-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HK6rzqMBe3Bff54w2RXPA3mojLTZ//OJMN+mHXT5ODBtfD5B6KkD6YF+7zxg1Aft kZFgzmtVVU9Jw8ct7qWkmA== 0000912057-00-007165.txt : 20000216 0000912057-00-007165.hdr.sgml : 20000216 ACCESSION NUMBER: 0000912057-00-007165 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLUESTONE SOFTWARE INC CENTRAL INDEX KEY: 0001039242 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 222964141 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-26613 FILM NUMBER: 546648 BUSINESS ADDRESS: STREET 1: 1000 BRIGGS RD CITY: MT LAUREL STATE: NJ ZIP: 08054 BUSINESS PHONE: 6097274600 MAIL ADDRESS: STREET 1: 1000 BRIGGS ROAD CITY: MT LAUREL STATE: NJ ZIP: 08054 10-K/A 1 10-K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A AMENDMENT NO. 1 (MARK ONE) /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
Commission file number: 0-26613 ------------------------ BLUESTONE SOFTWARE, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation 22-2964141 or organization) (I.R.S. Employer Identification No.)
300 STEVENS DRIVE PHILADELPHIA, PENNSYLVANIA 19113 (Address of principal executive offices, including zip code) (610) 915-5000 (Registrant's telephone number, including area code) 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 1 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. 2 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.
YEAR ENDED DECEMBER 31, ------------------------------------------ 1997 1998 1999 -------- -------- -------- (AS A PERCENTAGE OF TOTAL REVENUE) 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)%
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. 3 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 4 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. 5 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. 6 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 7 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. 8 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. 9 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. 10 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. 11 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 12 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; 13 - 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 14 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 15 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. 16 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. 17 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. BLUESTONE SOFTWARE, INC. By: /s/ S. CRAIG HUKE ----------------------------------------- S. Craig Huke Senior Vice President and Chief Financial Officer
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