<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission file number: 0-26613
-------------------------------
BLUESTONE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2964141
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
300 STEVENS DRIVE
PHILADELPHIA, PENNSYLVANIA 19113
(Address of principal executive offices, including zip code)
(610) 915-5000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
As of May 2, 2000, there were 20,407,137 shares of the registrant's common
stock outstanding.
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<PAGE>
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
Balance sheets as of March 31, 2000 (unaudited) and December 31, 1999.
Statements of operations (unaudited) for the three months ended March 31, 2000 and 1999.
Statements of cash flows (unaudited) for the three months ended March 31, 2000 and 1999.
Notes to financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Item 5. OTHER INFORMATION.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURE
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLUESTONE SOFTWARE, INC.
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................. $ 192,072 $ 66,160
Marketable securities ...................... 19,504 --
Accounts receivable, net ................... 6,553 4,079
Prepaid expenses and other ................. 2,065 1,043
--------- ---------
Total current assets ......................... 220,194 71,282
Property and equipment, net .................. 2,859 2,495
Other assets ................................. 623 363
--------- ---------
$ 223,676 $ 74,140
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt ......... $ 17 $ 429
Accounts payable .......................... 3,208 2,259
Accrued expenses .......................... 7,033 3,083
Deferred revenues ......................... 3,171 1,966
--------- ---------
Total current liabilities .................... 13,429 7,737
Long-term debt ............................... -- 439
Stockholders' equity (deficit):
Common stock .............................. 20 18
Common stock warrants ..................... 1,205 1,205
Deferred stock-based compensation ......... (1,048) (1,133)
Additional paid-in capital ................ 249,740 100,790
Accumulated deficit ....................... (39,670) (34,916)
--------- ---------
Total stockholders' equity (deficit) ......... 210,247 65,964
--------- ---------
$ 223,676 $ 74,140
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
BLUESTONE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
-------- --------
<S> <C> <C>
Net revenues:
Software license fees ...................... $ 5,002 $ 2,257
Services ................................... 2,269 1,020
-------- --------
Total net revenues ....................... 7,271 3,277
Cost of revenues:
Software license fees ...................... 211 57
Services ................................... 2,760 1,338
-------- --------
Total cost of revenues ................... 2,971 1,395
-------- --------
Gross profit ............................... 4,300 1,882
Operating expenses:
Sales and marketing ........................ 7,422 2,826
Product development ........................ 1,604 904
General and administrative ................. 1,644 635
Amortization of stock-based compensation ... 85 --
-------- --------
Total operating expenses ................. 10,755 4,365
-------- --------
Operating loss ............................. (6,455) (2,483)
Interest income (expense), net ................ 1,701 (48)
-------- --------
Net loss ...................................... (4,754) (2,531)
Accretion of preferred stock redemption value . -- (264)
-------- --------
Net loss available to common stockholders ..... $ (4,754) $ (2,795)
======== ========
Basic and diluted net loss per share:
Net loss ................................... $ (0.25) $ (0.90)
Accretion of preferred stock redemption value -- (0.09)
-------- --------
$ (0.25) $ (0.99)
======== ========
Shares used in computing net loss per share 19,125 2,815
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
BLUESTONE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Operating activities:
Net loss .................................................................. $ (4,754) $ (2,531)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization ........................................ 238 153
Provision for doubtful accounts ...................................... 271 26
Amortization of stock-based compensation ............................. 85 --
Changes in operating assets and liabilities
Accounts receivable ................................................ (2,745) 1,813
Prepaid expenses and other assets .................................. (1,282) (236)
Accounts payable and accrued expenses .............................. 4,911 468
Deferred revenues .................................................. 1,206 (1,532)
--------- ---------
Net cash used in operating activities .......................... (2,070) (1,839)
--------- ---------
Investing activities:
Purchases of property and equipment ....................................... (602) (34)
Purchases of marketable securities ........................................ (19,504) --
--------- ---------
Net cash used in investing activities ......................... (20,106) (34)
--------- ---------
Financing activities:
Repayments of long-term debt .............................................. (851) (31)
Issuance of common stock, net of offering expenses ........................ 145,974 --
Net repayments to related party ........................................... (13) (34)
Proceeds from exercise of common stock options ............................ 2,978 1
--------- ---------
Net cash provided by (used in) financing activities ............ 148,088 (64)
--------- ---------
Net increase (decrease) in cash and cash equivalents ......................... 125,912 (1,937)
Cash and cash equivalents, beginning of period ............................... 66,160 2,535
--------- ---------
Cash and cash equivalents, end of period ..................................... $ 192,072 $ 598
========= =========
Supplemental cash flow information:
Cash paid for interest .................................................... $ 31 $ 148
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
BLUESTONE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
the Company and, in the opinion of management, include all adjustments
(consisting of normal recurring adjustments) necessary for the fair presentation
of results for the interim periods presented. These financial statements and
notes included herein should be read in conjunction with the Company's audited
financial statements and notes for the year ended December 31, 1999 included in
the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire year ending December 31, 2000.
NOTE 2. NET LOSS PER SHARE
The Company follows SFAS No. 128, "Earnings Per Share," which requires
a dual presentation of "basic" and "diluted" earnings per share ("EPS") on the
face of the statements of operations. Basic EPS is computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding for the period. Diluted EPS includes the dilutive effect, if any,
from the potential exercise or conversion of securities like stock options,
which would result in the issuance of additional shares of common stock. For the
three months ended March 31, 2000 and 1999, diluted EPS is equal to basic EPS as
all common stock equivalents were anti-dilutive for all periods presented.
NOTE 3. ACCRUED EXPENSES
Accrued expenses at March 31, 2000 includes $1,546,000 in accrued wages
and $2,142,000 in accrued payroll taxes. Accrued expenses at December 31, 1999
includes $892,000 in accrued wages and $628,000 in accrued payroll taxes.
NOTE 4. PUBLIC OFFERING
On February 22, 2000, the Company completed a public offering of
3,500,000 shares of its common stock. Of the 3,500,000 total shares offered,
1,750,000 shares were offered by the Company and 1,750,000 shares were offered
by certain selling stockholders. The Company received proceeds of $146.0
million, net of underwriting discounts and offering expenses.
NOTE 5. RECENT PRONOUNCEMENTS
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. 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
("AICPA") 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with our
audited Financial Statements and Notes thereto for the year ended December
<PAGE>
31, 1999 included in our Annual Report on Form 10-K that was filed with the
Securities and Exchange Commission on February 15, 2000.
The information in this discussion contains forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements or
industry results to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. Such
factors include those described in "Risk Factors." The forward-looking
statements included in this report may prove to be inaccurate. In light of the
significant uncertainties inherent in these forward-looking statements, you
should not consider this information to be a guarantee by us or any other person
that our objectives and plans will be achieved.
OVERVIEW
We are a leading provider of software for enterprise interaction
management, which enables businesses to extend information over the World
Wide Web in a controlled manner and to support high volumes of users and
interactions. Our flagship product, Sapphire/Web, is a framework for JAVA Web
application servers and is currently in Release 7. 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 December 1999, we released Bluestone Total-e-Business, an
e-business platform that provides the infrastructure, integration, content
management, personalization and e-commerce components that companies utilize
to conduct their businesses on the Internet. In May 2000, Release 7 of
Sapphire/Web was made generally available.
We generate revenue from two principal sources: license fees for our
software products and professional services and support revenue derived from
consulting, training and maintenance services related to our software
products. During the three months ended March 31, 2000, one software license
customer and one services customer individually accounted for greater than
10% of our total revenues. Our top 10 customers represented 77% of total
revenues during the three months ended March 31, 2000. In the future, we
expect to continue to have individual customers account for a significant
portion of our revenues during a given period.
SOFTWARE LICENSE FEES. Typically, our end-user customers pay an
up-front, one-time fee for a perpetual license of our software. The amount of
the fee is generally based on the number of developer seats and server
interactions. Pricing models based on enterprise-wide deployment or the number
of processors are also available. We also sell annual and multi-year licenses to
independent software vendors that allow for the integration of our products into
their software. We generally require a written license contract that typically
provides for payment within 30-90 days of contract signing. Certain multi-year
license contracts contain payment terms that extend beyond one year. Pursuant to
the American Institute of Certified Public Accountants' Statement of Position
97-2, any amounts due under contract beyond one year are not deemed to be fixed
or determinable and therefore are deferred and recognized as revenue when the
payments become due.
Prior to 1998, software licenses were principally the result of direct
sales to end-users. Beginning in 1998, we began to focus on channel sales and
marketing. This has resulted in significant sales of products through
independent software vendors, resellers and systems integrators. We believe that
these alliances have increased our exposure in the marketplace. Furthermore, we
have experienced, and expect to continue to experience, significant variation in
the size of individual licensing transactions, ranging from small sales of
perpetual developer licenses to large, multi-year licensing arrangements with
independent software vendors.
We generally recognize license fee revenue when a formal agreement
exists, delivery of the product has occurred, no production, modification,
customization or implementation obligations remain, the license fee is
<PAGE>
deemed fixed or determinable and collectibility is probable. Revenue from
arrangements with distributors and resellers is not recognized until our product
is delivered to the end-user.
SERVICES REVENUE. Services revenue consists principally of revenue
derived from consulting services provided to customers during implementation and
integration of our software products, training of customers' employees and fees
for ongoing maintenance, which consists of customer technical support services
and unspecified product upgrades/enhancements on a when-and-if-available basis.
Consulting and training services are typically delivered on a time and material
basis. We recognize services revenue as the services are performed. Maintenance
revenue is generally invoiced in advance and is recognized ratably over the term
of the maintenance agreement, which is generally 12 months.
COST OF SOFTWARE LICENSE FEES. Cost of software license fees
consists of the costs associated with the purchase of product CDs and related
documentation and duplication costs. Cost of licenses also includes the cost
of third-party software products embedded in our product offerings.
COST OF SERVICES. Cost of services consist primarily of salary and
benefit costs of our consulting, support and training organizations, as well as
the costs of outside consultants engaged to meet customer demand, and are
expensed when incurred.
SALES AND MARKETING. We license our products primarily through our
indirect channels and direct sales force. Sales and marketing expenses consist
primarily of personnel costs, commissions to employees, office facilities,
travel and promotional events such as trade shows, advertising and public
relations programs.
PRODUCT DEVELOPMENT. We maintain an in-house development staff to
enhance our existing products and to develop new ones. Product development
expenditures are generally charged to operations as incurred. Statement of
Financial Accounting Standards No. 86 requires the capitalization of certain
software development costs subsequent to the establishment of technological
feasibility. We establish technological feasibility upon the completion of a
working model. To date, we have expensed all software development costs due to
the minimal level of development costs incurred subsequent to the establishment
of technological feasibility.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
our personnel and other costs of our corporate, finance, human resources and
information services activities.
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.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
SOFTWARE LICENSE FEES
License fees were $5.0 million and $2.3 million for the three months
ended March 31, 2000 and 1999, respectively. This increase of 121.6% was
primarily due to an increased presence in the market, as well as an increase in
the number of licenses with independent software vendors, which has increased
the amount of license revenue per customer during the first quarter of 2000
versus the same period in 1999.
SERVICES REVENUE
Services revenue was $2.3 million and $1.0 million for the three months
ended March 31, 2000 and 1999, respectively, an increase of 122.5%. Services
revenue increased between the two periods primarily due to two large consulting
engagements performed during the first quarter of 2000.
<PAGE>
GROSS MARGIN-LICENSE FEES
Our license fee gross margin decreased to 95.8% for the three months
ended March 31, 2000 from 97.5% for the same period in 1999. This decrease was
primarily due to an increase in the cost of third-party software products
embedded in our product offerings.
GROSS MARGIN-SERVICES REVENUE
Our services gross margin improved to (21.6)% for the three months
ended March 31, 2000 from (31.2)% for the same period in 1999. Our services
gross margin remained negative in 2000 primarily due to the hiring and training
of additional internal personnel and external consultants to support our growing
installed base of customers and anticipated increases in future revenues, as
well as the training of our existing internal and external consultants on our
Total-e-Business products. Based on our current business plan, we believe that
our services margin will remain negative for the next several quarters as we
continue to add additional personnel. We anticipate that our services margin
will improve and will be approaching a breakeven point during the fourth quarter
of 2000.
SALES AND MARKETING
Sales and marketing expenses were $7.4 million and $2.8 million for the
three months ended March 31, 2000 and 1999, respectively, an increase of 162.6%.
Of this increase, $1.4 million was due to increases in payroll and related
costs, $290,000 in recruiting costs and $380,000 in travel costs as a result of
the growth in the number of sales personnel, $184,000 in rent expense due to the
expansion of our sales offices throughout the United States and Europe, $665,000
was due to increased trade show, direct mail and public relations expenses, and
$430,000 was due to increased commissions expense as a result of higher sales
volume. We also incurred increases in variable marketing expenses due to
increased printing and promotional items, professional fees and advertising
in order to increase market awareness and gain market acceptance of our
products. We have increased our spending on sales and marketing because we
believe that our sales and marketing efforts are essential for us to increase
our market position and our product acceptance. The average number of sales
and marketing employees for the three months ended March 31, 2000 was 94
compared to 51 for the three months ended March 31, 1999. These costs as a
percentage of revenue were 102.1% and 86.2% for the three months ended March
31, 2000 and 1999, respectively.
PRODUCT DEVELOPMENT
Product development expenses were $1.6 million and $904,000 for the
three months ended March 31, 2000 and 1999, respectively, an increase of 77.4%.
These dollar increases were associated with the development and enhancement of
our Sapphire/Web, XML and Bluestone Total-e-Business products and were primarily
due to an increase in payroll and related costs of $480,000. Average development
headcount for the three months ended March 31, 2000 and 1999 was 44 and 27,
respectively. 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 22.1% and 27.6% for the three months ended March
31, 2000 and 1999, respectively.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1.6 million and $635,000 for
the three months ended March 31, 2000 and 1999, respectively, an increase of
158.9%. This increase was primarily due to payroll and related costs resulting
from the addition of personnel to support the growth of our business as well as
increased expenses for recruiting, travel, professional fees and insurance. The
average number of general and administrative employees for the three months
ended March 31, 2000 was 37 compared to 28 for the three months ended March 31,
1999. General and administrative expenses as a percentage of revenue were 22.6%
and 19.4% for the three months ended March 31, 2000 and 1999, respectively.
AMORTIZATION OF STOCK-BASED COMPENSATION
Amortization of stock-based compensation was $85,000 and zero
for the three months ended March 31, 2000 and 1999, respectively.
Deferred compensation of $1.4 million arose due to the issuance
of stock options at exercise prices below the fair market value of
our common stock for accounting purposes relative to the hiring of
<PAGE>
key employees and 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 March 31, 2000, we had an aggregate of $1.0 million of deferred compensation
to be amortized through June 30, 2003.
INTEREST INCOME (EXPENSE), NET
Net interest income was $1.7 million for the three months ended March
31, 2000 and net interest expense was $48,000 for the three months ended March
31, 1999. The additional interest income was due to interest earned on a higher
cash balance during the first quarter of 2000 as compared to the first quarter
of 1999 resulting from $54.8 million of net proceeds generated from our initial
public offering of common stock in September 1999 and $146.0 million of net
proceeds generated from our follow-on public offering in February 2000.
LIQUIDITY AND CAPITAL RESOURCES
In February 2000, we completed our secondary public offering of shares
of our common stock. Of the 3,500,000 total shares offered, 1,750,000 shares
were offered by the Company and 1,750,000 shares were offered by certain selling
stockholders. We realized net proceeds from the offering of $146.0 million. In
September 1999, we completed our initial public offering of 4,000,000 shares of
our common stock, realizing net proceeds of $54.8 million. Prior to these
offerings, we financed our operations and met our capital expenditure
requirements primarily through sales of preferred stock, bank loans, equipment
loans and funds generated from operations. From April 1997 through May 1999, we
raised approximately $41.6 million of venture capital funding in order to expand
the sales and marketing and product development efforts of the business. As of
March 31, 2000 our primary sources of liquidity consisted of cash and cash
equivalents and short term marketable securities totaling approximately $212.0
million and available borrowings under our two revolving lines of credit which
are secured by substantially all of our assets. As of March 31, 2000, we had a
total of $2.0 million of available borrowings under both the $3.0 million and
$500,000 revolving lines of credit. We did not have an outstanding balance on
either line of credit. Borrowings under the $3.0 million revolving line of
credit are subject to a borrowing base of 80% of eligible domestic accounts
receivable and borrowings under the $500,000 revolving line of credit are
subject to a borrowing base of 90% of eligible foreign accounts receivable.
Interest is payable monthly at a rate of prime plus .50% on both lines of
credit.
Net cash used in operating activities was $2.1 and $1.8 million for the
three months ended March 31, 2000 and 1999. Included in net loss for the three
months ended March 31, 2000 were non-cash items as follows: depreciation of
$238,000, provision for doubtful accounts of $271,000 and charges of $85,000 to
operating expense for the issuance of options to purchase common stock that were
issued at an exercise price below fair market value. The cash used in operating
activities in the first quarter of 2000 was attributable primarily to net losses
of $4.8 million, offset by the above non-cash items and changes in operating
assets and liabilities. The cash used in operating activities for the three
months ended March 31, 1999 was attributable primarily to net losses of $2.5
million offset by depreciation expense of $153,000 and provisions for doubtful
accounts of $26,000.
Net cash used in investing activities was $20.1 million and $34,000 for
the three months ended March 31, 2000 and 1999. The cash used in investing
activities for the three months ended March 31, 2000 related primarily to the
purchase of short term marketable securities, as well as the purchase of fixed
assets of $602,000. The cash used in investing activities for the three months
ended March 31, 1999 related to purchases of computers and software for internal
use.
Net cash provided by financing activities was $148.1 million for the
three months ended March 31, 2000. During the three months ended March 31, 2000,
net proceeds of $146.0 million was provided from the public offering of shares
of our common stock. Additionally, we received proceeds of $3.0 million from the
exercise of common stock options and made repayments of $851,000 of long-term
debt. Net cash used in financing activities for the three months ended March 31,
1999 was $64,000. This was primarily due to repayments of long-term debt of
$31,000 and net repayments to a related party of $34,000.
We anticipate that we will continue to expand our sales operations
throughout the U.S. and 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
<PAGE>
offerings. These expenditures will use large amounts of cash. However, we
believe that our existing capital resources are sufficient to meet our capital
requirements for at least the next 12 months.
RISK FACTORS
THIS SECTION HIGHLIGHTS SPECIFIC RISKS WITH RESPECT TO AN INVESTMENT IN
OUR BUSINESS. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. WE
ALSO CAUTION YOU THAT THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS THAT ARE
BASED ON MANAGEMENT'S BELIEFS AND ASSUMPTIONS AND ON INFORMATION CURRENTLY
AVAILABLE TO MANAGEMENT.
WE HAVE HAD RECENT LOSSES AND MAY INCUR FUTURE LOSSES THAT MAY DEPRESS OUR STOCK
PRICE.
We have incurred significant net losses since 1996, including losses of
approximately $11.6 million and $15.1 million for the years ended December 31,
1998 and 1999, respectively and $4.8 million for the three months ended March
31, 2000. Our losses have resulted in an accumulated deficit of approximately
$39.7 million as of March 31, 2000. Any significant shortfall of revenues in
relation to our expectations or any material delay of customer orders would have
an immediate adverse effect on our business, operating results and financial
condition. We may not be profitable in any future period. Our future operating
results will depend on many factors, including:
- the overall growth rate for the markets in which we compete;
- the level of market acceptance of, and demand for, our software
products;
- the level of product and price competition;
- our ability to establish strategic marketing relationships,
develop and market new and enhanced products, and control costs;
- our ability to expand our direct sales force and indirect
distribution channels;
- our ability to integrate acquired businesses and product lines;
- our ability to develop and maintain awareness of our brands; and
- our ability to attract, train and retain consulting, technical and
other key personnel.
LACK OF GROWTH OR DECLINE IN INTERNET USAGE OR THE LACK OF ACCEPTANCE OF
COMMERCE CONDUCTED VIA THE INTERNET COULD BE DETRIMENTAL TO OUR FUTURE OPERATING
RESULTS.
Our products enhance companies' ability to transact business and conduct
operations utilizing the Internet. Therefore, our future sales and any future
profits are substantially dependent upon the widespread acceptance and use of
the Internet as an effective medium of commerce by consumers and businesses.
Rapid growth in the use of the Internet and other online services is a recent
development and we are unsure whether that acceptance and use will continue to
develop or that a sufficiently broad base of consumers will adopt and continue
to use the Internet and other online services as a medium of commerce. To be
successful, we must rely on consumers and businesses, who have historically used
traditional means of commerce to purchase products, accepting and utilizing new
ways of conducting business and exchanging information over the Internet.
In addition, the Internet may not be accepted as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and Web performance improvements. If the Internet
continues to experience significant growth in the number of users, frequency of
use or an increase in bandwidth requirements, the Internet's infrastructure may
not be able to support the demands placed upon it. In addition, the Internet
could lose its viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. If Congress, or other
governing bodies both within
<PAGE>
and outside the United States, decides to alter materially the current approach
to, and level of, regulation of the Internet, we may need to adapt our
technology. Any required adaptation could cause us to spend significant amounts
of time and money. If use of the Internet does not continue to grow or grows
more slowly than expected, if the infrastructure for the Internet does not
effectively support growth that may occur, if government regulations change, or
if the Internet does not become a viable commercial marketplace, our business
could suffer.
WE DEPEND ON OUR SOFTWARE PRODUCTS AND IF THE MARKET FOR THESE PRODUCTS DOES NOT
CONTINUE TO GROW, OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED.
Software license revenues from our software products were $11.7 million
or 74% of total revenues in 1999 and $5.0 million or 69% of total revenues in
the first three months of 2000. We expect to continue to be dependent upon our
software products in the future, and any factor adversely affecting the market
for Web application server and e-business platform software in general, or our
software in particular, would adversely affect our ability to generate revenues.
The market for Web application server and e-business platform software is
competitive, highly fragmented and characterized by rapid technological change.
Our future financial performance will depend in large part on the successful
development, introduction and customer acceptance of our new products and
product enhancements in a timely and cost effective manner. We expect to
continue to commit significant resources to market and further develop our
software products and enhance the brand awareness of our products. The market
for our software may not continue to grow or may grow at a slower rate than we
expect. Furthermore, the market may not accept our products. If this market
fails to grow or grows more slowly than we anticipate, or if the market fails to
accept our products, our business could suffer.
IF THE MARKET'S ACCEPTANCE AND ADOPTION OF JAVA AND XML SERVER TECHNOLOGIES DOES
NOT CONTINUE, OUR FUTURE RESULTS MAY SUFFER.
Our Sapphire/Web product is 100% Pure JAVA. JAVA is a programming
language developed by Sun Microsystems. Therefore, the continued acceptance of
our products in the marketplace depends on JAVA's acceptance as a standard
programming language. If Sun Microsystems were to make significant changes to
the JAVA language or fail to correct defects and limitations in its products,
our ability to continue to improve and ship our products could be impaired. In
the future, our customers may also require the ability to deploy our products on
platforms for which technically acceptable JAVA implementations either do not
exist or are not available on commercially reasonable terms.
In January 1999, we introduced a product based on a document format for
the Web called XML, or extensible mark-up language. We cannot be sure that XML
technology will be adopted as a standard, that XML-based products will achieve
broad market acceptance, that our XML products will be accepted or that other
superior technologies will not be developed. The failure of XML technology to
become a standard or the failure of our XML products to achieve broad acceptance
could adversely affect our ability to generate revenues. The XML server
technology is one of several competing technologies used in information exchange
and Internet commerce. We intend to continue to invest substantial resources in
our XML products.
INTENSE COMPETITION AND INCREASING CONSOLIDATION IN OUR INDUSTRY COULD CREATE
STRONGER COMPETITORS AND HARM OUR BUSINESS.
The market for our products is intensely competitive, highly
fragmented, characterized by rapid technological change and significantly
affected by new product introductions. 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.
<PAGE>
We expect to face increased competition in the future from our current
competitors. In addition, new competitors, or alliances among existing and
future competitors, may emerge and rapidly gain significant market share. We
also may face increased competition from existing large business application
software vendors that may broaden their product offerings to include Web
application server software. Their significant installed customer bases and
abilities to offer a broad solution and price these new products as incremental
add-ons to existing systems could provide them with a significant competitive
advantage.
OUR CUSTOMERS ARE CONCENTRATED AND THE LOSS OF ONE OF OUR LARGEST CUSTOMERS
COULD CAUSE OUR REVENUES TO DROP QUICKLY AND UNEXPECTEDLY.
Our top ten customers for the year ended December 31, 1999 and the
three months ended March 31, 2000 in the aggregate accounted for approximately
56% and 77%, respectively, of our revenues. One customer accounted for more than
10% of our revenues for the year ended December 31, 1999 and two customers
individually accounted for more than 10% of our revenues for the three months
ended March 31, 2000. We expect that a small number of customers will continue
to account for a substantial portion of revenues in any given quarter in the
foreseeable future, although it is unusual for the same customer to account for
a substantial amount of revenues in each of several quarters. As a result, our
inability to secure major customers during a given period or the loss of any one
major customer could cause our revenues to drop quickly and unexpectedly.
IF WE FAIL TO DEVELOP NEW PRODUCTS AND SERVICES IN THE FACE OF OUR INDUSTRY'S
RAPIDLY EVOLVING TECHNOLOGY, OUR FUTURE RESULTS MAY BE ADVERSELY AFFECTED.
Due to the recent emergence of the Internet and the Web as a forum for
conducting business, the market for Web application server systems and
e-business platforms in which we participate is subject to rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards that may render existing products and services obsolete. Our
growth and future operating results will depend in part upon our ability to
enhance existing applications and develop and introduce new applications or
components that:
- meet or exceed technological advances in the marketplace;
- meet changing customer requirements;
- achieve market acceptance;
- integrate successfully with third party software; and
- respond to competitive products.
Our product development and testing efforts have required, and are
expected to continue to require, substantial investment. We may not possess
sufficient resources to continue to make the necessary investments in
technology. In addition, we may not successfully identify new software
opportunities and develop and bring new software to market in a timely and
efficient manner. If we are unable, for technological or other reasons, to
develop and introduce new and enhanced software in a timely manner, we may lose
existing customers and fail to attract new customers, resulting in a decline in
revenues.
OUR STOCK PRICE MAY FLUCTUATE WIDELY.
Prior to our initial public offering in September 1999, there was no
public market for our common stock. Since then, the market price of our common
stock has fluctuated, and it may continue to fluctuate substantially, due to:
- quarterly fluctuations in operating results;
- announcements of new products or product enhancements by us or our
competitors;
- technological innovations by us or our competitors;
<PAGE>
- general market conditions or market conditions specific to our or
our customers' industries; and
- changes in earnings estimates or recommendations by analysts.
Stock prices of Internet-related companies have been highly volatile.
Our current stock price may not be indicative of the price that will prevail in
the trading market. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has at times
been instituted against that company. If we become subject to securities
litigation, we could incur substantial costs and experience a diversion of
management's attention and resources.
THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY ADVERSELY AFFECT THE
TRADING PRICE OF OUR COMMON STOCK.
Quarterly fluctuations in operating results may be caused by:
- changes in the growth rate of Internet usage;
- fluctuations in the demand for our products and services;
- the level of product and price competition in our markets;
- the timing and market acceptance of new product introductions and
upgrades by us or our competitors;
- our success in expanding our customer support and marketing and
sales organizations;
- the size and timing of individual transactions;
- delays in, or cancellations of, customer implementations;
- customers' budget constraints;
- the level of product development expenditures;
- our ability to control costs; and
- general economic conditions.
Many of these factors are not in our control. In addition, we also
experience seasonality which causes us to typically recognize a
disproportionately greater amount of our revenues for any fiscal year in our
fourth quarter and a disproportionately lesser amount in our first quarter, due
largely to sales force quota practices in the software industry and to customer
budgeting processes.
OUR FAILURE TO SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS COULD ADVERSELY AFFECT
OUR BUSINESS.
We intend to acquire complementary product lines, technologies and
businesses as part of our growth strategy. Although we may make such
acquisitions, we may not be able to successfully integrate them with our
business in a timely manner. Our failure to successfully address the risks
associated with such acquisitions, if consummated, could have a material adverse
effect on our business and our ability to develop and market products. The
success of any acquisitions will depend on our ability to:
- successfully integrate and manage the acquired operations;
- retain the key employees of the acquisition targets;
- develop, integrate and market products and product enhancements
based on the acquired products and
<PAGE>
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.
In the first quarter of 2000, we established a U.K. subsidiary and
opened a branch office in London, England. We expect to continue to expand our
international operations and international sales and marketing efforts and
anticipate opening a regional sales and support offices in Asia Pacific by year
end. We have limited experience in marketing, selling and distributing our
products and services internationally. International operations, including
operations in those regions that we are targeting, are subject to the following
risks:
- recessions in foreign economies;
- political and economic instability;
- fluctuations in currency exchange rates;
- difficulties and costs of staffing and managing foreign
operations;
- potentially adverse tax consequences;
- reduced protection for intellectual property rights in some
countries; and
- changes in regulatory requirements.
OUR FAILURE TO MAINTAIN ONGOING SALES THROUGH A LIMITED NUMBER OF INDIRECT
CHANNELS MAY RESULT IN LOWER REVENUES.
We derive a significant portion of our license revenues through a
limited number of independent software vendors, systems integrators,
distributors and resellers. Although we intend to increase our marketing and
direct sales efforts, we expect that a limited number of these indirect channels
will continue to account for a significant portion of our revenues in any given
quarter in the foreseeable future. To be successful, we must continue to foster
and maintain our existing indirect channels, as well as develop new
relationships. The loss of, or reduction in orders through, existing indirect
channels or the failure to develop new indirect channel relationships could
cause our revenues to decline and have a material adverse effect on our
business.
<PAGE>
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 involve a significant commitment of resources by
our customers. A customer's decision to license our software generally involves
the evaluation of the available alternatives by a significant number of
personnel in various functional and geographic areas, each often having specific
and conflicting requirements. Accordingly, we typically must expend substantial
resources educating prospective customers about the value of our software
solutions. For these reasons, the length of time between the date of initial
contact with the potential customer and the execution of a software license
agreement typically ranges from three to six months, and is subject to delays
over which we have little or no control. As a result, our ability to forecast
the timing and amount of specific sales is limited and the delay or failure to
complete one or more large license transactions could cause our operating
results to vary significantly from quarter to quarter.
THE FAILURE TO IMPLEMENT SUCCESSFULLY OUR SOFTWARE PRODUCTS COULD RESULT IN
DISSATISFIED CUSTOMERS AND DECREASED SALES.
Implementation of our software products often involves a significant
commitment of financial and other resources by our customers. The customer's
implementation cycle can be lengthy due to the size and complexity of their
systems and operations. In addition, our customers rely heavily on third party
systems integrators to assist them with the installation of our software. Our
failure or the failure of our alliance partners, our customers or our third
party integrators to implement successfully our software could result in
dissatisfied customers which could adversely affect our reputation.
WE MAY REQUIRE FUTURE ADDITIONAL FUNDING TO STAY IN BUSINESS.
Over time, we may require additional financing for our operations.
Additionally, we periodically review other companies' product lines and
technologies for potential acquisition. Any material acquisitions or joint
ventures could require additional financing. This additional financing may not
be available to us on a timely basis if at all, or, if available, on terms
acceptable to us. Moreover, additional financing may cause dilution to existing
stockholders.
CAPACITY RESTRICTIONS COULD REDUCE THE DEMAND AND UTILITY OF OUR PRODUCTS.
Concurrency restrictions can limit Internet deployment and use
capacity. The boundaries of our Sapphire/Web software, Bluestone XML server and
Bluestone Total-e-Business capacity, in terms of numbers of concurrent users or
interactions, are unknown because, to date, no customer or testing environment
has reached these boundaries. These boundaries may, at some future time, be
reached and, when reached, may be insufficient to enable our customers to
achieve their desired levels of information deployment and exchange. We may lose
customers or fail to gain new customers if any of our products' capacity
boundary limits the ability of our customers to achieve expected levels of
information deployment and exchange or Internet commerce transactions.
<PAGE>
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 resold, and may in the future resell, under
license, certain third party software that enables our software to interact with
other software systems or databases. In addition, we license certain software
technology used to develop our software. The loss or inability to maintain any
of these software licenses could result in delays or reductions in product
shipments until equivalent software could be identified and licensed or
compiled, which could adversely affect our business.
WE MAY BE SUBJECT TO FUTURE PRODUCT LIABILITY CLAIMS AND OUR PRODUCTS'
REPUTATIONS MAY SUFFER.
Many of our installations involve projects that are critical to the
operations of our customers' businesses and provide benefits that may be
difficult to quantify. Any failure in a customer's system could result in a
claim for substantial damages against us, regardless of our responsibility for
the failure. Although our license agreements with our customers typically
contain provisions designed to limit contractually our liability for damages
arising from negligent acts, errors, mistakes or omissions, it is possible that
these provisions will not be enforceable in certain instances or would otherwise
not protect us from liability for damages. Although we maintain general
liability insurance coverage, this coverage may not continue to be available on
reasonable terms or at all, or may be insufficient to cover one or more large
claims.
We have entered into and plan to continue to enter into agreements with
strategic alliance partners whereby we license our software products for
integration with the alliance partners' software. If an alliance partner's
software fails to meet customer expectations or causes a failure in its
customer's systems, the reputation of our software products could be materially
and adversely affected even if our software products performed in accordance
with their functional specifications.
OUR EXECUTIVE OFFICERS AND DIRECTORS AND THEIR AFFILIATES OWN A LARGE PERCENTAGE
OF OUR VOTING STOCK AND WILL HAVE THE ABILITY TO MAKE DECISIONS THAT COULD
ADVERSELY AFFECT OUR STOCK PRICE.
Currently, our executive officers, directors and their affiliates
beneficially own approximately 33% of the outstanding shares of common stock. As
a result, these stockholders are able to control all matters requiring
stockholder approval and, thereby, our management and affairs. Matters that
require stockholder approval include:
- election of directors;
<PAGE>
- 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.
OUR CHARTER AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE
A TAKEOVER EVEN IF BENEFICIAL TO STOCKHOLDERS.
Our charter and our bylaws, in conjunction with Delaware law, contain
provisions that could make it more difficult for a third party to obtain control
of Bluestone even if doing so would be beneficial to stockholders. For example,
our charter provides for a classified board of directors and restricts the
ability of stockholders to call a special meeting. Our bylaws allow the board of
directors to expand its size and fill any vacancies without stockholder
approval.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
The market price of our common stock could decline as a result of sales
by our existing stockholders or the perception that those sales may occur. These
sales could also make it more difficult for us to raise funds through equity
offerings in the future at a time and at a price that we think is appropriate.
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.
YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS.
We have not experienced any material internal Year 2000 problems to
date. While our software products are not time/date sensitive, many of the third
party software applications run by our customers are time/date sensitive. We
have not been advised and are not otherwise aware of any material Year 2000
problems experienced by our customers to date. We have, however, in the past
resold third party software that may not be Year 2000 compliant. While we have
not been made aware of any material Year 2000 problems relating to the hardware
and software used by our customers in connection with our products to date,
these problems may exist. Should any of these problems develop, they may have a
material adverse effect on our business, operating results and financial
condition. In addition, we utilize software, computer technology and other
services internally developed and provided by third party vendors that may have
Year 2000 issues. Although we have not experienced any of these problems to
date, the failure of our internal computing systems or of systems provided by
third party vendors to be Year 2000 compliant could materially adversely affect
our business.
Our costs related to Year 2000 compliance, which thus far have not been
material could ultimately be significant if Year 2000 problems surface. In the
event that we experience disruptions as a result of any Year 2000 problems, our
business could be seriously harmed. Additionally our insurance coverage may not
cover or be adequate to offset these and other business risks related to the
Year 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Until the first quarter of 2000, we developed our products in the U.S.
and 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 first
quarter of 2000, we established a U.K. subsidiary, opened a branch office in
London, England and generated an immaterial amount of revenue from
<PAGE>
that office, which was denominated in U.S. dollars. In the future, we expect to
increase operations in that office and our international operations in general
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(d) Use of Proceeds
On September 23, 1999, the Securities and Exchange Commission declared
effective our registration statement on Form S-1 (File No. 333-82213) relating
to our initial public offering of our common stock. We received net proceeds of
approximately $54.8 million after deducting underwriting discounts and offering
expenses. Although we cannot distinguish the net proceeds from our initial
public offering from the net proceeds from our prior financing activities, the
net proceeds of $146.0 million from our follow-on public offering in February
2000, or other cash on hand at September 30, 1999, we used $6.4 million in cash
for operating activities since September 30, 1999 (approximately the date of
closing of our initial public offering) and believe that approximately 67% of
such amount was used for sales and marketing activities, 16% was used for
product development and 16% was used for general corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On January 31, 2000, we conducted a special meeting of our
stockholders to vote on the following items:
1. The ratification and approval of our 1996 Incentive and
Non-Qualified Stock Option Plan; and
2. The approval of an amendment to our 1996 Incentive and
Non-Qualified Stock Option Plan increasing the number of shares of
common stock reserved for issuance from 3,290,328 to 6,750,000.
Ratification of the 1996 Incentive and Non-Qualified Stock Option Plan
was authorized by the following votes:
12,626,093 FOR 1,785,437 AGAINST 1,856 ABSTAIN
Approval of the amendment was authorized by the following votes:
12,603,663 FOR 1,808,093 AGAINST 1,630 ABSTAIN
ITEM 5. OTHER INFORMATION.
None.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule (in electronic format only).
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLUESTONE SOFTWARE, INC.
Dated: May 15, 2000 By: /s/ S. Craig Huke
-----------------------------
S. Craig Huke
SENIOR VICE-PRESIDENT AND
CHIEF FINANCIAL OFFICER
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