amount of the net deferred tax asset due to the limited operating history of the Company and uncertainty surrounding realizability. At December 31, 1998, the Company had a net operating loss carryforward of approximately $14 million beginning to expire in 2012 for federal tax purposes and in 2004 for state tax purposes. 11. TRANSACTIONS WITH BCI: On April 17, 1997, in connection with the sale of the Series A Convertible Preferred Stock (see Note 7), the Company spun off its consulting division, BCI, to its then sole stockholder, who is currently a director of the Company. In connection with the spin-off, the Company entered into the Intercompany Services Agreement with BCI, whereby BCI provided the Company certain administrative services at an allocated cost based on actual cost and usage. For the year ended December 31, 1997, general and administrative expense includes $871,784 for such services provided by BCI. The Company also sells certain software products and services to BCI and purchases certain consulting services from BCI. For the years ended December 31, 1997 and 1998 and for the six months ended June 30, 1998 and 1999, the Company's sales to BCI totaled $40,448, $58,607, $28,582 and F-17 BLUESTONE SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) 11. TRANSACTIONS WITH BCI: (CONTINUED) $75,520, respectively, and total purchases from BCI were $47,088, $351,739, $194,638 and $52,725, respectively. At December 31, 1997 and 1998 and June 30, 1999, accounts receivable includes $5,217, $23,299 and $85,860, respectively, due from BCI and accounts payable includes $43,889, $77,097 and $3,925, respectively, payable to BCI. On March 31, 1998, the Company decided to no longer sell non-proprietary software products. In addition, the Company agreed to allow BCI to commence the sale and support of this product line, and sub-contracted support services to BCI related to previously sold maintenance contracts. The Company paid BCI $450,000 in 1998 and paid BCI $150,000 in 1999, for the sub-contracted support services. The Company also sub-leases a portion of its operating facility to BCI (see Note 12). Amounts charged to BCI, which reduced the Company's rent expense for the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 and 1999, totaled $130,588, $74,165, $28,586 and $46,949, respectively. During the year ended December 31, 1998 and the six months ended June 30, 1998 and 1999, the Company rented certain equipment from BCI, totaling $89,489, $39,845 and $49,510, respectively. In connection with the Series A Convertible Preferred Stock sale and spin-off of BCI, the Company issued a $500,000, 10% note payable to BCI (see Note 6). 12. COMMITMENTS AND CONTINGENCIES: The Company has operating leases on its office facilities (see Note 11) and certain equipment. Future minimum lease payments under such noncancelable operating leases are summarized as follows, as of December 31, 1998: 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, $272,788 and $430,500 for the years ended December 31, 1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999, respectively. The Company is involved in certain legal actions arising in the ordinary course of business. Management believes that the outcome of such actions will not have a material adverse effect on the Company's financial position or results of operations. 13. PUBLIC OFFERING SUBSEQUENT TO DECEMBER 31, 1998: On June 10, 1999, the Company's Board of Directors authorized management to file a Registration Statement with the SEC to permit the Company to commence an initial public offering. In connection therewith, on August 13, 1999, the Company's Board of Directors authorized a 1-for-3.2 reverse split of its common stock to be effected immediately prior to the offering. The reverse stock split has been retroactively reflected in the accompanying financial statements. F-18 After the 1-for-3.2 reverse stock split of each outstanding share of common stock, as discussed in Note 13 to the financial statements, is effected, we expect to be in a position to render the following audit report. /s/ Arthur Andersen LLP Philadelphia, PA March 31, 1999 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Bluestone Software, Inc. We have audited, in accordance with generally accepted auditing standards, the financial statements of Bluestone Software, Inc. included in this registration statement and have issued our report thereon dated March 31, 1999. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying financial statement schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Philadelphia, PA March 31, 1999 S-1 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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...................... 16 Use of Proceeds................................. 16 Dividend Policy................................. 16 Capitalization.................................. 17 Dilution........................................ 18 Selected Financial Data......................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 20 Business........................................ 31 Management...................................... 42 Certain Transactions............................ 51 Principal and Selling Stockholders.............. 56 Description of Securities....................... 59 Shares Eligible For Future Sale................. 62 Plan of Distribution............................ 64 Legal Matters................................... 66 Experts......................................... 66 Where You Can Find More Information Glossary.... 67 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. 4,000,000 Shares [LOGO] Common Stock --------------------- PROSPECTUS --------------------- Deutsche Banc Alex / / Brown SoundView Technology Group C.E. Unterberg, Towbin Legg Mason Wood Walker Incorporated , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Securities and Exchange Commission registration fee............... 15,346 NASD and Blue Sky fees and expenses............................... 15,000 Nasdaq National Market listing fee................................ 95,000 Accountants' fees and expenses.................................... 125,000 Legal fees and expenses........................................... 300,000 Transfer Agent's fees and expenses................................ 6,300 Printing and engraving expenses................................... 200,000 Miscellaneous..................................................... 43,354 --------- Total Expenses.................................................... $ 800,000 --------- ---------
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 9,766 shares of common stock at an exercise price equal to $2.56 per share. The warrant may be exercised at any time prior to November 24, 2004. The exercise price of the warrant and the number of shares of common stock into which the warrant is exercisable are subject to proportionate adjustment in the event of stock dividends payable in shares of common stock and combinations and splits of common stock. In addition, pursuant to an antidilution agreement between the Registrant and Silicon Valley Bank dated November 24, 1997, the exercise price of the warrant and the number of shares of common stock into which the warrant is exercisable are subject to adjustment on a broad-based weighted average basis for issuance of securities after November 24, 1997 for less than the then applicable exercise price for the warrant. Pursuant to a stock purchase agreement dated April 22, 1998, the Registrant issued 8,782,695 shares of Series B preferred stock to institutional and accredited investors for a total purchase price of $11.4 million or $1.296 per share. On January 21, 1999, the Registrant entered into the Note and Warrant Purchase Agreement with substantially all of the holders of the Series B preferred stock (the "Investors"). Under the Note and Warrant Purchase Agreement, the Investors agreed to provide subordinated secured debt financing of up to $5.0 million (the "Committed Principal Amount"). The Registrant drew down $1.35 million of such debt and issued 10% Convertible Subordinated Secured Notes and warrants to purchase up to 136,088 shares of common stock at an exercise price equal to $1.98 per share to the Investors. The outstanding $1.35 million of the Committed Principal Amount was converted into Series C preferred stock as part of our issuance of 9,191,176 shares of Series C preferred stock at $2.72 per share on May 25, 1999. Pursuant to a stock purchase agreement dated May 25, 1999, the Registrant issued 9,191,176 shares of Series C preferred stock to institutional and accredited investors for a total purchase price of $25.0 million, or $2.72 per share. Deutsche Bank Securities Inc. acted as the placement agent for such offering for which it received $1.4 million and a warrant to purchase up to 150,448 shares of common stock at $8.70 per share. From March 1, 1996 to June 30, 1999, the Registrant granted stock options to purchase 3,062,177 shares of common stock at exercise prices ranging from $2.24 to $8.70 per share to employees, consultants and directores pursuant to its Amended and Restated 1996 Incentive and Non-Qualified Stock Option Plan. Between March 1998 and June 1999, 7,455 shares of common stock of the Registrant have been issued to current and former employees pursuant to the exercise of stock options. The Registrant believes that all grants of options or sales of common stock made pursuant to the exercise of stock options were made in reliance upon Rule 701 under the Securities Act or on Section 4(2) of the Securities Act. The Registrant believes that all of the other transactions described above were exempt from registration under Section 3(b) or 4(2) of the Securities Act because the subject securities were sold to a limited group of persons, each of whom was believed to have been a sophisticated, accredited investor or to have had a pre-existing business or personal relationship with the Registrant or its management and to have been purchasing for investment without a view to further distribution. In addition, the recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates issued in such transactions. All recipients had adequate access to information about the Registrant. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following exhibits are filed herewith:
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. 3.5 Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation of Bluestone dated August , 1999. 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.
II-3
EXHIBIT NO. DESCRIPTION - ---------- ------------------------------------------------------------------------------------------------------ 10.15** Service Mark License Agreement, dated April 17, 1997, between Bluestone and Bluestone Consulting, Inc. 10.16** $500,000 Amended and Restated Convertible and Subordinated Note, dated April 17, 1997, by Bluestone in favor of Mark Baiada. 10.17** $500,000 Promissory Note, dated April 17, 1997, by Bluestone in favor of Bluestone Consulting, Inc. 10.18 Sublease Agreement dated as of April 30, 1997 between Bluestone (as sublandlord) and Bluestone Consulting, Inc. (as subtenant). 10.19 Equipment Lease, dated September 5, 1997, between Bluestone and Colonial Pacific Leasing. 10.20** Loan and Security Agreement, dated as of December 8, 1997, between Silicon Valley Bank and Bluestone. 10.21** First Loan Modification Agreement, dated as of August 16, 1998, between Silicon Valley Bank and Bluestone. 10.22** Second Loan Modification Agreement, dated as of January 21, 1999, between Silicon Valley Bank and Bluestone. 10.23** Third Loan Modification Agreement, dated as of March 30, 1999, between Silicon Valley Bank and Bluestone. 10.24** Negative Pledge Agreement, dated as of August 16, 1998, between Silicon Valley Bank and Bluestone. 10.25** Warrant to purchase 31,250 shares of Common Stock of Bluestone, dated as of November 24, 1997, issued by Bluestone to Silicon Valley Bank, as amended. 10.26** Antidilution Agreement, dated as of November 24, 1997, between Silicon Valley Bank and Bluestone. 10.27** Registration Rights Agreement, dated as of November 24, 1997, between Silicon Valley Bank and Bluestone. 10.28 Warrant to purchase 481,434 shares of Common Stock of Bluestone, dated as of April 28, 1999, issued by Bluestone to Deutsche Banc Alex. Brown 10.29** Series A Preferred Stock Purchase Agreement, dated as of April 18, 1997, between Bluestone and the investors listed therein. 10.30** Series B Preferred Stock Purchase Agreement, dated as of April 22, 1998, between Bluestone and the investors listed therein. 10.31** Convertible Subordinated Secured Note and Warrant Purchase Agreement, dated as of January 21, 1999, between Bluestone and the investors listed therein. 10.32** Form of Warrant issued to the investors under the Convertible Subordinated Secured Note and Warrant Purchase Agreement dated January 21, 1999. 10.33** Preferred Stock Purchase Agreement relating to the sale of Series C Preferred Stock, dated as of May 25, 1999, between Bluestone and the purchasers listed therein. 10.34** Second Restated First Refusal and Co-Sale Agreement, dated as of May 25, 1999, between Bluestone and the investors and stockholders listed therein.
II-4
EXHIBIT NO. DESCRIPTION - ---------- ------------------------------------------------------------------------------------------------------ 10.35** Second Restated Investors' Rights Agreement, dated as of May 25, 1999, between Bluestone and the investors and stockholders listed therein, as amended by the First Amendment dated as of June 16, 1999. 10.36** Restated Voting Agreement, dated as of April 23, 1998, between Bluestone and the investors and founders listed therein, as amended by the First Amendment dated as of June 16, 1999. 10.37** Lease for headquarters space at 1000 Briggs Road, Mount Laurel, New Jersey, dated September 27, 1993, with Liberty Property Limited Partnership (successor to Briggs Properties Partnership) as landlord. 10.38 Stock Repurchase Agreement between Bluestone and Mel Baiada dated April 18, 1997. 10.39*+ Executive Bonus Pool 23.1 Consent of Arthur Andersen LLP. 23.2* Consent of Pepper Hamilton LLP (included in Exhibit 5.1). 23.3 Consent of International Data Corporation 24.1** Powers of Attorney (included in the signature page to the Registration Statement). 27.1 Financial Data Schedule (in electronic format only).
- ------------------------ * To be filed by amendment. ** Previously filed. + Management contract or compensatory plan. (b) The following financial statement schedule and the report related thereto are included with this Registration Statement: 1. Schedule II--Valuation and Qualifying Accounts of Bluestone. 2. Report of Arthur Andersen LLP on financial statement schedule. Schedules, other than those referred to above, are omitted as non-applicable or not required, or the required information is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreements certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other 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 II-5 a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The Registrant hereby undertakes that: (i) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. (ii) For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this amendment to its registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Mount Laurel, New Jersey on the 20th day of August, 1999. BLUESTONE SOFTWARE, INC. By: /s/ P. KEVIN KILROY ----------------------------------------- P. Kevin Kilroy PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- */s/ P. MELAN BAIADA Chairman of the Board of - ------------------------------ Directors August 20, 1999 P. Melan Baiada President and Chief /s/ P. KEVIN KILROY Executive Officer and - ------------------------------ Director (Principal August 20, 1999 P. Kevin Kilroy Executive Officer) Senior Vice President Chief /s/ S. CRAIG HUKE Financial Officer - ------------------------------ (Principal Financial and August 20, 1999 S. Craig Huke Accounting Officer) */s/ GREGORY M. CASE Director - ------------------------------ August 20, 1999 Gregory M. Case */s/ WILLIAM C. HULLEY Director - ------------------------------ August 20, 1999 William C. Hulley */s/ ANTON SIMUNOVIC Director - ------------------------------ August 20, 1999 Anton Simunovic */s/ ANDREW J. FILIPOWSKI Director - ------------------------------ August 20, 1999 Andrew J. Filipowski */s/ PAUL E. BLONDIN Director - ------------------------------ August 20, 1999 Paul E. Blondin
*/s/ P. KEVIN KILROY ------------------------------ P. Kevin Kilroy By: ATTORNEY-IN-FACT 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. 3.5 Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation dated August , 1999. 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.
EXHIBIT NO. DESCRIPTION - ---------- ------------------------------------------------------------------------------------------------------ 10.16** $500,000 Amended and Restated Convertible and Subordinated Note, dated April 17, 1997, by Bluestone in favor of Mark Baiada. 10.17** $500,000 Promissory Note, dated April 17, 1997, by Bluestone in favor of Bluestone Consulting, Inc. 10.18 Sublease Agreement dated as of April 30, 1997 between Bluestone (as sublandlord) and Bluestone Consulting, Inc. (as subtenant). 10.19 Equipment Lease, dated September 5, 1997, between Bluestone and Colonial Pacific Leasing. 10.20** Loan and Security Agreement, dated as of December 8, 1997, between Silicon Valley Bank and Bluestone. 10.21** First Loan Modification Agreement, dated as of August 16, 1998, between Silicon Valley Bank and Bluestone. 10.22** Second Loan Modification Agreement, dated as of January 21, 1999, between Silicon Valley Bank and Bluestone. 10.23** Third Loan Modification Agreement, dated as of March 30, 1999, between Silicon Valley Bank and Bluestone. 10.24** Negative Pledge Agreement, dated as of August 16, 1998, between Silicon Valley Bank and Bluestone. 10.25** Warrant to purchase 31,250 shares of Common Stock of Bluestone, dated as of November 24, 1997, issued by Bluestone to Silicon Valley Bank, as amended. 10.26** Antidilution Agreement, dated as of November 24, 1997, between Silicon Valley Bank and Bluestone. 10.27** Registration Rights Agreement, dated as of November 24, 1997, between Silicon Valley Bank and Bluestone. 10.28 Warrant to purchase 481,434 shares of Common Stock of Bluestone, dated as of April 28, 1999, issued by Bluestone to Deutsche Banc Alex. Brown 10.29** Series A Preferred Stock Purchase Agreement, dated as of April 18, 1997, between Bluestone and the investors listed therein. 10.30** Series B Preferred Stock Purchase Agreement, dated as of April 22, 1998, between Bluestone and the investors listed therein. 10.31** Convertible Subordinated Secured Note and Warrant Purchase Agreement, dated as of January 21, 1999, between Bluestone and the investors listed therein. 10.32** Form of Warrant issued to the investors under the Convertible Subordinated Secured Note and Warrant Purchase Agreement dated January 21, 1999. 10.33** Preferred Stock Purchase Agreement relating to the sale of Series C Preferred Stock, dated as of May 25, 1999, between Bluestone and the purchasers listed therein. 10.34** Second Restated First Refusal and Co-Sale Agreement, dated as of May 25, 1999, between Bluestone and the investors and stockholders listed therein. 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.
EXHIBIT NO. DESCRIPTION - ---------- ------------------------------------------------------------------------------------------------------ 10.36** Restated Voting Agreement, dated as of April 23, 1998, between Bluestone and the investors and founders listed therein, as amended by the First Amendment dated as of June 16, 1999. 10.37** Lease for headquarters space at 1000 Briggs Road, Mount Laurel, New Jersey, dated September 27, 1993, with Liberty Property Limited Partnership (successor to Briggs Properties Partnership) as landlord. 10.38 Stock Repurchase Agreement between Bluestone and Mel Baiada dated April 18, 1997. 10.39*+ Executive Bonus Pool. 23.1 Consent of Arthur Andersen LLP. 23.2* Consent of Pepper Hamilton LLP (included in Exhibit 5.1). 23.3 Consent of International Data Corporation 24.1** Powers of Attorney (included in the signature page to the Registration Statement). 27.1 Financial Data Schedule (in electronic format only).
- ------------------------ * To be filed by amendment. ** Previously filed. + Management contract or compensatory plan. EX-3.5 2 EXHIBIT 3.5 Exhibit 3.5 CERTIFICATE OF AMENDMENT OF THE THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF BLUESTONE SOFTWARE, INC. Bluestone Software, Inc. (the "Corporation"), a corporation organized and existing under, and by virtue of, the General Corporation Law of the State of Delaware (the "DGCL"), does hereby certify: FIRST: That the Board of Directors of the Corporation, by written consent filed with the minutes of proceedings of the board, duly adopted a resolution declaring advisable the amendment of the Third Amended and Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation") and submitted the same to the stockholders of the Corporation for approval. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Board hereby deems it advisable and in the best interest of the Corporation to amend the Corporation's Certificate of Incorporation as follows: 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 78,400,187 shares of capital stock which shall be divided into 54,900,000 shares of Common Stock, par value $.001 per share ("Common Stock") 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 20th day of August, 1999. BLUESTONE SOFTWARE, INC. /s/ KEVIN KILROY --------------------------------------------- Kevin Kilroy President and Chief Executive Officer -2- EX-10.1 3 EXHIBIT 10.1 Exhibit 10.1 BLUESTONE SOFTWARE, INC. 1996 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN AS AMENDED AND RESTATED EFFECTIVE AUGUST 20, 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 Ten Million Five Hundred Twenty Nine Thousand Forty Nine (10,529,049) 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 Ten Million Five Hundred Twenty-Nine Thousand Forty-Nine (10,529,049) 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 Amended and Restated: August 20, 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-10.2 4 EXHIBIT 10.2 Exhibit 10.2 BLUESTONE SOFTWARE, INC. DIRECTORS' COMPENSATION PLAN BLUESTONE SOFTWARE, INC. DIRECTORS' COMPENSATION PLAN Section 1. PURPOSES. The purposes of the Plan are (a) to recognize the contributions made to Bluestone Software, Inc. (the "Company") by Non-Employee Directors, (b) to provide such persons with additional incentive to devote themselves to the future success of the Company, and (c) to improve the ability of the Company to attract, retain and motivate individuals who may serve as members of the Board by providing such persons with an opportunity to acquire or increase their proprietary interest in the Company through the receipt of rights to acquire the Company's Common Stock. The Options granted pursuant to the Plan are intended to constitute non-qualified stock options. Section 2. DEFINITIONS. (a) "AFFILIATE" means, 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. (b) "AWARD" means a grant of an Option to a Non-Employee Director pursuant to the provisions of the Plan. (c) "BOARD" means the Board of Directors of the Company, as constituted from time to time. (d) "CHANGE OF CONTROL" means 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), -1- 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 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. (e) "CODE" means the Internal Revenue Code of 1986, as amended. (f) "COMMON STOCK" means common stock of the Company, $.001 par value per share. (g) "COMPANY" means Bluestone Software, Inc., a Delaware corporation, and any successor in interest that agrees to assume and maintain the Plan. (h) "DISABILITY" or "DISABLED" with respect to an Optionee shall mean 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 shall be determined by the Board of Directors, whose determination shall be conclusive. -2- (i) "EFFECTIVE DATE" means June 10, 1999. (j) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (l) "FAIR MARKET VALUE" means the fair market value of a share of Common Stock, as determined pursuant to Section 10 hereof. (m) "NON-EMPLOYEE DIRECTOr" has 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. (n) "OPTION" means a non-qualified stock option to purchase Shares that is granted pursuant to the Plan. (o) "OPTION AGREEMENT" means a written agreement in such form as the President of the Company (subject to the terms and conditions of this Plan) may from time to time approve evidencing and reflecting the terms of an Option. (p) "OPTIONEE" means the holder of an Option. (q) "PLAN" means this Bluestone Software, Inc. Directors' Compensation Plan, as amended from time to time. (r) "PUBLIC OFFERING" means the consummation of a firm commitment underwritten public offering of equity securities of the Company registered under the Securities Act. (s) "SALE OF THE COMPANY" means 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 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. (t) "SECURITIES ACT" means the Securities Act of 1933, as amended. -3- (u) "SHARES" means shares of Common Stock, as adjusted in accordance with Section 11 of the Plan. (v) "SUBSIDIARY" means, 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. Section 3. ADMINISTRATION. (a) GENERAL. The Plan shall be administered by the Board. Subject to the provisions of the Plan, the Board shall have the authority, in its discretion: (i) to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; (ii) to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreements relating thereto); (iii) to determine or modify the terms and conditions, not inconsistent with the terms of the Plan, of any Option granted hereunder, including but not limited to, the exercise price and any restriction or limitation, any vesting provisions, or any vesting acceleration or forfeiture waiver regarding any Option, or the length of the period following termination of service of any Optionee during which any Option may be exercised, based on such factors as the Board shall determine in its sole discretion; (iv) to amend the terms of any agreement relating to any Award issued under the Plan; (v) to authorize any person to execute on behalf of the Company any instrument required to effectuate the Award of an Option previously granted 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 Award or exercise thereof; and (vi) to make such other determinations and establish such other procedures as it deems necessary or advisable for the administration of the Plan. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Award granted in the manner and to the extent it shall deem necessary to carry out the intent of the Plan. (b) EFFECT OF BOARD DECISIONS. All decisions, determinations and interpretations of the Board shall be final and binding on all persons, including the Company and Optionees. -4- (c) LIMITATION OF LIABILITY. Notwithstanding anything herein to the contrary, no member of the Board shall be liable for any good faith determination, act or failure to act in connection with the Plan or any Option granted hereunder. Section 4. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of the Plan, the maximum aggregate number of Shares which may be granted and sold under the Plan is Five Hundred Thousand (500,000) Shares. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, return to the Plan and become available for future Awards under the Plan. Section 5. PARTICIPATION. Only Non-Employee Directors may be granted Options under the Plan. Section 6. AWARDS. Options shall be granted as follows: (a) Upon a Non-Employee Director's initial election to the Board, such Non-Employee Director shall receive an Option for 20,000 Shares. Upon the anniversary date of a Non-Employee Director's election to the Board, such Non-Employee Director shall receive an Option for 10,000 Shares, provided the Non-Employee Director has served continuously as a Non-Employee Director from the date of his initial election. (b) Upon a Non-Employee Director's appointment to serve on the compensation, audit or other duly constituted Committees of the Board, such Non-Employee Director shall receive an Option for 2,500 Shares. Upon the anniversary date of such appointment, the Non-Employee Director shall receive an Option for 2,500 Shares, provided the Non-Employee Director has served continuously on such Committee from the date of his initial election. (c) Upon a Non-Employee Director's appointment to serve as the Chairperson of the Board, such Non-Employee Director shall receive an Option for 10,000 Shares. Upon the anniversary date of a Non-Employee Director's election as Chairperson of the Board, such Non-Employee Director shall receive an Option for 2,500 Shares, provided the Non-Employee Director has served continuously in such position from the date of his initial election. -5- Section 7. TERMS AND CONDITIONS OF OPTIONS/VESTING. (a) OPTION AGREEMENT. Each Option granted pursuant to the Plan shall be evidenced by an Option Agreement in such form as the Board may from time to time determine. Each Option Agreement shall incorporate by reference all terms and conditions of the Plan. (b) VESTING. All Options shall be fully vested and exercisable at the time they are granted. (c) EXERCISE PRICE. The exercise price for Options granted under the Plan will be 100% of the Fair Market Value of such Shares on the date the Option is granted. (d) TERM OF OPTIONS. The right of an Optionee to exercise any part of an option granted pursuant to the Plan terminates on the first to occur of the following: (i) five (5) years from and including the date of grant; (ii) expiration of three (3) months from and including the date the Optionee's service as a member of the Board terminates for any reason other than death or Disability; or (iii) the expiration of one (1) year from and including the date the Optionee's service as a member of the Board terminates by reason of death or Disability. Section 8. EXERCISE OF OPTIONS. (a) EXERCISABILITY. To the extent then vested, Options shall be exercisable in full or in part from and after their respective dates of grant. No Option may be exercised at any time after the fifth anniversary of the date of grant. (b) MANNER OF EXERCISE. An Option shall be deemed to be exercised when written notice of such exercise has been given to 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 any other documents required by the terms of the Plan and/or Option Agreement. Full payment may consist of any consideration and method of payment allowable under Section 9 of the Plan. (c) DELIVERY OF SHARES. As soon as practicable after any 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 -6- listing requirements of any national or regional securities exchange or any law or regulation applicable to the issuance or delivery of such Shares. (d) EFFECT ON PLAN. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for grant under the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. Section 9. FORM OF PAYMENT. Subject to Section 20 hereof, 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 Board and may consist entirely of: (i) cash; (ii) check; (iii) 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 (iv) such other consideration and method of payment as the Board may from time to time determine. In making its determination as to the type of consideration to accept, the Board shall consider if the acceptance of such consideration may be reasonably expected to benefit the Company. Section 10. DETERMINATION OF FAIR MARKET VALUE OF COMMON STOCK. (a) Except to the extent otherwise provided in this Section 10, the Fair Market Value of a share of Common Stock shall be determined by the Board in its sole discretion. (b) In the event Shares are listed on the American Stock Exchange or any other national or regional securities exchange or traded on the Nasdaq Stock Market ("Nasdaq") the Fair Market Value of a share of Common Stock shall be the closing price of a share of Common Stock on the exchange or on Nasdaq, as reported in The Wall Street Journal on the relevant valuation date, or if there is no trading on that date, on the next trading date. In the event that Shares are traded in the over-the-counter market, 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, if not so reported, as otherwise reported by the National Quotation Bureau, Inc.) as applicable or, if there is no trading on such date, on the next trading date. Section 11. ADJUSTMENTS. (a) STOCK SPLITS, ETC. Subject to required action by the shareholders, if any, the number of Shares as to which Options may be granted under the Plan and the number of Shares subject to outstanding Options and the exercise prices thereof shall be adjusted proportionately for any increase or decrease in the number of outstanding shares of Common -7- Stock of the Company resulting from stock splits, reverse stock splits, stock dividends, reclassifications and recapitalizations. (b) 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. Section 12. RIGHTS AS A SHAREHOLDER. The Optionee shall have no rights as a shareholder of the Company and shall not have the right to vote or receive dividends with respect to any Shares subject to an Option until such Option has been exercised and a certificate with respect to the Shares purchased upon such exercise has been issued to him. Section 13. PURCHASE FOR INVESTMENT AND OTHER RESTRICTIONS. At the option of the Board, the issuance of Shares on the exercise of an Option may be conditioned on receipt by the Company of such appropriate representations and warranties of the Optionee, including a representation and warranty that the purchase of Shares or the exercise of an Option shall be for investment, and not with a view to the public resale or distribution thereof, unless the Shares subject to the Option are registered under the Securities Act and the transfer or sale of such Shares complies with all other laws, rules and regulations applicable thereto. Unless the Shares subject to the Option are registered under the Securities Act, the Optionee shall acknowledge that the Shares purchased on exercise of the Option are not registered under the Securities Act and may not be sold or otherwise transferred unless the Shares have been registered under the Securities Act in connection with the sale or other transfer thereof, or that counsel satisfactory to the Company has issued an opinion satisfactory to the Company that the sale or other transfer of such Shares is exempt from registration under the Securities Act, and unless said sale or transfer is in compliance with all other applicable laws, rules and regulations, including all applicable federal and state securities laws, rules and regulations. Unless the Shares issued or issuable upon the exercise of an Option are registered under the Securities Act, the certificates representing the Shares shall contain the following legend in substantially the following form: 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 OTHERWISE TRANSFERRED OR DISPOSED OF, BY GIFT -8- 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 A SATISFACTORY OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT AND UNDER APPLICABLE STATE SECURITIES LAWS. Section 14. TRANSFERABILITY. No Option shall be assignable or transferable otherwise than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of ERISA, as amended. During the lifetime of the Optionee, his Options shall be exercisable only by him, or, in the event of his legal incapacity, by his legal guardian or representative, except as otherwise permitted by the Board. Section 15. CHANGE OF CONTROL. (a) In the event of a Change of Control, the Board shall have the right, in its sole discretion, 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). (b) In addition, in the event of a Change of Control, 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 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 -9- 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 16. AMENDMENT OF THE PLAN. The Board, in its discretion, may from time to time suspend, terminate or discontinue the Plan or revise or amend it any respect. Section 17. 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 18. CONDITIONS UPON ISSUANCE OF SHARES. 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. Section 19. RESERVATION OF SHARES. 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. Section 20. TAXES, FEES, EXPENSES AND WITHHOLDING OF TAXES. (a) TRANSFER TAXES. The Company shall pay all original issue and transfer taxes (but not income taxes, if any) with respect to the grant of Options 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 which, in the opinion of counsel for the Company, shall be applicable thereto. (b) WITHHOLDING RIGHT. The grant 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 -10- 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. The Company may, in its sole discretion, require the Optionee (or such other person entitled herein to exercise the Option), as a condition of 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 21. NOTICES. Any notice to be given to the Company pursuant to the provisions of the 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 him at the address given beneath his signature on his Option Agreement, or at such other address as such Optionee or his 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 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 direct mailing address. Section 22. NO ENLARGEMENT OF RIGHTS. The 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 Non-Employee Director for the continuation of his service as a Non-Employee Director. Nothing contained in the Plan shall be deemed to give any Non-Employee Director the right to be retained in the service of the Company. Upon the grant of an Option to a Non-Employee Director, he 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 23. INVALID PROVISIONS. In the event that any provision of the 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. -11- Section 24. TERMINATION. The Board may terminate the Plan at any time. Unless it has been previously terminated, the Plan shall terminate after five (5) years from the date the Plan become effective. Section 25. APPLICABLE LAW. The Plan shall be governed by and construed in accordance with the laws of the State of New Jersey. -12- EX-10.12 5 EXHIBIT 10.12 SAPPHIRE/WEB VAR AGREEMENT - NORTH AMERICA Subject to the terms and conditions of this Agreement and the terms annexed hereto, Bluestone Software, Inc. ("Bluestone") appoints Reseller as a non-exclusive Reseller of the Bluestone product listed below, in the Territory designated below. Reseller hereby accepts such appointment, subject to such terms. TERM: This Agreement shall commence on January 1, 1998 and shall terminate on December 31, 1998. CONTRACT TYPE New Agreement Renewal X ------- ------- PROGRAM LEVEL Opal Diamond X ------- ------- PRODUCT: Sapphire/Web TERRITORY: United States and Canada DISCOUNTS: BENEFITS: REQUIREMENTS: 1. RESELLER OBLIGATIONS Reseller shall use its best efforts to sell Products in the Territory. Reseller shall not, whether directly or indirectly, solicit sales outside the Territory. Reseller shall ensure that the Product delivered to the end-user is accompanied by the current End-User License Agreement. Reseller shall at all relevant times, have in its employ a full-time technical support representative capable of demonstrating the Products and supporting the Products on such computer system or workstation for which Reseller distributes Products. Reseller shall distribute software updates (available via Bluestone's ftp site or reseller can order new documentation and media) to customers with current support agreements. NFR licenses are to be used for in-house evaluation and demonstration purposes only. Any misuse of this license will result in revocation. Sapphire/Web NFR product licenses are not intended for resale, for employee personal use at home, or for installation at a customer site (customer product evaluations are available through Bluestone Software Inc.'s 30 day Evaluation Program). Reseller shall not itself create or market any product with the same or similar functionality as the Products, during the term or this Agreement and for six months thereafter. Reseller shall ensure that the Product and the marketing thereof, and the performance by Reseller of all obligations hereunder are in compliance with all applicable legislation. Failure to achieve quota will result in the following: Diamond Level - Resellers will be assigned to Opal Level; Opal Level - Resellers will be subject to Termination as per Section 6. 2. PRICE AND PAYMENT Reseller may purchase products from Bluestone at Bluestone's then current list price less Discount. Price is determined by quantity of customer order and not by aggregate orders. To provide for quick shipment to end-users, Reseller may purchase from Bluestone inventory copies of the Media and Manual Kits and marketing material at Bluestone's then current reseller list price. All Software, Media and Manual Kits and marketing materials will be delivered to Reseller, F.O.B. Mt. Laurel, NJ, (in accordance with the International Chamber of Commerce INCOTERMS) and Reseller will be responsible for all customs, duties, and shipping charges. Prices are net of taxes, and Reseller shall be responsible for payment of all applicable local sales, use, withholding, value added, and goods and services taxes. In such jurisdictions where Bluestone is not registered to collect use, sales, or similar taxes, Reseller shall ensure their payment, and provide upon request to Bluestone evidence of same. Reseller agrees to pay Bluestone within 30 days of invoice date. Bluestone reserves the right to change the terms of payment if: (1) Reseller fails to make a payment to Bluestone when due; or (2) in Bluestone's reasonable judgement there has been material adverse change in Reseller's credit position. If Reseller chooses to pay using an international bank transfer, Reseller must notify Bluestone by fax, on the day of the transfer indicating the transfer amount, and how it should be applied to outstanding invoices. Any bank charges for bank transfers shall be to Reseller's account. 3. EVALUATION, ORDERING AND RECORDS Reseller may provide to end-users the Product in its time limited form for evaluation purposes. Reseller may retrieve evaluation passwords from Bluestone Reseller website or similar means. Reseller will fax or send a Purchase Order to Bluestone specifying customer name and address, and Product order code. Bluestone will, upon acceptance of the order, immediately provide reseller with a permanent password. Bluestone will normally ship the appropriate Media and Manual Kit. Reseller may ship from their inventory and indicate this intention on their purchase order, and receive a credit therefore from the purchase price. Reseller must ensure that every customer receives an original and current Media and Manual Kit. 4. PROPRIETARY RIGHTS All title to, copyright in, and ownership interest in the Products and all Bluestone trademarks shall at all times remain with Bluestone. Reseller shall ensure that all Bluestone copyright and trademark notices are prominently displayed on all related materials. Reseller acknowledges that the Products are proprietary to Bluestone and Reseller shall not take any action, such as reverse assembly or reverse engineering, to derive a source code equivalent for any product software, or copy or reproduce the functionality thereof, nor shall Reseller attempt in any way to make the Product software operational by the end-user without obtaining from Bluestone a permanent Password specifically for that end-user. Reseller shall have no right to any software source code, nor rights to translation of derivative works. Reseller may not use, sell or otherwise permit the use of the Products except pursuant to and as limited by the terms of this Agreement. Without limitation, Reseller shall not copy, in whole or in part, the Product software, the Media and Manual Kit or the marketing materials. Reseller shall, during the term of this Agreement, use Bluestone trademarks (registered or unregistered) solely in connection with the promotion of the Products and Bluestone hereby grants to Reseller, during the term of this Agreement, a nonexclusive nontransferable right to use such marks solely for the purposes of promoting the Products as authorized herein. Reseller shall accompany each use of a Bluestone trademark with a conspicuous notation that the Marks are owned by Bluestone and any other proprietary legend that Bluestone determines reasonably necessary to protect its rights therein. Bluestone will defend, at its expense, any action brought against Reseller to the extent that it is based on a claim that the sale or use of Products, within the scope of this Agreement, infringes any patent, trade secret or copyright. Bluestone will indemnify Reseller from any costs, damages and fees finally awarded against Reseller which are attributable to such claim, provided that Reseller notifies Bluestone promptly in writing of the claim and provides Bluestone with information, reasonable assistance and sole authority to deliver or settle the claim. Reseller shall have no authority to settle any claim on behalf of Bluestone. Should the Products become or, in Bluestone's opinion, are likely to become the subject of a claim or infringement of patent, trade secret or copyright, Bluestone may (1) procure for Reseller and Reseller's end-users, at no cost to Reseller or Reseller's end-users, the right to continue to use the Product, or (2) replace or modify the Product, to make such non-infringing, provided that substantially the same function is performed by the replacement or modified software, or if (1) or (2) are not commercially reasonable, terminate the license to use such Product software, and, upon proof of removal, grant Reseller a credit as depreciated on a stright-line five (5) year basis from date of purchase. Bluestone shall have no liability for any claim of copyright, trade secret or patent infringement based on (1) the use of other than the latest Product release from Bluestone, if such infringement could have been avoided by the such use; or (2) the use or combination of Product with software, hardware, or other materials not provided by Bluestone. 5. WARRANTIES & LIMITATION OF LIABILITY Except as provided in this sub-section and in the limited warranty to end-users as set forth in the End-User License Agreement, Bluestone makes no warranty or representation to Reseller or any third parties concerning the Product, or operation thereof. Bluestone disclaims any and all implied warranties including that of merchantability and fitness for a particular purpose. Bluestone liability for any damages in any action relating to the use of Product or arising out of this agreement shall not exceed the purchase price paid by Reseller to Bluestone for the Product at issue. In no event shall Bluestone be liable for indirect, special, incidental or consequential damages arising out of the use of Product or under this agreement regardless of the form of action, even if advised of the possibility of such damages. 6. TERMINATION This Agreement may be terminated at any time without recourse or compensation for such termination: (a) by Bluestone, if Reseller has not purchased from Bluestone, in the most recently completed Agreement quarter, Product in value equal the quarterly Quota; and (b) by either party if the other party becomes insolvent or is declared bankrupt, or on 30 days notice providing an opportunity to cure, of the other party has materially breached its obligations, hereunder; (c) by either party for any reason by giving the other party at least sixty (60) days written notice. 7. MISCELLANEOUS Reseller agrees to maintain electronic mail (email) access to the internet, for routine communication with Bluestone. Reseller is an independent contractor, and is not the agent or representative of Bluestone for any purpose. Reseller may not assign, pledge, or otherwise transfer this Agreement or any of its rights or obligations to any party. This Agreement, contains the full, complete and exclusive understanding of the parties and supersedes any prior agreement. Modifications shall be in writing and signed by both parties. Any contrary provision in any purchase order or similar document shall be of no effect. Any Notice, request or consent made under this Agreement shall be in writing, and sent by registered mail or telegram shall, subject to proof of mailing, be deemed to have been received by the party to whom it was sent at the time at which the record of the person delivering the same indicates it was so delivered. Any notice, demand or other communication sent by facsimile communication shall be deemed, in the absence of proof to the contrary, to have been received by the party to whom it was sent on the date of dispatch. This contract and any disputes relating to it shall be governed by the laws of New Jersey. Reseller agrees to attorn to the courts of New Jersey, with respect to any such disputes. Reseller: BCI Bluestone Software, Inc. 1000 Briggs Road 1000 Briggs Road Mt. Laurel, NJ 08054 Mt. Laurel, NJ 08054 Phone: ________________ Phone: (609) 727-4600 Fax: __________________ Fax: (609) 778-8125 Signed: /s/ Thomas Bernetich Signed: /s/ Shiela Potter -------------------- ------------------ Thomas Bernetich Shiela Potter - ---------------------------- -------------------------- Area Director Na Channels Mgr. - ---------------------------- -------------------------- Date: February 9, 1998 Date: February 9, 1998 ---------------------- ---------------------- EX-10.18 6 EXHIBIT 10.18 Exhibit 10.18 SUBLEASE AGREEMENT THIS SUBLEASE AGREEMENT ("Sublease"), effective as of April 30, 1997, is made by and between BLUESTONE SOFTWARE, INC., a Delaware corporation ("Sublandlord"), and BLUESTONE CONSULTING, INC., a Delaware corporation ("Subtenant"). BACKGROUND A. Briggs Properties Partnership ("Prime Landlord"), as lessor, and Sublandlord, as lessee, entered into a Lease dated September 27, 1993, as amended by a First Addendum to Lease dated December 1, 1993, a Second Addendum to Lease dated December 15, 1994, a Third Addendum to Lease dated June 1, 1995, and a Fourth Addendum to Lease dated May 16, 1996 (collectively, "Prime Lease"). Pursuant to the Prime Lease, Prime Landlord leased to Sublandlord approximately 34,746 square feet of space ("Demised Premises") in the building located at 1000 Briggs Road, Mt. Laurel, New Jersey 08054 ("Building"), for a term expiring at midnight on the 30 day of November, 2003. B. Subtenant desires to sublease from Sublandlord, and Sublandlord desires to sublease to Subtenant, a portion of the Demised Premises in accordance with the terms and conditions of this Sublease. NOW, THEREFORE, in consideration of the rents herein provided and of the covenants and agreements herein contained, and intending to be legally bound hereby, Sublandlord and Subtenant hereby covenant and agree as follows: 1. SUBLEASED PREMISES. Sublandlord hereby subleases to Subtenant and Subtenant hereby rents from Sublandlord a portion of the Demised Premises ("Subleased Premises") containing approximately ___________ square feet, as described more particularly on EXHIBIT A attached hereto and made a part hereof. 2. TERM OF SUBLEASE. (a) The term of this Sublease ("Term") shall commence on April 30, 1997 ("Commencement Date"), and shall expire on the earlier of (i) the date on which the Prime Lease shall terminate for any reason or (ii) at 11:59 P.M. on the scheduled termination date of the Lease ("Expiration Date"). (b) Under no circumstances shall the Term of this Sublease extend beyond the expiration, surrender or termination of the Prime Lease, whether the Prime Lease expires by its own terms, is terminated for Sublandlord's default, is surrendered by agreement of Prime Landlord and Sublandlord, or is terminated for any other reason. (c) Sublandlord shall attempt to obtain Prime Landlord's consent to this Sublease. Sublandlord shall incur no liability if Sublandlord does not obtain Prime Landlord's consent to this Sublease. 3. USE. The Subleased Premises shall be occupied only by Subtenant and used solely for the purpose of general office use and the sale of computer software, training and counseling, and related activities. 4. RENT. (a) Subtenant shall pay to Sublandlord, at a place designated by Sublandlord, base rent in the annual amount of One Hundred Thousans Seven Hundred Three Dollars ($107,703), to be paid in equal monthly installments, in advance, on the first day of every calendar month during the Term hereof, without deduction, abatement or set off (except as otherwise provided in this Sublease). If the Term of this Sublease shall commence or end on a day other than the first day of the month, the monthly rent installment due for such month shall pro rated based on the number of rental days of such calendar month. If any payment of base rent is received by Sublandlord more than five (5) days after payment is due, Subtenant shall pay to Sublandlord a late payment charge equal to five percent (5%) of such late payment. (b) Subtenant also shall pay Subtenant's Proportionate Share (defined below) of "Taxes" (as such term is defined in Article IV of the Prime Lease) for the Subleased Premises as "Taxes" are determined by the Prime Landlord in accordance with the Prime Lease and charged to Sublandlord. The amount payable by Subtenant to Sublandlord for Taxes shall be deemed "additional rent" and paid within fifteen (15) days after each such tax billing is received by Subtenant from Sublandlord. (c) Subtenant also shall pay Subtenant's Proportionate Share of the "common area maintenance costs" (as such term is defined in Article XI of the Prime Lease) for the Subleased Premises as such "common area maintenance costs" are determined by Prime Landlord in accordance with the Prime Lease and charged to Sublandlord. The amount payable by Subtenant to Sublandlord shall be deemed "additional rent" and shall be paid within fifteen (15) days after each such billing is received by Subtenant from Sublandlord. (d) Subtenant shall pay Subtenant's Proportionate Share of utility costs and other services rendered or furnished to the Subleased Premises during the Term of this Sublease such as trash disposal and janitorial services, provided Subtenant's use is no more intensive than that of Sublandlord. Where Subtenant shall require utilities or services beyond that provided by the Prime Lease (including other than during normal business hours established by the Prime Lease), Subtenant shall pay any additional charge incurred by Sublandlord therefor. If, however, any utilities are separately metered and billed to the Subleased Premises, Subtenant shall pay all of such charges directly to the utility provider. The amount payable by Subtenant to Sublandlord shall be additional rent and shall be paid within fifteen (15) days after each such billing is received by Subtenant from Sublandlord. (e) "Subtenant's Proportionate Share" shall be 28% which has been determined by dividing the Subleased Premises by the Demised Premises (9,500 / 34,746 = .28) and multiplying such figure by 100%. 5. CONDITION OF THE SUBLEASED PREMISES. Subtenant acknowledges and represents to Sublandlord that (a) Subtenant has thoroughly inspected and examined the Subleased Premises, (b) Subtenant is fully familiar with the physical conditions and state of repair of the Subleased Premises, (c) Subtenant hereby accepts the Subleased Premises in their "as is" condition as of the date hereof and that Sublandlord shall have no obligation to perform any work in connection with this Sublease, and (d) neither Sublandlord nor any agent of Sublandlord has made any representation or warranty with respect to the Subleased Premises or the Building including without limitation, any representation or warranty with respect to the suitability or fitness of the Subleased Premises or the Building for the conduct of Subtenant's business. 6. PRIME LEASE. a. COPY OF PRIME LEASE. Sublandlord represents that the copy of the Prime Lease attached hereto as EXHIBIT B is a true, complete and correct copy of the Prime Lease. b. SUBORDINATION. This Sublease and all the rights of Subtenant hereunder are expressly subject and subordinate to the Prime Lease and all leases and mortgages to which the Prime Lease is subordinate. In the event of the foreclosure of any underlying mortgage against which Sublandlord has nondisturbance protection, Subtenant shall enjoy the same nondisturbance protection as Sublandlord. c. INCORPORATION BY REFERENCE. Except as otherwise provided in this Section 6 or elsewhere in this Sublease, all of the terms, covenants, conditions and definitions of the Prime Lease (except such as by their nature or purport do not relate to the Subleased Premises or are inapplicable or inappropriate to the subleasing of the Subleased Premises pursuant to this Sublease or are inconsistent with any of the provisions of this Sublease) are hereby incorporated in and made part of this Sublease with the same force and effect as though set forth at length herein. The foregoing incorporation by reference is subject to the provisions of this Section 6, including the following: (i) References in the Prime Lease to "Lessor" (other than in provisions of the Prime Lease which impose or relate to obligations of Prime Landlord to repair or restore, or to perform or furnish utilities, work or services with respect to, the Demised Premises or the Building) shall be deemed to refer to Sublandlord under this Sublease unless the context requires that such reference be deemed to refer to both Prime Landlord and Sublandlord; (ii) References in the Prime Lease to "Lessee" (other than in provisions of the Prime Lease which grant to the lessee thereunder an expansion option, right of first refusal or option to renew) shall be deemed to refer to Subtenant under this Sublease; (iii) Reference in the Prime Lease to "the Lease" or "this Lease" shall be deemed to refer to this Sublease; (iv) Reference in the Prime Lease to specific terms or provisions of the Prime Lease shall be deemed to be to the provisions of the Prime Lease incorporated herein; (v) References in the Prime Lease to the "term" of the Prime Lease shall be deemed to refer to the Term of this Sublease; (vi) References in the Prime Lease to "minimum rent" or "additional rent" or "rental" or "rent" shall be deemed to refer to the rent payable under this Sublease, but the provisions of the Prime Lease notwithstanding, the only rent to be paid by Subtenant is as provided in Section 4 of this Sublease; (vii) Whenever a provision of the Prime Lease incorporated herein by reference obliges Sublandlord to perform some act for the benefit of Prime Landlord, including by way of example providing insurance or indemnity or making repairs or permitting access, such provisions as incorporated herein shall oblige Subtenant to perform such act to the extent applicable to the Subleased Premises for the benefit of Prime Landlord and Sublandlord. Whenever a provision of the Prime Lease incorporated herein by reference affords the Prime Landlord some right against Sublandlord, such provision as incorporated herein shall afford Prime Landlord and Sublandlord such right against Subtenant; (viii) Whenever a provision of the Prime Lease incorporated herein by reference requires or refers to Prime Landlord's consent and approval, such provision as incorporated herein shall be deemed to require or refer to both Prime Landlord's and Sublandlord's consent and approval. In such a case, Subtenant shall submit its request for consent or approval to Sublandlord and Sublandlord shall immediately submit such request for consent or approval to Prime Landlord. Sublandlord shall notify Subtenant of Sublandlord's determination to grant or deny its consent or approval within the time period, if any, set forth in the Prime Lease. (ix) Whenever pursuant to a provision of the Prime Lease incorporated herein by reference Sublandlord is required to take some action by a date certain or within a certain time period, Subtenant shall take such action not less than three (3) days prior to the date or time for Sublandlord's performance provided that in any instance, other than scheduled or regularly recurring obligations, Subtenant shall have had at least five (5) days prior written notice of the date and time performance is required. Immediately upon receipt or delivery thereof, as the case may be, Sublandlord shall provide Subtenant with copies of any default notices under the Prime Lease given by Sublandlord or received by Sublandlord. Immediately upon receipt thereof, Sublandlord also shall provide Subtenant with copies of any other notices under the Prime Lease relating to the Subleased Premises received by Sublandlord. (d) PROTECTION OF PRIME LEASE. Subtenant shall not do or cause to be done or suffer or permit any act or thing which would constitute a default under the Prime Lease or cause the Prime Lease or the rights of Sublandlord as lessee thereunder to be terminated or which would cause Sublandlord to become liable for any damages, costs, claims or penalties or would increase the minimum rent or additional rent or other charges or obligations of Sublandlord as lessee under the Prime Lease, or would adversely affect or reduce any of Sublandlord's rights or benefits under the Prime Lease. Sublandlord agrees that it shall not do or cause to be done, or suffer or permit to be done, any act or thing which would constitute a default under the Prime Lease or cause the Prime Lease to be terminated. (e) INDEMNIFICATION. (i) Subtenant shall indemnify, defend and hold harmless Sublandlord from and against any and all claims, actions, liabilities, losses, damages, costs, and expenses, including, without limitation, reasonable fees for legal counsel (collectively, "Claims") arising (A) from the use or occupancy by Subtenant of the Subleased Premises or the Building or any business conducted therein by Subtenant, or (B) from any condition created by or any negligence or willful misconduct of Subtenant or its employees, agents, contractors, visitors or licensees, in or about the Subleased Premises or any other part of the Building, or (C) from Subtenant's failure to perform any of the obligations imposed on it hereunder (through incorporation of the Prime Lease or otherwise), or (D) from a termination of the Prime Lease resulting from a default by Subtenant under this Sublease. (ii) Sublandlord shall indemnify, defend and hold harmless Subtenant from and against any and all Claims arising (A) from the negligence or willful misconduct of Sublandlord, its employees, agents, contractors, visitors or licensees in or about the Subleased Premises or (B) Sublandlord's failure to perform any of the obligations imposed on it under the Prime Lease. (f) LIMITATION ON PRIME LANDLORD'S OBLIGATION. Notwithstanding anything contained in this Sublease (including any provisions of the Prime Lease which are incorporated by reference into this Sublease), Subtenant acknowledges and agrees that except as specifically provided below Sublandlord shall have no obligation, liability or responsibility whatsoever to Subtenant to provide or perform any work, service, utility, repair, alteration, restoration or other obligation as such items pertain to the Subleased Premises which Prime Landlord is obliged to provide or perform pursuant to the provisions of the Prime Lease. If Prime Landlord shall default or delay in providing or performing any such work, service, utility, repair, alteration, restoration or other obligation as such items pertain to the Subleased Premises, Sublandlord's only obligations to Subtenant on account thereof shall be (i) to permit Subtenant, at its expense, to prosecute an action against Prime Landlord for damages or specific performance for Subtenant's benefit in Sublandlord's name, and (ii) to make a good faith effort and to reasonably cooperate with Subtenant (at Subtenant's expense) in attempting to cause Prime Landlord to provide or perform such service or obligation. Any condition resulting from such default or delay by Prime Landlord shall not constitute an eviction, actual or constructive, of Subtenant. No such default or delay shall excuse Subtenant from the performance or observance of any of its obligations to be performed or observed under this Sublease or shall entitle Subtenant to terminate this Sublease or to any reduction in or abatement of the minimum rent or other charges provided for in this Sublease; provided, however, if Sublandlord is entitled to a reduction or abatement in the rent due under the Prime Lease, then Subtenant shall be entitled to a pro-rata share of such reduction or abatement based on Subtenant's Proportionate Share or, if less than all of the Subleased Premises are affected, Subtenant shall be entitled to an abatement, deduction, or set off based on the ratio of the square footage of the area of the Subleased Premises affected by such default or delay to the square footage of the Premises. In furtherance of the foregoing, to the extent permitted by law, Subtenant does hereby waive any cause of action and any right to bring an action against Sublandlord by reason of any act or omission of Prime Landlord under the Prime Lease. If Subtenant shall undertake any action against Prime Landlord pursuant to clause (i) of the second sentence of this Section 6(e), then (i) all papers, pleadings and other aspects of such action shall be subject to Sublandlord's approval, not to be unreasonably withheld, and (ii) Sublandlord may participate in such action. (g) SUBLANDLORD'S OBLIGATIONS UNDER THE PRIME LEASE. Sublandlord agrees that it shall pay all amounts due and perform all obligations required of it under the Prime Lease in a timely manner. Sublandlord agrees that it shall not amend, modify, terminate, or otherwise change the Prime Lease in any manner which materially and adversely affects Subtenant or this Sublease without first obtaining the approval of Subtenant, which approval shall not be unreasonably withheld, delayed or conditioned. The parties agree that a denial of Subtenant's consent shall not be unreasonable if the change in the Prime Lease results in the imposition of an increased monetary burden on Subtenant. 7. NOTICES. All statements and notices to be given under this Sublease and the Prime Lease shall be in writing and given either (i) in person, (ii) by certified mail, return receipt requested, postage paid, or (iii) overnight deliver by Express Mail, Federal Express or other nationally recognized carrier, fee prepaid, addressed in each case to the proper party at the following address: To Prime Landlord: Briggs Property Partnership 1629 Locust Street Philadelphia, PA 19103 To Sublandlord: Bluestone Software, Inc. 1000 Briggs Road Mt. Laurel, NJ 08054 Attn: R. Ballezzi, CFO To Subtenant: Bluestone Consulting, Inc. 1000 Briggs Road Mt. Laurel, NJ 08054 Attn: T. Ballezzi, COO Any party may inform the other in the manner provided for the giving of notices of any change in address. Notices so given shall be deemed given and received on the earlier of actual receipt or the first business day where delivery is attempted. 8. ASSIGNMENT AND SUBLETTING. Subtenant shall not assign, mortgage or encumber this Sublease or sublet all or any part of the Subleased Premises, or permit the Subleased Premises to be used by others not in the employ of Subtenant, without the prior written consent of the Sublandlord and the Prime Landlord under the Prime Lease. For purposes of this Sublease, a change in the control or ownership of Subtenant shall be deemed an assignment. If consent is granted, Subtenant shall remain liable for the performance of all of the terms and conditions on the part of the Subtenant to be performed hereunder. 9. ALTERATIONS. Subtenant shall not make any additions, alterations, changes or improvements to the Subleased Premises without the prior written consent of Sublandlord and, where necessary in Sublandlord's opinion, Prime Landlord. 10. BROKERS. Sublandlord and Subtenant each warrants and represents to the other that it had no dealing with any broker or finder concerning the subletting of the Subleased Premises. Each party hereto agrees to indemnify and hold the other party harmless from any and all liabilities and expenses, including, without limitation, reasonable attorneys' fees, arising out of claims against the other party by any broker, consultant, finder or like agent claiming to have brought about this Sublease based upon the alleged acts of the indemnifying party. This Section 10 shall survive the expiration or termination of this Sublease. 11. SURRENDER OF SUBLEASED PREMISES. At the expiration or earlier termination of the Term, Subtenant shall quit and surrender the Subleased Premises broom clean, in as good condition as it was at the beginning of the Term, reasonable wear and tear excepted, and shall, to the extent not inconsistent with any specific provision of this Sublease, comply with all terms and conditions of the Prime Lease regarding surrender of the Subleased Premises. Without limiting the generality of the foregoing, Subtenant, on or before the expiration or termination of this Sublease, shall (a) remove all of Subtenant's personal property and repair any damage caused by such removal, and (b) remove all trash and broom-sweep the Subleased Premises. If any personal property of Subtenant shall remain in the Subleased Premises after the termination of this Sublease, at the election of Sublandlord, (a) it shall be deemed to have been abandoned by Subtenant and may be retained by Sublandlord as its own property, or (b) such property may be removed and disposed of by Sublandlord at the expense of Subtenant. Subtenant's obligation to observe or perform under this Section 12 shall survive the expiration or termination of this Sublease. 12. HOLDOVER. If Subtenant shall unlawfully hold possession of the Subleased Premises after the end of the Term of this Sublease, Subtenant shall pay to Sublandlord the greater of (i) any amounts owed by Sublandlord to Prime Landlord as a result of Subtenant's holding over or (ii) monthly holdover rent equal to one hundred fifty percent (150%) of the base rent payable in the last month of the Term, plus additional rent at its regular rate. The rights and remedies of Sublandlord under this Section 12 shall be Sublandlord's exclusive remedies in the event of any holdover by Subtenant (provided, however, that such remedies shall not vitiate Sublandlord's rights to compel Subtenant's removal from the Subleased Premises upon the expiration or other termination of the Term). 13. DEFAULT. If Subtenant defaults under the terms of this Sublease or the terms of the Prime Lease incorporated herein by reference, and such default continues beyond any applicable grace or cure periods, if any, provided under the Prime Lease except to the extent modified hereby, Sublandlord shall be entitled to exercise any remedies available to a landlord under New Jersey law, including without limitation, those remedies set forth in the Prime Lease. Notwithstanding the terms of the Prime Lease, if Subtenant shall fail to pay any installment of rent (including additional rent) required under this Sublease within five (5) days after notice of nonpayment, Sublandlord shall have all rights described in the preceding sentence. If Subtenant shall fail to provide insurance as required under the terms of this Sublease, or to perform any other obligation required under the terms of this Sublease within twenty (20) days after notice of nonperformance, Sublandlord shall have the right to perform such obligation and Subtenant shall reimburse Sublandlord for all costs and expenses related to such performance, as additional rent, promptly upon receipt of any invoice therefor. 14. MISCELLANEOUS. a. QUIET ENJOYMENT. Provided Subtenant complies with its covenants, duties and obligations hereunder, Sublandlord shall not disturb Subtenant's quiet enjoyment of the Subleased Premises. The foregoing shall not, however, be deemed to limit Section 2 of this Sublease. b. LIMITATION OF LIABILITY. The term "Sublandlord" shall refer only to the owner from time to time of the lessee's interest in the Prime Lease so that if Sublandlord shall assign its interest in the Prime Lease, the assignor shall be entirely freed from all obligations, covenants and duties hereunder thereafter accruing, provided that the assignee assumes the liability of Sublandlord for all such obligations, covenants and duties hereunder thereafter accruing. c. ENTIRE AGREEMENT. This Sublease (i) contains the entire agreement of the parties; (ii) supersedes all prior or other negotiations, representations, understandings and agreements of, by or between the parties, which shall be deemed fully merged herein; (iii) shall be construed and governed by the laws of the State of New Jersey is located; and (iv) may not be changed or terminated orally. d. COUNTERPARTS. This Sublease may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which shall constitute one and the same instrument. e. PROVISIONS BINDING. This Sublease shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. f. INVALIDITY OF PARTICULAR PROVISIONS. If any term or provision of this Sublease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of the Sublease, 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 Sublease shall be valid and be enforced to the fullest extent permitted by law. IN WITNESS WHEREOF, the parties hereto have duly executed this Sublease as of the day and year first above written. SUBLANDLORD: BLUESTONE SOFTWARE, INC., a Delaware corporation By: /s/ Mel Baiada ---------------------------------- Mel Baida, President SUBTENANT: BLUESTONE CONSULTING, INC., a Delaware corporation By: /s/ Mel Baiada ---------------------------------- Mel Baida, President EX-10.19 7 EXHIBIT 10.19 Exhibit 10.19 - -------------------------------------------------------------------------------- LESSOR LEASE NUMBER KING COMMERCIAL CORP. 10820 Sunset Office Dr., Suite 208 307360001 St. Louis, MO 63127 TEL (314) 965-9800 , FAX (314) 965-4321 - -------------------------------------------------------------------------------- FULL LEGAL NAME AND ADDRESS OF LESSEE SUPPLIER OF EQUIPMENT (COMPLETE ADDRESS) Bluestone Software, Inc. Clarify, Inc. 1000 Briggs Road 2125 O'Nel Drive Mount Laurel, NJ 08054 San Jose, CA 95131 JOINTLY AND SEVERALLY RESPONSIBLE - -------------------------------------------------------------------------------- QUANTITY DESCRIPTION, MODEL#, CATALOG #, SERIAL # OR OTHER IDENTIFICATION - -------------------------------------------------------------------------------- E See Exhibit "A" Attached Hereto And Made A Part Hereof. Q U L I E P A M S E E N D T - ------------------ -------------------------------------------------------------------------------------------------------------- EQUIPMENT STREET ADDRESS________________________________________________________________________________________________ LOCATION IF CITY____________ COUNTY___________ STATE____________ ZIP_______ DIFFERENT - ---------------------------------------------------------------------------------------------------------------------------------- ----------------------- TERMS AMOUNT OF EACH MONTHLY /X/ TERM OF LEASE NO. OF SECURITY PAYMENT (PLUS OTHER/SPECIFY /_/ (NO. OF PAYMENTS DEPOSIT SALES TAX, IF MONTHS) 36 $5,589.70 APPLICABLE) 36 $1,906.98 - ----------------------------------------------------------------------------------------------------------------------------------
TERMS AND CONDITIONS OF LEASE 1. LEASE. Lessee hereby leases from Lessor, and Lessor leases to Lessee, the personal property described above, together with any replacement parts, additions, repairs or accessories now or hereafter incorporated or affixed to it (hereinafter referred to as the "Equipment"). 2. ACCEPTANCE OF EQUIPMENT. Lessee agrees to inspect the Equipment and to execute an Acknowledgment and Acceptance of Equipment by Lessee notice, as provided by Lessor, after the Equipment has been delivered and after Lessee is satisfied that the Equipment is satisfactory in every respect. Lessee hereby authorized Lessor to insert in this Lease serial numbers or other identifying data with respect to the Equipment. 3. DISCLAIMER OF WARRANTS AND CLAIMS; LIMITATION OF REMEDIES. THERE ARE NO WARRANTIES BY OR ON BEHALF OF LESSOR. Lessee acknowledges and agrees by his signature below as follows: (a) LESSOR MAKES NO WARRANTIES EITHER EXPRESS OR IMPLIED AS TO THE CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY, ITS FITNESS OR SUITABILITY FOR ANY PARTICULAR PURPOSE, ITS DESIGN, ITS CAPACITY, ITS QUALITY, OR WITH RESPECT TO ANY CHARACTERISTICS OF THE EQUIPMENT. (b) Lessee has fully inspected the Equipment which it has requested Lessor to acquire and lease to Lessee, and the Equipment is in good condition and to Lessee's complete satisfaction; (c) Lessee leases the Equipment "as is" and with all faults; (d) Lessee specifically acknowledges that the Equipment is leased to Lessee solely for commercial or business purposes and not for personal, family, household, or agricultural purposes; (e) If the Equipment is not properly installed, does not operate as represented or warranted by the supplier or manufacturer, or is unsatisfactory for any reason, regardless of cause or consequence, Lessee's only remedy, if any, shall be against the supplier or manufacturer of the Equipment and not against Lessor; (f) Provided Lessee is not in default under this Lease, Lessor assigns to Lessee any warranties made by the supplier or the manufacturer of the Equipment; (g) LESSEE SHALL HAVE NO REMEDY FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES AGAINST LESSOR; and (h) NO DEFECT, DAMAGE, OR UNFITNESS OF THE EQUIPMENT FOR ANY PURPOSE SHALL RELIEVE LESSEE OF THE OBLIGATION TO PAY RENT OR RELIEVE LESSEE OF ANY OTHER OBLIGATION UNDER THIS LEASE. Initials PMB The parties have specifically negotiated and agreed to the foregoing paragraph. 4. STATUTORY FINANCE LEASE. Lessee agrees and acknowledges that is in the intent of both parties to this Lease that it qualify as a statutory finance lease under Article 2A of the Uniform Commercial Code. Lessee acknowledges and agrees that Lessee has selected both: (1) the Equipment; and (2) the supplier from whom Lessor is to purchase the Equipment. Lessee acknowledges that Lessor has not participated in any way in Lessee's selection of the Equipment or of the supplier, and Lessor has not selected, manufactured, or supplied the Equipment. LESSEE IS ADVISED THAT IT MAY HAVE RIGHTS UNDER THE CONTRACT EVIDENCING THE LESSOR'S PURCHASE OF THE EQUIPMENT FROM THE SUPPLIER CHOSEN BY LESSEE AND THAT LESSEE SHOULD CONTACT THE SUPPLIER OF THE EQUIPMENT FOR A DESCRIPTION OF SUCH RIGHTS. 5. ASSIGNMENT BY LESSEE PROHIBITED. WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, LESSEE SHALL NOT ASSIGN THIS LEASE OR SUBLEASE THE EQUIPMENT OR ANY INTEREST THEREIN OR PLEDGE OR TRANSFER THIS LEASE, OR OTHERWISE DISPOSE OF THE EQUIPMENT COVERED HEREBY. 6. COMMENCEMENT; RENTAL PAYMENTS; INTERIM RENTALS. This Lease shall commence upon the written acceptance hereof by Lessor and shall end upon full performance and observance by Lessee of each and every term, condition and covenant set forth in this Lease, any Schedules hereto and any extensions hereof. Rental payments shall be in the amounts and frequency as set forth on the face of this Lease or any Schedules hereto. In addition to regular rentals, Lessee shall pay to Lessor interim rent for the use of the Equipment prior to the due date of the first payment. Interim rent shall be in an amount equal to 1/30th of the monthly rental, multiplied by the number of days elapsing between the date on which the Equipment is accepted by Lessee and the commencement date of this Lease, together with the number of days elapsing between commencement of the Lease and the due date of the first payment. The payment of interim rent shall be due and payable upon Lessee's receipt of invoice from Lessor. The rental period under the Lease shall terminate following the last day of the terms stated on the face hereof or in any Schedule hereto unless such Lease or Schedule has been extended or otherwise modified. Lessor shall have no obligation to execute and deliver to Lessor an Acknowledgment and Acceptance of Equipment by Lessee acknowledging its acceptance of the Equipment within thirty (30) days after it is delivered to Lessee, with respect to the Lease or any Schedule hereto. THIS LEASE IS NOT CANCELABLE OR TERMINABLE BY LESSEE. SEE REVERSE SIDE FOR ADDITIONAL TERMS AND CONDITIONS WHICH ARE A PART OF THIS LEASE. LESSEE UNDERSTANDS AND ACKNOWLEDGES THAT NO BROKER OR SUPPLIER, NOR ANY SALESMAN, BROKER, OR AGENT OF ANY BROKER OR SUPPLIER, IS AN AGENT OF LESSOR, NO BROKER OR SUPPLIER, NOR ANY SALESMAN, BROKER OR AGENT OF ANY BROKER OR SUPPLIER IS AUTHORIZED TO WAIVE OR ALTER ANY TERM OR CONDITION OF THIS LEASE, AND NO REPRESENTATION AS TO THE EQUIPMENT OR ANY OTHER MATTER BY THE BROKER OR SUPPLIER, NOR ANY SALESMAN, BROKER OR AGENT OF ANY BROKER OR SUPPLIER SHALL IN ANY WAY AFFECT LESSEE'S DUTY TO PAY THE RENTALS AND TO PERFORM LESSEE'S OBLIGATIONS SET FORTH IN THIS LEASE. 7. CHOICE OF LAW. This Lease shall not be effective until signed by Lessor at its principal office listed above. This Lease shall be considered to have been made in the state of Lessor's principal place of business noted above and shall be interpreted in accordance with the laws and regulations of the state of Lessor's principal place of business. Lessee agrees to jurisdiction in the state of Lessor's principal place of business listed above in any action, suit or proceeding regarding this Lease, and concedes that it, and each of them, transacted business in the state of Lessor's principal place of business listed above by entering into this Lease. In the event of any legal action with regard to this Lease or the equipment covered hereby, Lessee agrees that venue may be laid in the County of Lessor's principal place of business. LESSEE: Bluestone Software, Inc. LESSOR: KING COMMERCIAL CORP. /s/ Paul M. Baiada DATE: 9/3/97 /s/ King Commercial Corp. signature DATE: 9/5/97 - ---------------------------------------------------------------------------------------------------------------- DATE: - -------------------------------------------------------------
- -------------------------------------------------------------------------------- LESSOR LEASE NUMBER KING COMMERCIAL CORP. 10820 Sunset Office Dr., Suite 208 307360002 St. Louis, MO 63127 TEL (314) 965-9800 , FAX (314) 965-4321 - -------------------------------------------------------------------------------- FULL LEGAL NAME AND ADDRESS OF LESSEE SUPPLIER OF EQUIPMENT (COMPLETE ADDRESS) Bluestone Software, Inc. Clarify, Inc. 1000 Briggs Road 2125 O'Nel Drive Mount Laurel, NJ 08054 San Jose, CA 95131 JOINTLY AND SEVERALLY RESPONSIBLE - -------------------------------------------------------------------------------- QUANTITY DESCRIPTION, MODEL#, CATALOG #, SERIAL # OR OTHER IDENTIFICATION - -------------------------------------------------------------------------------- E See Exhibit "A" Attached Hereto And Made A Part Hereof. Q U L I E P A M S E E N D T - ------------------ -------------------------------------------------------------------------------------------------------------- EQUIPMENT STREET ADDRESS________________________________________________________________________________________________ LOCATION IF CITY____________ COUNTY_________ STATE____________ ZIP________ DIFFERENT - --------------------------------------------------------------------------------------------------------------------------------- TERMS AMOUNT OF EACH MONTHLY /X/ TERM OF LEASE NO. OF SECURITY PAYMENT (PLUS OTHER/SPECIFY /_/ (NO. OF PAYMENTS DEPOSIT SALES TAX, IF MONTHS) 36 $7,500.00 APPLICABLE) 36 $2,558.70 - ---------------------------------------------------------------------------------------------------------------------------------
TERMS AND CONDITIONS OF LEASE 1. LEASE. Lessee hereby leases from Lessor, and Lessor leases to Lessee, the personal property described above, together with any replacement parts, additions, repairs or accessories now or hereafter incorporated or affixed to it (hereinafter referred to as the "Equipment"). 2. ACCEPTANCE OF EQUIPMENT. Lessee agrees to inspect the Equipment and to execute an Acknowledgment and Acceptance of Equipment by Lessee notice, as provided by Lessor, after the Equipment has been delivered and after Lessee is satisfied that the Equipment is satisfactory in every respect. Lessee hereby authorized Lessor to insert in this Lease serial numbers or other identifying data with respect to the Equipment. 3. DISCLAIMER OF WARRANTS AND CLAIMS; LIMITATION OF REMEDIES. THERE ARE NO WARRANTIES BY OR ON BEHALF OF LESSOR. Lessee acknowledges and agrees by his signature below as follows: (a) LESSOR MAKES NO WARRANTIES EITHER EXPRESS OR IMPLIED AS TO THE CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY, ITS FITNESS OR SUITABILITY FOR ANY PARTICULAR PURPOSE, ITS DESIGN, ITS CAPACITY, ITS QUALITY, OR WITH RESPECT TO ANY CHARACTERISTICS OF THE EQUIPMENT. (b) Lessee has fully inspected the Equipment which it has requested Lessor to acquire and lease to Lessee, and the Equipment is in good condition and to Lessee's complete satisfaction; (c) Lessee leases the Equipment "as is" and with all faults; (d) Lessee specifically acknowledges that the Equipment is leased to Lessee solely for commercial or business purposes and not for personal, family, household, or agricultural purposes; (e) If the Equipment is not properly installed, does not operate as represented or warranted by the supplier or manufacturer, or is unsatisfactory for any reason, regardless of cause or consequence, Lessee's only remedy, if any, shall be against the supplier or manufacturer of the Equipment and not against Lessor; (f) Provided Lessee is not in default under this Lease, Lessor assigns to Lessee any warranties made by the supplier or the manufacturer of the Equipment; (g) LESSEE SHALL HAVE NO REMEDY FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES AGAINST LESSOR; and (h) NO DEFECT, DAMAGE, OR UNFITNESS OF THE EQUIPMENT FOR ANY PURPOSE SHALL RELIEVE LESSEE OF THE OBLIGATION TO PAY RENT OR RELIEVE LESSEE OF ANY OTHER OBLIGATION UNDER THIS LEASE. Initials PMB The parties have specifically negotiated and agreed to the foregoing paragraph. 4. STATUTORY FINANCE LEASE. Lessee agrees and acknowledges that is in the intent of both parties to this Lease that it qualify as a statutory finance lease under Article 2A of the Uniform Commercial Code. Lessee acknowledges and agrees that Lessee has selected both: (1) the Equipment; and (2) the supplier from whom Lessor is to purchase the Equipment. Lessee acknowledges that Lessor has not participated in any way in Lessee's selection of the Equipment or of the supplier, and Lessor has not selected, manufactured, or supplied the Equipment. LESSEE IS ADVISED THAT IT MAY HAVE RIGHTS UNDER THE CONTRACT EVIDENCING THE LESSOR'S PURCHASE OF THE EQUIPMENT FROM THE SUPPLIER CHOSEN BY LESSEE AND THAT LESSEE SHOULD CONTACT THE SUPPLIER OF THE EQUIPMENT FOR A DESCRIPTION OF SUCH RIGHTS. 5. ASSIGNMENT BY LESSEE PROHIBITED. WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, LESSEE SHALL NOT ASSIGN THIS LEASE OR SUBLEASE THE EQUIPMENT OR ANY INTEREST THEREIN OR PLEDGE OR TRANSFER THIS LEASE, OR OTHERWISE DISPOSE OF THE EQUIPMENT COVERED HEREBY. 6. COMMENCEMENT; RENTAL PAYMENTS; INTERIM RENTALS. This Lease shall commence upon the written acceptance hereof by Lessor and shall end upon full performance and observance by Lessee of each and every term, condition and covenant set forth in this Lease, any Schedules hereto and any extensions hereof. Rental payments shall be in the amounts and frequency as set forth on the face of this Lease or any Schedules hereto. In addition to regular rentals, Lessee shall pay to Lessor interim rent for the use of the Equipment prior to the due date of the first payment. Interim rent shall be in an amount equal to 1/30th of the monthly rental, multiplied by the number of days elapsing between the date on which the Equipment is accepted by Lessee and the commencement date of this Lease, together with the number of days elapsing between commencement of the Lease and the due date of the first payment. The payment of interim rent shall be due and payable upon Lessee's receipt of invoice from Lessor. The rental period under the Lease shall terminate following the last day of the terms stated on the face hereof or in any Schedule hereto unless such Lease or Schedule has been extended or otherwise modified. Lessor shall have no obligation to execute and deliver to Lessor an Acknowledgment and Acceptance of Equipment by Lessee acknowledging its acceptance of the Equipment within thirty (30) days after it is delivered to Lessee, with respect to the Lease or any Schedule hereto. THIS LEASE IS NOT CANCELABLE OR TERMINABLE BY LESSEE. SEE REVERSE SIDE FOR ADDITIONAL TERMS AND CONDITIONS WHICH ARE A PART OF THIS LEASE. LESSEE UNDERSTANDS AND ACKNOWLEDGES THAT NO BROKER OR SUPPLIER, NOR ANY SALESMAN, BROKER, OR AGENT OF ANY BROKER OR SUPPLIER, IS AN AGENT OF LESSOR, NO BROKER OR SUPPLIER, NOR ANY SALESMAN, BROKER OR AGENT OF ANY BROKER OR SUPPLIER IS AUTHORIZED TO WAIVE OR ALTER ANY TERM OR CONDITION OF THIS LEASE, AND NO REPRESENTATION AS TO THE EQUIPMENT OR ANY OTHER MATTER BY THE BROKER OR SUPPLIER, NOR ANY SALESMAN, BROKER OR AGENT OF ANY BROKER OR SUPPLIER SHALL IN ANY WAY AFFECT LESSEE'S DUTY TO PAY THE RENTALS AND TO PERFORM LESSEE'S OBLIGATIONS SET FORTH IN THIS LEASE. 7. CHOICE OF LAW. This Lease shall not be effective until signed by Lessor at its principal office listed above. This Lease shall be considered to have been made in the state of Lessor's principal place of business noted above and shall be interpreted in accordance with the laws and regulations of the state of Lessor's principal place of business. Lessee agrees to jurisdiction in the state of Lessor's principal place of business listed above in any action, suit or proceeding regarding this Lease, and concedes that it, and each of them, transacted business in the state of Lessor's principal place of business listed above by entering into this Lease. In the event of any legal action with regard to this Lease or the equipment covered hereby, Lessee agrees that venue may be laid in the County of Lessor's principal place of business. LESSEE: Bluestone Software, Inc. LESSOR: KING COMMERCIAL CORP. /s/ Paul M. Baiada DATE: 9/3/97 /s/ King Commercial Corp. signature DATE: 9/5/97 - --------------------------------------------------------------------------------------------------------------------------------- DATE: - ----------------------------------------------------------------------
EX-10.28 8 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. Void after 5:00 pm New York City Time, April 26, 2004 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 until 5:00 pm New York City time on April 26, 2004. 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, until 5:00 pm New York City time on April 26, 2004 (the "Expiration Date"), provided, however, that if such day is a day on which banking institutions in the State of New York are authorized by law to close, then on the next succeeding day which shall not be such a day. The Warrant may be exercised 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: May 25, 1999 BLUESTONE SOFTWARE, INC. By: /s/ S. Craig Hoke ------------------------------------- Name: S. Craig Hoke ----------------------------------- Title: Chief Financial Officer ---------------------------------- 16 EX-10.38 9 EXHIBIT 10.38 Exhibit 10.38 STOCK REPURCHASE AGREEMENT THIS AGREEMENT is made on the 18th day of April, 1997 by and between Bluestone Software, Inc., a Delaware corporation (the "Company"), and Mel Baiada (the "Stockholder"). BACKGROUND WHEREAS, the Stockholder is the holder of 9,000,000 shares (the "Base Shares") of common stock, $.001 par value per share, of the Company ("Common Stock"); WHEREAS, certain investors (the "Investors") and the Stockholder are acquiring an aggregate of approximately $5,250,000 worth of shares of Series A Convertible Preferred Stock, $.001 par value per share, of the Company ("Preferred Stock") pursuant to the terms of a Series A Preferred Stock Purchase Agreement dated the date hereof among the Company, the Investors and the Stockholder (the "Purchase Agreement"); and WHEREAS, it is a condition to the obligations of the Investors under the Purchase Agreement that this Agreement be executed by the parties hereto, and the parties are willing to execute this Agreement; TERMS NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and intending to be legally bound hereby, the parties agree as follows: Section 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: "CONTINGENT SHARES" as of any date shall mean the number of shares of Common Stock that are held by the Stockholder and that are designated as "Contingent Shares" on the table set forth in Exhibit A attached hereto; provided that no additional Contingent Shares shall become Vested Shares after the date upon which the Stockholder shall cease to be employed by the Company and its subsidiaries. The numbers of Shares referred to in the preceding sentence shall be appropriately adjusted in the event of any stock split, stock dividend or the like affecting the number of issued and outstanding shares of Common Stock. "VESTED SHARES" as of any date shall mean the number of shares of Common Stock that are held by the Stockholder, that were formerly Contingent Shares and that are designated as "Vested Shares" under the table in Exhibit A; provided that no additional Contingent Shares shall become Vested Shares after the date upon which the Stockholder shall cease to be employed by the Company and its subsidiaries. The numbers of Vested Shares referred to in the preceding sentence shall be appropriately adjusted in the event of any stock split, stock dividend or the like affecting the number of issued and outstanding shares of Common Stock. "OTHER SHARES" shall mean any shares of the capital stock of the Company that are held by the Stockholder and that are neither Contingent Shares nor Vested Shares. Section 2. PROHIBITED TRANSFERS. The Stockholder shall not sell, assign, transfer, pledge, hypothecate, mortgage, encumber or otherwise dispose of any or all of the Contingent Shares without the prior written consent of Company in its sole discretion. The preceding sentence shall not restrict any Vested Shares or Other Shares; provided that any transfer by the Stockholder of Vested Shares or Other Shares shall be made subject to and in accordance with the provisions of the Purchase Agreement, a certain Voting Agreement of even date herewith among the Company and the Investors, the Stockholder and the other stockholders listed therein (the "Voting Agreement"), and a certain First Refusal and Co-Sale Agreement of even date herewith among the Company, the Investors, the Stockholder and the other parties thereto (the "First Refusal Agreement"). Section 3. OPTION OF COMPANY UPON TERMINATION OF EMPLOYMENT. a If the Stockholder ceases to be an employee of the Company and its subsidiaries for any reason other than the death or disability of the Stockholder, then the Company may, within sixty (60) days from the date upon which the Stockholder shall so cease to be employed, exercise the Company's option under this Section 3 to purchase from the Stockholder all, but not less than all, of the Contingent Shares as of the date upon which the Stockholder shall so cease to be employed (the "Termination Date"). For the purposes of this Agreement, "disability" shall have the meaning ascribed to such term in the Executive Employment Agreement dated April __, 1997 between the Stockholder and the Company. b The purchase price per share of the Contingent Shares for which the Company exercises its option under this Section 3 (the "Option Price") shall be the price per share that the Board of Directors of the Company determines is the fair market value per share of the Common Stock in connection with granting of stock options in the Company to the employees of the Company on or about the date hereof (such price being subject to equitable adjustment for any stock split, stock dividend, combination of shares or the like and based upon Common Stock). c If the Company desires to exercise the Company's option to purchase, then the Company shall do so by communicating in writing the Company's election to purchase to the Stockholder, which communication shall state the then current number of Contingent Shares to be purchased by the Company and the aggregate -2- Option Price and shall be given to the Stockholder in accordance with Section 8(a) below within the 60-day period provided for in Section 3(a). The sale of the Contingent Shares to be sold to the Company pursuant to this Section 3 shall be made at the offices of the Company on the 20th day following the date of the Company's written election to purchase (or if such 20th day is not a business day, then on the next succeeding business day). Such sale shall be effected by the Stockholder's delivery to the Company of a certificate or certificates evidencing the Contingent Shares to be purchased by the Company, duly endorsed for transfer to the Company, against payment to the Stockholder by the Company in cash in an amount equal to (i) the Option Price, multiplied by (ii) the number of Contingent Shares to be purchased by the Company (the "Purchase Price"). d Any action requiring the consent or election by the Company under this Agreement shall require the approval of a majority of the Board of Directors of the Company. Section 4. TERM. a The rights of the Company under this Agreement and the correlative obligations of the Stockholder with respect to the Company shall terminate upon the first to occur of: (i) the fourth (4th) anniversary of this Agreement, provided that the Stockholder is employed by the Company or one of its subsidiaries on such date; or (ii) at such time as the Stockholder shall no longer be the owner of any Contingent Shares. Section 5. FAILURE TO DELIVER SHARES. If the Stockholder becomes obligated to sell the Contingent Shares to the Company under this Agreement and fails to deliver the Contingent Shares in accordance with the terms of this Agreement, then the Company may, at the Company's option and in addition to all other remedies the Company may have, send to the Stockholder the Purchase Price for the Contingent Shares as is herein specified. Thereupon, the Company upon written notice to the Stockholder (a) shall cancel on the Company's books the certificate or certificates representing the Contingent Shares to be sold and (b) shall issue to the Stockholder a certificate or certificates evidencing the number of Vested Shares, if any, registered in the name of the Stockholder, and thereupon all of the Stockholder's rights in and to such Contingent Shares shall terminate. Section 6. SPECIFIC ENFORCEMENT. The Stockholder expressly agrees that the Investors and the Company will be irreparably damaged if this Agreement is not specifically enforced. Upon a breach or threatened breach of the terms, covenants and/or conditions of this Agreement by the Stockholder, the Investors and the Company shall, in addition to all other remedies, each -3- be entitled to a temporary or permanent injunction, without showing any actual damage, and/or a decree for specific performance, in accordance with the provisions hereof. Section 7. ISSUANCE OF SHARE CERTIFICATES AT CLOSING; LEGEND REQUIREMENTS; REISSUANCE OF SHARES. a At the closing contemplated by the Purchase Agreement, the Stockholder shall deliver to the Company for cancellation the certificate evidencing the Base Shares, and in consideration therefor, the Company shall issue to the Stockholder (i) a certificate or certificates evidencing the Other Shares, and (ii) a certificate or certificates evidencing the Contingent Shares, in each case duly registered in the name of the Stockholder and duly executed by the Company. b Each certificate representing the Contingent Shares owned by the Stockholder 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 STOCK RESTRICTION AGREEMENT BY AND AMONG THE REGISTERED HOLDER (OR HIS PREDECESSOR IN INTEREST) AND BLUESTONE SOFTWARE, INC. A COPY OF SUCH AGREEMENT IS ON THE FILE AT THE PRINCIPAL OFFICE OF THE COMPANY." c The Section 7(b) legend shall be removed by the Company: (i) with respect to Vested Shares, at the request of the Stockholder from time to time; and (ii) with respect to Contingent Shares, upon termination of this Agreement in accordance with the provisions of Section 4. d From time to time as the Contingent Shares become Vested Shares, the Stockholder may deliver to the Company any certificates evidencing such Vested Shares, and the Company shall accept such certificates for cancellation, and reissue certificates evidencing such Vested Shares, in an amount adjusted to reflect the number of such Vested Shares, and certificates representing the number of Contingent Shares as of such date of issuance, in each case duly registered in the name of the Stockholder and duly executed by the Company. Section 8. MISCELLANEOUS PROVISIONS. a 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 (3) business days after being mailed by first class mail, postage prepaid, or (iii) one (1) business day after being sent by a reputable overnight delivery service, postage -4- 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 8(a), except that any such change of address notice shall not be effective unless and until received. b 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. c WAIVER OR MODIFICATION. Any amendment or modification of this Agreement shall be effective only if evidenced by a written instrument executed by the Company and the Stockholder or their assignees. Section 9. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without regard to the principles of conflicts of law of any jurisdiction. Section 10. 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. Section 11. FURTHER ASSURANCES. Each party agrees to act in accordance herewith and not to take any action which is designed to avoid the intention hereof. Section 12. OWNERSHIP. The Stockholder represents and warrants that he is the sole legal and beneficial owner of the shares of stock subject to this Agreement and that no other person has any interest (other than a community property interest) in such shares. Section 13. ASSIGNMENT; SUCCESSORS AND ASSIGNS. This Agreement shall not be assigned by either party hereto without the prior written consent of the other party. This Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, permitted assigns and legal representatives. Section 14. ENTIRE AGREEMENT. This Agreement and the other Transaction Agreements (as defined in the Purchase 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 -5- manner by any warranties, representations, or covenants except as specifically set forth herein or therein. Section 15. 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. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. MEL BAIADA /s/ Mel Baiada --------------------------------------------- (Signature) BLUESTONE SOFTWARE, INC. By: /s/ Mel Baiada ---------------------------------------- Name: Mel Baiada ------------------------------ Title: President ----------------------------- -6- EXHIBIT A
QUARTER CALENDAR CONTINGENT VESTED NUMBER QUARTER SHARES SHARES - --------- ---------- ------------ -------- 1 2nd Quarter 1997 1,350,000 0 - -------------------------------------------------------------------------------- 2 3rd Quarter 1997 1,265,625 84,375 - -------------------------------------------------------------------------------- 3 4th Quarter 1997 1,181,250 168,750 - -------------------------------------------------------------------------------- 4 1st Quarter 1998 1,096,875 253,125 - -------------------------------------------------------------------------------- 5 2nd Quarter 1998 1,012,500 337,500 - -------------------------------------------------------------------------------- 6 3rd Quarter 1998 928,125 421,875 - -------------------------------------------------------------------------------- 7 4th Quarter 1998 843,750 506,250 - -------------------------------------------------------------------------------- 8 1st Quarter 1999 759,375 590,625 - -------------------------------------------------------------------------------- 9 2nd Quarter 1999 675,000 675,000 - -------------------------------------------------------------------------------- 10 3rd Quarter 1999 590,625 759,375 - -------------------------------------------------------------------------------- 11 4th Quarter 1999 506,250 843,750 - -------------------------------------------------------------------------------- 12 1st Quarter 2000 421,875 928,125 - -------------------------------------------------------------------------------- 13 2nd Quarter 2000 337,500 1,012,500 - -------------------------------------------------------------------------------- 14 3rd Quarter 2000 253,125 1,096,875 - -------------------------------------------------------------------------------- 15 4th Quarter 2000 168,750 1,181,250 - -------------------------------------------------------------------------------- 16 1st Quarter 2001 84,375 1,265,625 - -------------------------------------------------------------------------------- 17 2nd Quarter 2001 0 1,350,000 - --------------------------------------------------------------------------------
-7- EX-23.1 10 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 August 16, 1999 EX-23.3 11 EXHIBIT 23.3 Exhibit 23.3 CONSENT OF INTERNATIONAL DATA CORPORATION Information as is will be used in the registration statement: The increase of users and business activities on the Web has created a large and growing market for Web application software as existing businesses and new Web-based enterprises foster new revenue streams, significantly broaden information deployment, enable inter-enterprise collaboration and strive to reduce the cost of maintaining an ever-changing technology infrastructure. An International Data Corporation report estimates that Internet-centric software, which accounted for $4.0 billion in revenue in 1997, will approach $16.0 billion in revenue by 2000 due to aggressive corporate adoption. Consent: Consent of International Data Corporation I hereby consent to the inclusion in the registration statement of Bluestone Software, Inc. of the information attributed to this company derived from our reports (noted above in context) contained in such registration statement. International Data Corporation By: /s/ R. Paul Mason - ------------------------------------------- Name: R. Paul Mason Title: V.P. Information Software Research Dated: August 19, 1999 EX-27 12 EXHIBIT 27
5 6-MOS YEAR DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 JUN-30-1999 DEC-31-1998 20,600,454 2,534,819 0 0 2,967,390 3,413,987 210,314 44,473 0 0 23,617,408 6,053,651 2,897,821 2,734,202 1,585,649 1,284,921 24,968,561 7,535,929 7,041,534 6,393,232 0 0 40,453,151 17,414,551 654,169 875,642 2,821 2,816 (24,183,114) (18,150,312) 24,968,561 7,535,929 4,726,889 3,391,221 6,591,985 8,117,911 156,232 258,572 2,622,892 5,335,001 10,150,300 14,308,272 140,000 32,800 1,147,676 46,520 (7,468,883) (11,604,682) 0 0 (7,468,883) (11,604,682) 0 0 0 0 0 0 (7,468,883) (11,604,682) (2.65) (4.12) (2.65) (4.12)
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