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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL PERIOD ENDED
DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number: 0-26613
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BLUESTONE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE
(State or other jurisdiction of incorporation 22-2964141
or organization) (I.R.S. Employer Identification No.)
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300 STEVENS DRIVE
PHILADELPHIA, PENNSYLVANIA 19113
(Address of principal executive offices, including zip code)
(610) 915-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes / / No /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 31, 2000 was $677,258,692. This calculation does not
reflect a determination that persons are affiliates for any other purpose.
Number of shares of common stock outstanding as of January 31, 2000:
18,241,886.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement relating to its 2000
annual stockholders meeting are incorporated by reference into Part III of this
annual report on Form 10-K.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
GENERAL
We were incorporated in New Jersey in 1989 as Bluestone Consulting, Inc. Our
primary business initially consisted of general information technology
consulting on the UNIX platform and information technology staffing. In
January 1991, we entered the software business and became a value added reseller
of third party software products. We also began to develop software internally
for sale to customers as part of our software business. In October 1995, our
proprietary product, Sapphire/Web 1.0, was released.
In March 1997, we reincorporated in Delaware and changed our name to
"Bluestone Software, Inc." In April 1997, we spun off our consulting business to
Bluestone Consulting, Inc., a newly formed Delaware corporation. Immediately
after the spin-off, our business consisted of two product lines:
- Sapphire/Web, our proprietary software product; and
- third party graphical user interface software products, which we resold to
our customers.
For the year ended December 31, 1997, the Sapphire/Web products and related
services generated approximately $4.5 million in revenues, while third party
products and related services contributed approximately $5.2 million.
In 1998, we decided to focus on internally developed software products and
curtail the licensing and services related to third party products. Beginning in
March 1998, we increased our sales and marketing efforts and hired new
management. We hired a significant number of sales personnel throughout the
country in order to develop a nationwide presence and generate increased
revenue. The positioning and feature set of the Sapphire/Web product was shifted
from a low-cost development tool to an enterprise-wide software solution for
Internet applications. For the year ended December 31, 1998, the Sapphire/Web
products and related services generated approximately $7.0 million in revenues,
while third party products and related services contributed approximately
$1.1 million. In January 1999, we released Bluestone XML Suite, which represents
a new generation of specialized Web application server focused on Internet
commerce. In May 1999, Release 6 of Sapphire/Web was made generally available.
In December 1999, we released Bluestone Total-e-Business. For the year ended
December 31, 1999, all of our revenue was generated from our proprietary
software products and related services.
OVERVIEW
Our fiscal year end is December 31. References to 1997, 1998 or 1999 mean
the fiscal year ended December 31, unless otherwise indicated.
We generate revenue from two principal sources:
- license fees for our software products; and
- professional services and support revenue derived from consulting,
training and maintenance services related to our software products.
In 1998, one customer accounted for 11% of our total product and services
revenues and, during 1999, one customer accounted for 13% of our total product
and services revenues. Our top 10 customers represented 34%, 39% and 56% of
total revenues in 1997, 1998 and 1999, respectively. In the future, we expect to
continue to have individual customers account for a significant portion of our
revenue during a given period.
SOFTWARE LICENSE FEES. Typically, our customers pay an up-front, one-time
fee for a perpetual license of our software. The amount of the fee is generally
based on the number of developer seats and server interactions. Pricing options
based on enterprise-wide deployment or the number of processors is
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also available. We also sell annual and multi-year licenses to independent
software vendors that allow for the integration of our products into their
software. We generally require a written license contract that typically
provides for payment within 30-60 days of contract signing. Certain multi-year
license contracts contain payment terms that extend beyond one year. Pursuant to
the American Institute of Certified Public Accountants' Statement of Position
97-2, any amounts due under contracts beyond one year are not deemed to be fixed
or determinable and therefore are deferred and recognized as revenue when the
payments become due.
Prior to 1998, software licenses were principally the result of direct sales
to end-users. Beginning in 1998, we began to focus on channel marketing. This
has resulted in significant sales of products sold through independent software
vendors, resellers and systems integrators. We believe that these alliances have
helped to maximize our exposure in the marketplace. Furthermore, we have
experienced, and expect to continue to experience, significant variation in the
size of individual licensing transactions, ranging from small sales of perpetual
developer licenses to large, multi-year licensing arrangements with independent
software vendors.
We generally recognize license fee revenue when a formal agreement exists,
delivery of the product has occurred, no production, modification, customization
or implementation obligations remain, the license fee is deemed fixed or
determinable and collectibility is probable. Revenue from arrangements with
distributors and resellers is not recognized until our product is delivered to
the end-user.
SERVICES REVENUE. Services revenue consists principally of revenue derived
from consulting services provided to customers during implementation and
integration of our software products, training of customers' employees and fees
for ongoing maintenance, which consists of customer technical support services
and unspecified product upgrades/enhancements on a when-and-if-available basis.
Consulting and training services are typically delivered on a time and material
basis and are typically completed within one month following license contract
signing. Consulting services generally consist of simple installations and
configurations. We recognize services revenue as the services are performed.
Maintenance revenue is generally invoiced in advance and is recognized ratably
over the term of the maintenance agreement, which is generally 12 months.
COST OF SOFTWARE LICENSE FEES. Cost of software license fees consists
primarily of the costs associated with the purchase of product CDs and related
documentation and duplication costs. Cost of licenses also includes the cost of
third-party software products embedded in our product offerings.
COST OF SERVICES. Cost of services consists primarily of salary and benefit
costs of our consulting, support and training organizations, and are expensed
when incurred. We also engage outside consultants to meet customer demand.
SALES AND MARKETING. We license our products primarily through our indirect
channels and our direct sales force. Sales and marketing expenses consist
primarily of personnel costs, commissions to employees, office facilities,
travel and promotional events such as trade shows, advertising and public
relations programs.
PRODUCT DEVELOPMENT. We maintain an in-house development staff to enhance
our existing products and to develop new ones. Product development expenditures
are generally charged to operations as incurred. Statement of Financial
Accounting Standards No. 86 requires the capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
We establish technological feasibility upon the completion of a working model.
To date, we have expensed all software development costs due to the minimal
level of development costs incurred subsequent to the establishment of
technological feasibility.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include our
personnel and other costs of our corporate, finance, human resources and
information services activities.
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STOCK-BASED COMPENSATION. The amount by which the fair market value of our
common stock exceeded the exercise price of stock options on the date of grant
is recorded as deferred compensation and is amortized to stock-based
compensation expense as the options vest.
RESULTS OF OPERATIONS
The table below sets forth statement of operations data for the periods
indicated as a percentage of total revenues.
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YEAR ENDED DECEMBER 31,
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1997 1998 1999
-------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUE)
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Revenues:
Software license fees..................................... 24% 42% 74%
Services.................................................. 22 44 26
Third party products and related services................. 54 14 --
---- ---- ----
Total revenues........................................ 100 100 100
Cost of revenues:
Software license fees..................................... 2 3 3
Services.................................................. 26 55 31
Third party products and related services................. 29 8 --
---- ---- ----
Total cost of revenues................................ 57 66 33
---- ---- ----
Gross profit................................................ 43 34 67
Operating expenses:
Sales and marketing....................................... 53 118 102
Product development....................................... 13 30 29
General and administrative................................ 17 29 28
Amortization of stock-based compensation.................. -- -- 2
---- ---- ----
Total operating expenses.............................. 83 177 161
---- ---- ----
Loss from operations........................................ (39) (142) (94)
Interest expense, net....................................... (1) (1) (3)
---- ---- ----
Loss from continuing operations............................. (40)% (143)% (97)%
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1999 COMPARED TO 1998
SOFTWARE LICENSE FEES
License fees were $11.7 million and $3.4 million for the years ended
December 31, 1999 and 1998, respectively. This increase of 243.7% was primarily
due to a shift in our product position from a low-priced development tool to a
high-end, higher-priced enterprise software solution. This change in product
position has resulted in increased revenues per customer. Additionally, we were
able to concentrate solely on our Sapphire/Web products and services once we
curtailed the licensing of our graphical user interface product line in
April 1998.
SERVICES REVENUE
Services revenue was $4.0 million and $3.6 million for 1999 and 1998,
respectively. Services revenue increased 10.3% between the two periods. This
relatively small increase in services revenue when compared to the increase in
software license fees was primarily due to a strategic change in the use of our
professional staff. By the beginning of 1999, the main focus of the services
organization had shifted to concentrate on short-term, installation-type
engagements, usually less than two weeks in duration, rather than long-term
implementation activities. Larger scale implementation activities currently are
performed primarily by systems integrators with which we have strategic
alliances.
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THIRD PARTY PRODUCTS AND RELATED SERVICES REVENUE
Third party products and related services revenue was zero and $1.1 million
for the years ended December 31, 1999 and 1998, respectively. This decrease was
due to our decision in 1998 to curtail the licensing and services related to
third party products so that we could focus on our proprietary products.
GROSS MARGIN-LICENSE FEES
Our license fee gross margin increased to 96.6% for 1999 from 92.4% in 1998.
This increase was primarily due to the increase in revenue per customer. Our
focus on positioning our Sapphire/Web family of products as enterprise-wide
solutions has increased the revenue associated with each sale, while the cost of
sales for the product has decreased, as we have reduced our printing and
duplication costs associated with our products and related documentation.
However, in future periods, as we continue to enhance our product offerings, the
license fee gross margin may decrease as a result of the cost of third-party
software embedded in our software products.
GROSS MARGIN-SERVICES REVENUE
Our services gross margin remained relatively flat at (20.0)% for 1999 and
(22.5)% in 1998. Our negative services gross margins are primarily due to the
hiring and training of additional services personnel in advance of anticipated
services revenue growth.
SALES AND MARKETING
Sales and marketing expenses were $15.9 million and $9.6 million for 1999
and 1998, respectively, representing an increase of 66.9%. Of this increase,
$1.8 million was due to increases in payroll and related costs, $796,000 was due
to recruiting and travel costs as a result of the growth in the number of sales
personnel, $1.1 million was due to increased advertising and trade show expenses
and $1.3 million was due to increased commissions expense as a result of higher
sales volume. We have increased our spending on sales and marketing because we
believe that our sales and marketing efforts are essential for us to increase
our market position and our product acceptance. The average number of sales and
marketing employees for 1999 was 59 compared to 49 for 1998. We also incurred
increases in variable marketing expenses due to increased channels and customer
marketing, direct mail campaigns and public relations expenses in order to
increase market awareness and gain market acceptance of our products. These
costs as a percentage of revenue were 101.8% and 117.7% for 1999 and 1998,
respectively.
PRODUCT DEVELOPMENT
Product development expenses were $4.5 million and $2.5 million for 1999 and
1998, respectively, representing an increase of 83.4%. This increase is
primarily due to increased payroll and related costs of $1.6 million associated
with the development of our new products, Sapphire/Web Release 6, Bluestone XML
Suite and Bluestone Total-e-Business. We believe that our product development
investment is essential for us to maintain our market and technological
competitiveness. These costs as a percentage of revenue were 29.0% and 30.5% for
1999 and 1998, respectively. Average development headcount for the years ended
December 31, 1999 and 1998 was 33 and 21, respectively.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $4.4 million and $2.3 million for
1999 and 1998, respectively. Included in expenses for 1999 were $577,000 for
severance and consulting costs. The severance costs were related to the
termination of certain executives, and the consulting costs were based upon the
fair value of options issued to outside consultants. Excluding these costs, our
general and administrative expenses were $3.8 million, an increase of 65.6% over
1998. This increase was
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primarily due to increased payroll and related costs of $645,000 resulting from
the addition of personnel to support the growth of our business as well as
increased professional fees and insurance costs. General and administrative
expenses as a percentage of revenue were 28.2% and 28.5% for the years ended
December 31, 1999 and 1998, respectively. Excluding these severance and
consulting costs, the expenses as a percentage of revenue decreased to 24.5% for
1999.
AMORTIZATION OF STOCK-BASED COMPENSATION
Amortization of stock-based compensation was $282,000 and zero for 1999 and
1998, respectively. Deferred compensation of $1.4 million arose due to the
issuance of stock options at exercise prices below the fair market value of our
common stock for accounting purposes relative to the hiring of key employees and
the appointment of directors during the second quarter of 1999. Deferred
compensation is included as a component of stockholders' equity and is being
amortized by charges to operations over the vesting periods of the options. As
of December 31, 1999, we had an aggregate of $1.1 million of deferred
compensation to be amortized through June 30, 2003.
INTEREST EXPENSE, NET
Net interest expense was $405,000 for 1999 and $47,000 for 1998. This
additional expense in 1999 was due to the issuance of warrants to purchase
137,608 shares of common stock at the weighted average exercise price of $2.06
per share in connection with the issuance of convertible subordinated bridge
notes. Original issue discount interest cost of $1.1 million was recorded during
the second quarter of 1999 based upon the fair value of the warrants at the
dates of issuance. The warrants are recorded as a component of stockholders'
equity. This $1.1 million of expense during 1999 was offset by interest income
earned on the proceeds from our initial public offering in September 1999 and
our Series C preferred stock financing in May 1999.
1998 COMPARED TO 1997
SOFTWARE LICENSE FEES
Sapphire/Web license fees were $3.4 million and $2.3 million for 1998 and
1997, respectively. The increase of 45.1% was due to increased market acceptance
of the Sapphire/Web software suite.
SERVICES REVENUE
Sapphire/Web services revenue was $3.6 million and $2.2 million for 1998 and
1997, respectively. This increase of 66.1% was due to the increase in the number
of consulting and training engagements associated with our growing customer
base.
THIRD PARTY PRODUCTS AND RELATED SERVICES REVENUE
Third party products and related services revenue was $1.1 million and
$5.2 million for 1998 and 1997, respectively. This decrease was due to our
decision in 1998 to curtail the sale of third party products and services.
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.
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SALES AND MARKETING
Sales and marketing expenses were $9.6 million and $5.1 million in 1998 and
1997, respectively, an increase of 86.1%. These costs as a percentage of revenue
increased to 117.7% in 1998 from 52.7% in 1997. These increases were primarily
due to an increase in the number of sales and marketing personnel between March
and September 1998, including the addition of a new Senior Vice President, Sales
and a Senior Vice President, Marketing, as well as three Sales Vice Presidents.
In 1998, we opened seven new remote sales offices in Georgia, California, Texas,
Colorado and Illinois. Beginning in March 1998, we focused our marketing efforts
on achieving market awareness of Bluestone and acceptance of our products, and
subsequently incurred significant costs for trade show participation,
advertising and direct mail campaigns.
PRODUCT DEVELOPMENT
Product development expenses were $2.5 million and $1.3 million for 1998 and
1997, respectively, representing an increase of 91.0%. These costs as a
percentage of revenue increased to 30.5% in 1998 from 13.3% in 1997. These
increases were primarily due to an increase of $948,000 in payroll and related
costs related to the hiring of additional developers, and $115,000 for
additional rent and depreciation expense related to capital expenditures for
software, hardware and equipment.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.3 million and $1.6 million for
1998 and 1997, respectively. This increase of 43.3% was primarily due to
increases in staff to support our growth. These costs as a percentage of revenue
increased to 28.5% in 1998 from 16.6% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
In September 1999, we completed the initial public offering of 4,000,000
shares of our common stock, realizing net proceeds from the offering of
$54.8 million. Prior to the offering, we financed our operations and met our
capital expenditure requirements primarily through sales of preferred stock,
bank loans, equipment loans and funds generated from operations. From
April 1997 through May 1999, we raised approximately $41.6 million of venture
capital funding in order to expand the sales and marketing and product
development efforts of our business. As of December 31, 1999, our primary
sources of liquidity consisted of cash and cash equivalents of approximately
$66.2 million and available borrowings of approximately $1.6 million under our
revolving line of credit, which is secured by substantially all of our assets.
As of December 31, 1999, we did not have an outstanding balance on our line of
credit. During December 1999, we amended our existing loan arrangement to
increase the maximum available amount of our revolving line of credit to
$3.0 million, extend the maturity date to December 1, 2000 and decrease the
interest rate to prime plus .50%. In conjunction with the loan amendment, we
entered into an agreement that provides for a separate $500,000 line of credit
facility. Borrowings are subject to a borrowing base of 90% of eligible foreign
accounts receivable and interest on this line is payable monthly at a rate of
prime plus .50%.
Net cash used in operating activities was $13.0 million, $10.3 million and
$3.0 million for the years ended December 31, 1999, 1998 and 1997, respectively.
The cash used in operating activities was attributable primarily to net losses
of $15.1 million, $11.6 million and $3.8 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
Net cash used in investing activities was $1.7 million, $1.2 million and
$872,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The
cash used in investing activities related primarily to purchases of computers,
software and equipment for internal use and, in 1999, furniture and leasehold
improvements for our new Philadelphia facility.
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Net cash provided by financing activities amounted to $78.3 million,
$11.7 million and $5.1 million for the years ended December 31, 1999, 1998 and
1997, respectively. In 1997, $4.8 million was provided from the sale of
Series A preferred stock to certain venture capital investors, $920,000 was
provided from borrowing under available credit lines and $250,000 was provided
from borrowings from a related party. In April 1998, approximately
$11.2 million was provided from the sale of Series B preferred stock to certain
venture capital investors and $919,000 was provided from borrowings under an
available equipment line. In May 1999, we sold 9,191,176 shares of Series C
preferred stock for net proceeds of $23.1 million, $1.35 million of which was
comprised of the conversion of indebtedness under bridge financing incurred
earlier in 1999. In September 1999, we completed our initial public offering of
4,000,000 shares of common stock for net proceeds of $54.8 million.
Additionally, during 1999 we received proceeds of $1.9 million from the exercise
of common stock options and made net repayments of $838,000 on our line of
credit and long-term debt and $598,000 to related parties.
On October 29, 1999, we entered into a seven and one-half year lease with a
realty company for our new operating facility in Philadelphia, Pennsylvania.
This lease is secured by a $600,000 letter of credit. We relocated several of
our departments to this facility during January 2000 and estimate that capital
expenditures, including leasehold improvements, furniture and equipment, of
approximately $1.2 million will be required related to this facility.
During November 1999, we entered into a master operating lease agreement
with an equipment leasing company that provides for an equipment lease line of
up to $1,000,000. Assets under operating leases on the lease line will be
secured with a letter of credit equal to 60% of the outstanding balance. As of
December 31, 1999 approximately $523,000 was available under the equipment lease
line. Letters of credit totaling approximately $286,000 were outstanding to
secure the outstanding assets on the lease line.
During December 1999, we entered into a five year lease commencing on
January 15, 2000 with a realty company for facilities in Redwood Shores,
California. We intend to begin occupying this facility in March 2000 and to use
this facility to house our West Coast operations.
We anticipate that we will continue to expand our sales operations
throughout the U.S., as well as internationally, within the next 12 months and,
therefore, we expect to incur increases in our sales and marketing expenditures.
We also expect to incur increases in our product development expenditures as we
continue to enhance our product offerings. These expenditures are expected to
use significant amounts of our cash resources. However, we believe that our
existing capital resources are sufficient to meet our capital requirements for
the next 12 months. In addition, we may pursue acquisitions in the future. Such
acquisitions could require significant capital resources. Presently, we have no
definitive agreements, commitments or understandings to consummate any
acquisitions.
YEAR 2000 ISSUES
GENERAL. Year 2000 issues relate to computer programs or hardware that have
date-sensitive software or embedded chips that may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruption of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in other normal business activities.
The term "computer programs and hardware" includes accounting, data
processing and telephone/ PBX systems, in addition to other miscellaneous
systems. These systems may contain imbedded technology, which complicates our
identification, assessment, remediation and testing efforts.
STATE OF READINESS. We have designed the current versions of our software
products to be Year 2000 compliant, and do not anticipate any Year 2000 issues
related to these products. However, some older versions of our software products
that we no longer sell may not be Year 2000 compliant. We
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believe that most of our customers using an older version of one of our products
that is not Year 2000 compliant upgraded such version to a newer, compatible
version or discontinued using the software prior to January 1, 2000. We have not
been advised of any material Year 2000 problems by our customers to date.
We have performed an assessment of the Year 2000 readiness of our
information technology systems, including the hardware and software we use to
provide and deliver our products. Our testing has included our major
infrastructure items, hardware platforms, telephone, voice mail and operating
systems. All of the tested systems are compliant. Desktop computing, servers,
switching and routing platforms have been inventoried and tested with only minor
upgrades necessary to one router family. All personal computer systems have been
tested and, where necessary, upgraded. By July 1999, we had largely completed
the implementation of Year 2000 compliant internal computer applications for our
main financial and order processing systems.
We completed a Year 2000 simulation on our internal systems and software
during the first quarter of 1999. Any discrepancies noted were corrected.
Another testing cycle was completed during the third quarter of 1999 to ensure
that systems then not compliant or systems that were newly discovered to be
non-compliant were remedied. No information technology projects have been
delayed or deferred by our Year 2000 compliance program and we have not
experienced any material internal Year 2000 problems to date.
All third party vendors who provide us with systems or software were
contacted and provided us with written assurances of their product's compliance.
We have incorporated any recommended changes and upgrades wherever necessary. We
have not used any independent verification or validation processes to verify the
Year 2000 compliance of our third party vendors. In the event that one or more
of our significant vendors or service providers are not Year 2000 compliant, due
to undetected or embedded system components or technology, we believe that our
results of operations will not be materially adversely affected and that our
relationships with customers, vendors and others will not be materially
adversely affected.
We have also sought assurances of Year 2000 compliance from our material
providers of items other than information technology. We have not received
notification from any vendor indicating that they are not Year 2000 compliant.
COST AND RISK. We have funded our Year 2000 compliance efforts from our
cash flow from operations and we have not incurred any significant costs to date
related to Year 2000 issues and do not expect the cost of future Year 2000
issues to be material. To date, there has been no material negative impact on
our financial condition or operations as a result of our Year 2000 compliance
program. Furthermore, we believe that Year 2000 issues will not pose significant
operational problems for us.
However, if all Year 2000 issues are not properly identified or if Year 2000
issues that may arise are not assessed, remediated and tested in a timely
fashion, the Year 2000 issue may adversely impact our results of operations or
adversely affect our relationships with customers, vendors or others. Although
none have been experienced to date, we may experience operational difficulties
caused by undetected errors or defects in embedded technologies that we use in
our internal systems. Additionally, we cannot predict whether the Year 2000
issues of third parties, if any, will have a material adverse impact on our
systems or results of operations.
The costs of our Year 2000 identification, assessment, remediation and
testing efforts are based upon management's best estimates. We have not used any
independent verification or validation process to assure the reliability of our
risks and costs estimates. These estimates may prove to be inaccurate and actual
results could differ materially from those currently anticipated.
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Year 2000 issues may affect the purchasing patterns of current and potential
customers in a variety of ways. Some companies may be expending significant
resources to replace or remedy their current hardware and software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase software products such as those offered by us. Furthermore, our
customers could be forced to postpone installations of our products due to
dedication of resources to their own Year 2000 issues. We do not believe that
there is any practical way to ascertain the extent of, and have no plan to
address problems associated with, any reduction in purchasing
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
THIS SECTION HIGHLIGHTS SPECIFIC RISKS WITH RESPECT TO AN INVESTMENT IN OUR
BUSINESS. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. WE ALSO
CAUTION YOU THAT THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS THAT ARE BASED
ON MANAGEMENT'S BELIEFS AND ASSUMPTIONS AND ON INFORMATION CURRENTLY AVAILABLE
TO MANAGEMENT.
WE HAVE HAD RECENT LOSSES AND MAY INCUR FUTURE LOSSES THAT MAY DEPRESS OUR
STOCK PRICE.
We have incurred significant net losses since 1996, including losses of
approximately $3.8 million, $11.6 million and $15.1 million for the years ended
December 31, 1997, 1998, and 1999, respectively. Our losses have resulted in an
accumulated deficit of approximately $34.9 million as of December 31, 1999. We
expect to increase our research and development, sales and marketing and general
and administrative expenses in future periods. Any significant shortfall of
revenues in relation to our expectations or any material delay of customer
orders would have an immediate adverse effect on our business, operating results
and financial condition. We may not be profitable in any future period. Our
future operating results will depend on many factors, including:
- the overall growth rate for the markets in which we compete;
- the level of market acceptance of, and demand for, our software products;
- the level of product and price competition;
- our ability to establish strategic marketing relationships, develop and
market new and enhanced products, and control costs;
- our ability to expand our direct sales force and indirect distribution
channels;
- our ability to integrate acquired businesses and product lines;
- our ability to develop and maintain awareness of our brands; and
- our ability to attract, train and retain consulting, technical and other
key personnel.
LACK OF GROWTH OR DECLINE IN INTERNET USAGE OR THE LACK OF ACCEPTANCE OF
COMMERCE CONDUCTED VIA THE INTERNET COULD BE DETRIMENTAL TO OUR FUTURE
OPERATING RESULTS.
Our products enhance companies' ability to transact business and conduct
operations utilizing the Internet. Therefore, our future sales and any future
profits are substantially dependent upon the widespread acceptance and use of
the Internet as an effective medium of commerce by consumers and businesses.
Rapid growth in the use of the Internet and other online services is a recent
development and we are unsure whether that acceptance and use will continue to
develop or that a sufficiently broad base of consumers will adopt and continue
to use the Internet and other online services as a medium of commerce. To be
successful, we must rely on consumers and businesses who have historically used
traditional means of commerce to purchase products accepting and utilizing new
ways of conducting business and exchanging information over the Internet.
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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 PRODUCTS AND IF THE MARKET FOR THESE PRODUCTS
DOES NOT CONTINUE TO GROW, OUR BUSINESS COULD BE MATERIALLY ADVERSELY
AFFECTED.
Software license revenues from our Sapphire/Web software were $3.4 million
or 42% of total revenues in 1998 and $11.7 million or 74% of total revenues of
1999. We expect to continue to be dependent upon the Sapphire/Web software
products in the future, and any factor adversely affecting the market for Web
application server software in general, or our software in particular, would
adversely affect our ability to generate revenues. The market for Web
application server software is competitive, highly fragmented and characterized
by rapid technological change. Our future financial performance will depend in
large part on the successful development, introduction and customer acceptance
of our new products and product enhancements in a timely and cost effective
manner. We expect to continue to commit significant resources to market and
further develop the Sapphire/Web software products and enhance the brand
awareness of Sapphire/Web and our other software products. The market for our
software may not continue to grow or may grow at a slower rate than we expect.
Furthermore, the market may not accept our products. If this market fails to
grow or grows more slowly than we anticipate, or if the market fails to accept
our products, our business could suffer.
IF THE MARKET'S ACCEPTANCE AND ADOPTION OF JAVA AND XML-SERVER TECHNOLOGIES
DOES NOT CONTINUE, OUR FUTURE RESULTS MAY SUFFER.
Our Sapphire/Web product is 100% Pure JAVA. JAVA is a programming language
developed by Sun Microsystems. Therefore, the continued acceptance of our
products in the marketplace depends on JAVA's acceptance as a standard
programming language. If Sun Microsystems were to make significant changes to
the JAVA language or fail to correct defects and limitations in its products,
our ability to continue to improve and ship our products could be impaired. In
the future, our customers may also require the ability to deploy our products on
platforms for which technically acceptable JAVA implementations either do not
exist or are not available on commercially reasonable terms.
In January 1999, we introduced a product based on a document format for the
Web called XML, or extensible mark-up language. We cannot be sure that XML
technology will be adopted as a standard, that XML-based products will achieve
broad market acceptance, that our XML products will be accepted or that other
superior technologies will not be developed. The failure of XML technology to
become a standard or the failure of our XML products to achieve broad acceptance
could adversely affect our ability to generate revenues. The XML-Server
technology is one of several competing technologies used in information exchange
and Internet commerce. We intend to continue to invest substantial resources in
our XML products.
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INTENSE COMPETITION AND INCREASING CONSOLIDATION IN OUR INDUSTRY COULD
CREATE STRONGER COMPETITORS AND HARM OUR BUSINESS.
The market for our products is intensely competitive, highly fragmented,
characterized by rapid technological change and significantly affected by new
product introductions. Recent acquisitions of several of our competitors by
large software companies and other market activities of industry participants
have increased the competition in our market. Our competitors consist of a
number of private and public companies including, among others: BEA Systems
which acquired WebLogic; IBM; Microsoft; Oracle; and Sun Microsystems, which
acquired NetDynamics and the rights to Netscape's Application Server. In
addition, we face competition from in-house software developers who may develop
some or all of the functionality that our products provide. Many of our
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources, greater name recognition, a broader
range of products to offer and a larger installed base of customers than us, any
of which could provide them with a significant competitive advantage.
We expect to face increased competition in the future from our current
competitors. In addition, new competitors, or alliances among existing and
future competitors, may emerge and rapidly gain significant market share. We
also may face increased competition from existing large business application
software vendors that may broaden their product offerings to include Web
application server software. Their significant installed customer bases and
abilities to offer a broad solution and to price these new products as
incremental add-ons to existing systems could provide them with a significant
competitive advantage.
OUR CUSTOMERS ARE CONCENTRATED AND THE LOSS OF ONE OF OUR LARGEST CUSTOMERS
COULD CAUSE OUR REVENUES TO DROP QUICKLY AND UNEXPECTEDLY.
Our top ten customers for the years ended December 31, 1998 and 1999 in the
aggregate accounted for approximately 39% and 56%, respectively, of our
revenues. Hewlett-Packard accounted for more than 10% of our revenues for the
year ended December 31, 1998 and OpenConnect accounted for more than 10% of our
revenues for the year ended December 31, 1999. We expect that a small number of
customers will continue to account for a substantial portion of revenues in any
given quarter in the foreseeable future, although it is unusual for the same
customer to account for a substantial amount of revenues in each of several
quarters. As a result, our inability to secure major customers during a given
period or the loss of any one major customer could cause our revenues to drop
quickly and unexpectedly.
IF WE FAIL TO DEVELOP NEW PRODUCTS AND SERVICES IN THE FACE OF OUR
INDUSTRY'S RAPIDLY EVOLVING TECHNOLOGY, OUR FUTURE RESULTS MAY BE ADVERSELY
AFFECTED.
Due to the recent emergence of the Internet and the Web as a forum for
conducting business, the market for Web application server systems in which we
participate is subject to rapid technological change, changing customer needs,
frequent new product introductions and evolving industry standards that may
render existing products and services obsolete. Our growth and future operating
results will depend in part upon our ability to enhance existing applications
and develop and introduce new applications or components that:
- meet or exceed technological advances in the marketplace;
- meet changing customer requirements;
- achieve market acceptance;
- integrate successfully with third party software; and
- respond to competitive products.
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Our product development and testing efforts have required, and are expected
to continue to require, substantial investment. We may not possess sufficient
resources to continue to make the necessary investments in technology. In
addition, we may not successfully identify new software opportunities and
develop and bring new software to market in a timely and efficient manner. If we
are unable, for technological or other reasons, to develop and introduce new and
enhanced software in a timely manner, we may lose existing customers and fail to
attract new customers, resulting in a decline in revenues.
OUR STOCK PRICE MAY FLUCTUATE WIDELY.
Prior to our initial public offering in September 1999, there was no public
market for our common stock. Since then, the market price of our common stock
has fluctuated significantly. The market price of our common stock could
continue to fluctuate substantially due to:
- quarterly fluctuations in operating results;
- announcements of new products or product enhancements by us or our
competitors;
- technological innovations by us or our competitors;
- general market conditions or market conditions specific to our or our
customers' industries; and
- changes in earnings estimates or recommendations by analysts.
Stock prices of Internet-related companies have been highly volatile. Our
current stock price may not be indicative of the price of our stock that will
prevail in the trading market. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has at times been instituted against that company. If we become subject to
securities litigation, we could incur substantial costs and experience a
diversion of management's attention and resources.
THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY ADVERSELY AFFECT
THE TRADING PRICE OF OUR COMMON STOCK.
Quarterly fluctuations in operating results may be caused by:
- changes in the growth rate of Internet usage;
- fluctuations in the demand for our products and services;
- the level of product and price competition in our markets;
- the timing and market acceptance of new product introductions and upgrades
by us or our competitors;
- our success in expanding our customer support and marketing and sales
organizations;
- the size and timing of individual transactions;
- delays in, or cancellations of, customer implementations;
- customers' budget constraints;
- the level of product development expenditures;
- our ability to control costs; and
- general economic conditions.
Many of these factors are not in our control. In addition, we also
experience seasonality which causes us to typically recognize a
disproportionately greater amount of our revenues for any fiscal year
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in our fourth quarter and a disproportionately lesser amount in our first
quarter, due largely to sales force quota practices in the software industry and
to customer budgeting processes.
OUR FAILURE TO SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS COULD ADVERSELY
AFFECT OUR BUSINESS.
We intend to acquire complementary product lines, technologies and
businesses as part of our growth strategy. Although we may make such
acquisitions, we may not be able to successfully integrate them with our
business in a timely manner. Our failure to successfully address the risks
associated with such acquisitions, if consummated, could have a material adverse
effect on our business and our ability to develop and market products. The
success of any acquisitions will depend on our ability to:
- successfully integrate and manage the acquired operations;
- retain the key employees of the acquisition targets;
- develop, integrate and market products and product enhancements based on
the acquired products and technologies; and
- control costs and expenses, as well as demands on our management,
associated with the potential acquisitions.
If we are not able to successfully integrate acquired product lines,
technologies or businesses with our business, we may incur substantial costs and
delays or other operational, technical or financial problems. In addition, our
failure to successfully integrate acquisitions may divert management's attention
from our existing business and may damage our relationships with key clients and
employees. To finance future acquisitions, we may issue equity securities that
could be dilutive to our stockholders. We may also incur debt and additional
amortization expenses related to goodwill and other intangible assets as a
result of future acquisitions. The interest expense related to this debt and
additional amortization expense may significantly reduce our profitability and
could have a material adverse effect on our business, financial condition and
operating results.
WE NEED TO MANAGE OUR GROWTH EFFECTIVELY OR WE MAY NOT SUCCEED.
We are a growing company. Our ability to manage our growth will depend in
large part on our ability to generally improve and expand our operational and
sales and marketing capabilities, to develop the management skills of our
managers and supervisors, many of whom have been employed by us for a relatively
short time, and to train, motivate and manage both our existing employees and
the additional employees that may be required. Additionally, we may not
adequately anticipate all of the demands that growth may impose on our systems,
procedures and structure. Any failure to adequately anticipate and respond to
these demands or manage our growth effectively would have a material adverse
effect on our future prospects.
THE DEVELOPMENT OF INTERNATIONAL OPERATIONS WILL CAUSE US TO FACE ADDITIONAL
RISKS.
We expect to expand our international operations and international sales and
marketing efforts, initially, by opening regional sales and support offices in
Europe and Asia Pacific within the next eight months. We have limited experience
in marketing, selling and distributing our products and services
internationally. International operations, including operations in those regions
that we are targeting, are subject to the following risks:
- recessions in foreign economies;
- political and economic instability;
- fluctuations in currency exchange rates;
- difficulties and costs of staffing and managing foreign operations;
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- potentially adverse tax consequences;
- reduced protection for intellectual property rights in some countries; and
- changes in regulatory requirements.
OUR FAILURE TO MAINTAIN ONGOING SALES THROUGH A LIMITED NUMBER OF INDIRECT
CHANNELS MAY RESULT IN LOWER REVENUES.
In 1999, we derived approximately 60% of our license revenues through a
limited number of independent software vendors, systems integrators,
distributors and resellers. Although we intend to increase our marketing and
direct sales efforts, we expect that a limited number of these indirect channels
will continue to account for a significant portion of our revenues in any given
quarter in the foreseeable future. To be successful, we must continue to foster
and maintain our existing indirect channels, as well as develop new
relationships. The loss of, or reduction in orders through, existing indirect
channels or the failure to develop new indirect channel relationships could
cause our revenues to decline and have a material adverse effect on our
business.
IF WE LOSE OUR KEY PERSONNEL, OR FAIL TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, THE SUCCESS AND GROWTH OF OUR BUSINESS MAY SUFFER.
A significant portion of our senior management team has been in place for a
relatively short period of time. Our success will depend to a significant extent
on their ability to gain the trust and confidence of our other employees and to
work effectively as a team.
Our future success will also depend significantly on our ability to attract,
integrate, motivate and retain additional highly skilled technical, managerial,
sales, marketing, and services personnel. Competition for skilled personnel is
intense, and we may not be successful in attracting, motivating and retaining
the personnel required to grow and operate profitably. Failure to attract,
integrate, motivate and retain highly skilled personnel could adversely affect
our business, especially our ability to develop new products and enhance
existing products.
THE LENGTHY AND VARIABLE SALES CYCLES OF OUR SOFTWARE PRODUCTS COULD CAUSE
SIGNIFICANT FLUCTUATION IN OUR QUARTERLY RESULTS.
Our software products are generally used for mission-critical or
enterprise-wide purposes and involves a significant commitment of resources by
our customers. A customer's decision to license our software products generally
involves the evaluation of the available alternatives by a significant number of
personnel in various functional and geographic areas, each often having specific
and conflicting requirements. Accordingly, we typically must expend substantial
resources educating prospective customers about the value of our software
solutions. For these reasons, the length of time between the date of initial
contact with the potential customer and the execution of a software license
agreement typically ranges from three to six months, and is subject to delays
over which we have little or no control. As a result, our ability to forecast
the timing and amount of specific sales is limited and the delay or failure to
complete one or more large license transactions could cause our operating
results to vary significantly from quarter to quarter.
THE FAILURE TO IMPLEMENT SUCCESSFULLY OUR SOFTWARE PRODUCTS COULD RESULT IN
DISSATISFIED CUSTOMERS AND DECREASED SALES.
Implementation of our software products often involves a significant
commitment of financial and other resources by our customers. The customer's
implementation cycle can be lengthy due to the size and complexity of their
systems and operations. In addition, our customers rely heavily on third party
systems integrators to assist them with the installation of the software. Our
failure or the failure of our
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alliance partners, our customers or our third party integrators to implement
successfully our software products could result in dissatisfied customers which
could limit our ability to generate repeat business and adversely affect our
reputation.
WE MAY REQUIRE FUTURE ADDITIONAL FUNDING FOR OUR BUSINESS.
Over time, we may require additional financing for our operations.
Additionally, we periodically review other companies and their product lines and
technologies for potential acquisition. Any material acquisitions or joint
ventures could require additional financing. This additional financing may not
be available to us on a timely basis, if at all, or, if available, on terms
acceptable to us. Moreover, additional financing may cause dilution to existing
stockholders.
CAPACITY RESTRICTIONS COULD REDUCE THE DEMAND AND UTILITY OF OUR PRODUCTS.
Concurrency restrictions can limit Internet deployment and use capacity. The
boundaries of our Sapphire/Web software and Bluestone XML-Server capacity, in
terms of numbers of concurrent users or interactions, are unknown because, to
date, no customer or testing environment has reached these boundaries. The
Sapphire/Web software's or the Bluestone XML-Server's capacity boundaries may,
at some future time, be reached and, when reached, may be insufficient to enable
our customers to achieve their desired levels of information deployment and
exchange. We may lose customers or fail to gain new customers if either of the
Sapphire/Web software's or the Bluestone XML-Server's capacity boundary limits
the ability of our customers to achieve expected levels of information
deployment and exchange or Internet commerce transactions.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD IMPAIR
OUR ABILITY TO COMPETE EFFECTIVELY.
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use information that
we regard as proprietary. Policing unauthorized use of our products is difficult
and, though we are unable to determine the extent to which piracy of our
software products exists, we expect software piracy to be a problem. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as the laws of the United States. Furthermore, our
competitors may independently develop technology similar to ours.
The number of intellectual property claims in our industry may increase as
the number of competing products grows and the functionality of products in
different industry segments overlaps. Although we are not aware that any of our
products infringe upon the proprietary rights of third parties, there can be no
assurance that third parties will not claim infringement by us with respect to
current or future products. Any of these claims, with or without merit, could be
time consuming to address, result in costly litigation, cause product shipment
delays or require us to enter into royalty or license agreements. These royalty
or license agreements might not be available on terms acceptable to us or at
all, which could have a material adverse effect on our business.
OUR FAILURE TO OBTAIN OR MAINTAIN THIRD PARTY LICENSES COULD HARM OUR
BUSINESS.
We have in the past and may in the future, resell, under license, certain
third party software that enables our software to interact with other software
systems or databases. In addition, we license certain software technology used
to develop our software. The loss or inability to maintain any of these
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software licenses could result in delays or reductions in product shipments
until equivalent software could be identified and licensed or compiled, which
could adversely affect our business.
WE MAY BE SUBJECT TO FUTURE PRODUCT LIABILITY CLAIMS AND OUR PRODUCTS'
REPUTATIONS MAY SUFFER.
Many of our installations involve projects that are critical to the
operations of our customers' businesses and provide benefits that may be
difficult to quantify. Any failure in a customer's system could result in a
claim for substantial damages against us, regardless of our responsibility for
the failure. Although our license agreements with our customers typically
contain provisions designed to limit contractually our liability for damages
arising from negligent acts, errors, mistakes or omissions, it is possible that
these provisions will not be enforceable in certain instances or would otherwise
not protect us from liability for damages. Although we maintain general
liability insurance coverage, this coverage may not continue to be available on
reasonable terms or at all, or may be insufficient to cover one or more large
claims.
We have entered into and plan to continue to enter into agreements with
strategic alliance partners whereby we license our software products for
integration with the alliance partners' software. If an alliance partner's
software fails to meet customer expectations or causes a failure in its
customer's systems, the reputation of our software products could be materially
and adversely affected even if our software products performed in accordance
with their functional specifications.
YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS.
We have not experienced any material internal Year 2000 problems to date.
While our software products are not time/date sensitive, many of the third party
software applications run by our customers are time/date sensitive. We have not
been advised of any material Year 2000 problems by our customers to date. We
have, however, in the past resold third party software that may not be Year 2000
compliant. While we have not been made aware of any material Year 2000 problems
relating to the hardware and software used by our customers in connection with
our products to date, these problems may exist. Should any of these problems
develop, they may have a material adverse effect on our business, operating
results and financial condition. In addition, we utilize software, computer
technology and other services internally developed and provided by third party
vendors that may have Year 2000 issues. Although we have not experienced any of
these problems to date, the failure of our internal computing systems or of
systems provided by third party vendors to be Year 2000 compliant could
materially adversely affect our business.
In addition, we believe that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies may still be expending significant resources to correct or patch
their current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase software products such as those
offered by us. Many companies may continue to wait some length of time to assure
that their systems are Year 2000 compliant prior to making commitments to
purchase our products.
If our potential customers delay purchasing or implementing our products in
order to address the Year 2000 issue, our business would be seriously harmed.
Our costs related to Year 2000 compliance, which thus far have not been
material, could ultimately be significant if Year 2000 problems surface. In the
event that we experience disruptions as a result of any Year 2000 problems, our
business could be seriously harmed.
Our insurance coverage may not cover or be adequate to offset these and
other business risks related to the Year 2000.
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OUR EXECUTIVE OFFICERS AND DIRECTORS AND THEIR AFFILIATES OWN A LARGE
PERCENTAGE OF OUR VOTING STOCK AND HAVE THE ABILITY TO INFLUENCE DECISIONS
THAT COULD ADVERSELY AFFECT OUR STOCK PRICE.
Our executive officers, directors and their affiliates own a large
percentage of the outstanding shares of common stock. As a result, these
stockholders are able to substantially influence all matters requiring
stockholder approval and, thereby, our management and affairs. Matters that
require stockholder approval include:
- election of directors;
- certain mergers or consolidations; and
- sale of all or substantially all of our assets.
This concentration of ownership may delay, deter or prevent acts that would
result in a change of control of Bluestone, which in turn could reduce the
market price of our common stock.
OUR CHARTER AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD
DISCOURAGE A TAKEOVER EVEN IF BENEFICIAL TO STOCKHOLDERS.
Our charter and our bylaws, in conjunction with Delaware law, contain
provisions that could make it more difficult for a third party to obtain control
of Bluestone even if doing so would be beneficial to stockholders. For example,
our charter provides for a classified board of directors and allows the board of
directors to expand its size and fill any vacancies without stockholder
approval. In addition, our bylaws restrict the ability of stockholders to call a
special meeting.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
The market price of our common stock could decline as a result of sales by
our existing stockholders or the perception that those sales may occur. These
sales also could make it more difficult for us to raise funds through equity
offerings in the future at a time and at a price that we think is appropriate.
The holders of a significant amount of our common stock, as well as the holders
of outstanding warrants are entitled to registration rights with respect to
their common stock or the common stock underlying their convertible securities.
If these holders, by exercising their registration rights, cause a large number
of securities to be registered and sold in the public market, these sales could
have an adverse effect on the market price for our common stock. If we were to
include, in a registration statement initiated by us, shares held by these
holders pursuant to the exercise of their registration rights, these sales may
have an adverse effect on our ability to raise needed capital.
FORWARD-LOOKING STATEMENTS
Some statements in this report constitute forward-looking statements. Such
statements are identified by the use of words such as "anticipate," "believe,"
"could," "estimate," "expect," "intend," "may," "should," "will," and "would" or
similar expressions. Forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements or those of our customers or our industry to be materially
different from any future results, performance or achievements expressed or
implied by these forward-looking statements. Such factors include those
described above. The forward-looking statements included in this report may
prove to be inaccurate. In light of the significant uncertainties inherent in
these forward-looking statements, you should not consider this information to be
a guarantee by us or any other person that our objectives and plans will be
achieved.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment no. 1 to its
report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, on the 15th day of February, 2000.
<TABLE>
<S> <C> <C>
BLUESTONE SOFTWARE, INC.
By: /s/ S. CRAIG HUKE
-----------------------------------------
S. Craig Huke
Senior Vice President and
Chief Financial Officer
</TABLE>
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