SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
|x| Annual Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the fiscal year ended: Commission File Number:
December 31, 1998 0-25265
| | Transition Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
ALLAIRE CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 41-1830792
(State or other jurisdiction of Incorporation) (IRS employer identification number)
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One Alewife Center
Cambridge, Massachusetts 02140
(Address of principal executive offices)
Telephone No.: (617) 761-2000
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Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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 No X
--- ---
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 the 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. X
---
The aggregate market value of Common Stock held by non-affiliates of the
registrant at March 2, 1999 was $268,792,810 based upon the last reported sales
price of the Common Stock as reported by Nasdaq National Market on such date.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding at March 2, 1999 was 10,875,877.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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Part I
Item 1. Business
Introduction
Allaire Corporation ("Allaire") develops, markets and supports software for a
wide range of Web development, from building static Web pages to developing
high-volume, interactive Web applications. Allaire's products and services
enable organizations to link their information systems to the Web, as well as to
develop new Web-based business applications in areas such as electronic
commerce, content management and personalization. Allaire's products
interoperate with emerging Web application technologies as well as key
enterprise information systems technologies. Allaire's flagship ColdFusion
product line employs an easy to learn software development language that allows
developers to quickly and efficiently create Web applications.
Allaire was incorporated in Minnesota on February 1, 1996 as the successor to a
Minnesota limited liability company and was reincorporated in Delaware on April
25, 1997. In March 1997, Allaire expanded its product offerings by acquiring the
HomeSite HTML design tool through the purchase of substantially all of the
assets of Bradbury Software L.L.C. Allaire's principal executive offices are
located at One Alewife Center, Cambridge, Massachusetts 02140, and the telephone
number at that location is (617) 761-2000.
Industry Background
The Internet has experienced dramatic growth, both in terms of the number of
users and as a means of conducting commercial transactions, and is expected to
continue to grow rapidly. According to a report prepared by International Data
Corporation, or IDC, the number of Internet users has increased from
approximately 14 million in 1995 to approximately 97 million in 1998, and is
expected to more than double over the next three years. The software technology
that has engendered the openness, ubiquity and usability of the Internet and the
World Wide Web provides a powerful business software platform. Web technology
provides an alternative to existing mainstream computing platforms, creates new
opportunities for commerce and information exchange, and represents potential
replacement technology to existing forms of media and communications.
Demand from existing businesses and new Web-based enterprises for Web
application software has created a sizable market experiencing strong growth. In
response to this growth, the number of Web developers is growing quickly. An IDC
report estimates that there were 7 million software developers worldwide at the
end of 1996. Of these, 3 million were rapid application development ("RAD"), 4GL
and analysis modeling and design developers who used tools such as Visual Basic
and PowerBuilder. Allaire believes that many of these developers are converting
from enterprise and client-server application development products to
Internet-centric products. In addition to the migration of these traditional
developers, many other Web developers have emerged from non-traditional
application development backgrounds such as page layout, graphic design, and
desktop database and spreadsheet programming. IDC estimates that professional
Web development tools, including Web page design and Web application development
tools, will account for $548 million in license and associated services revenue
in 1998 and will grow to more than $1.5 billion in license and associated
services revenue by 2002.
Allaire believes that most existing Web-enabled RAD tools fail to address the
unique requirements and challenges faced by Web application developers. Most Web
developers are proficient with Hypertext Markup Language, or HTML, and many are
familiar with eXtensible Markup Language, or XML, which are both core
technologies that are specifically designed for the Web platform. The ease of
using languages such as HTML and XML, which use declarative, English-like tags
consisting of a bracketed word with attributes, has enabled non-traditional
programmers to develop complex Web sites. These technologies enable Web
applications to unite rich content, traditional business transactions,
interactivity and personalization. Because the Web platform is a hybrid between
a communications medium and a traditional application environment, the
background of many developers drawn to Web development is different from the
background of traditional programmers. Web developers rely more heavily on
declarative, tag-based development languages than on traditional scripting
languages.
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A number of the programming languages that have migrated from client-server
development or have emerged for developing Web applications, such as Perl and
JavaScript, however, use a non-declarative scripting syntax. As a result, Web
application developers are faced with the prospect of having to code
simultaneously in unfamiliar scripting languages and declarative, tag-based
languages. At the same time, developers creating Web applications are often
required to integrate a variety of enterprise technologies, such as databases,
directories, messaging servers, transaction monitors and object middleware. Many
of these technologies require the use of complex programming interfaces that are
difficult to learn.
Products
Allaire has two product brands, HomeSite, an HTML design tool, and ColdFusion,
an integrated Web development environment and Web application server product
line. Allaire's products enable Web developers to build high-volume, interactive
Web sites and Web applications, including applications for electronic commerce,
content management and personalization. Allaire introduced versions 4.0 of
ColdFusion and HomeSite in November 1998. The discussion and chart below
describe Allaire's products.
HomeSite
HomeSite is a leading HTML design tool, which is principally used for the
creation of static Web sites. HomeSite 4.0 and earlier versions have won the
following awards:
o 1998 Web Techniques Editors' Choice Award;
o 1998 Win 100 Award from Windows Magazine;
o PC Magazine's Editors' Choice Award;
o Internet Computing Magazine's 'Net Best' Award;
o Webdeveloper.com's Product Award;
o CNET's builder.com Editor's Choice Award;
o CNET's builder.com 1998 Product Award; and
o CNET's Internet Excellence Award.
HomeSite 4.0 runs on Microsoft Windows NT, Windows 95 and Windows 98.
ColdFusion
ColdFusion is a leading cross-platform Web application development system.
ColdFusion includes an integrated development environment, ColdFusion Studio,
and a Web application server, ColdFusion Server. ColdFusion 4.0 and earlier
versions have won the following awards:
o 1998 Codie Award for software excellence from the Software Publishers
Association;
o "Best of the Show Award" at the 1998 Fall Internet World;
o CNET's builder.com 1998 Product Award; and
o Network World Blue Ribbon Award.
ColdFusion Studio is the integrated development environment for ColdFusion.
Based on HomeSite, ColdFusion Studio allows developers to preserve development
skills as well as individual projects as they move from developing static Web
pages and sites to interactive Web sites and Web applications. ColdFusion Studio
4.0 runs on Microsoft Windows NT, Windows 95 and Windows 98.
ColdFusion Server 4.0 is an open, scalable and secure Web application server. A
Web application server is a software program that hosts applications to be
accessed by Web browsers and other client devices and that enables applications
to access enterprise servers and legacy systems. Web applications built with
ColdFusion range from simple, database-driven pages to full electronic commerce
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solutions deployed on intranets, extranets and the Internet. ColdFusion Server
4.0 is available in two editions, Professional and Enterprise, and runs on
Windows NT. The Enterprise edition also runs on Sun Solaris.
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Product
(Suggested List Price) Description Typical Applications Target Users
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HomeSite 4.0 HTML page design and High-quality static Web site developers
(Electronic Version Web site development tool corporate Web sites
$89; Packaged Version Web development
$99) Features an intuitive team managers
graphical interface
ColdFusion An integrated development Business systems (HR, Web application
Studio 4.0 environment with a financial, customer developers
($395) number of visual tools for support)
creating Web applications Enterprise and client-
Electronic commerce server programmers
Includes the award- (stores, business to
winning HomeSite HTML business) HTML and desktop
design tool database developers
Dynamic content
Features include publishing (document Development team
interactive debugging, management, dynamic managers
remote development news and personalized
capabilities and one-step information)
deployment
Collaboration (discussion,
Team development support project and workflow
management)
ColdFusion Server Supports up to four Business intranets and Large enterprises
Professional 4.0 processors and allows an extranets
($1,295) unlimited number of Large systems integrators
concurrent users Field office extranets
New Web-based
Features include open Single server applications businesses
state repository and shared using a relational database
server security Internet service providers
Access to any ODBC and
OLE-DB data source
ColdFusion Server Supports up to eight High-volume, business- Large enterprises
Enterprise 4.0 processors and allows an critical commerce sites
($3,495) unlimited number of and applications Large systems integrators
concurrent users
Enterprise intranet New Web-based
Includes all Professional applications businesses
4.0 features, plus features
required for large scale
Enterprise applications
Internet service providers
applications, including
requiring native database
clustering, load balancing
drivers or CORBA and
automatic fail over and
CORBA support
Sybase, Oracle and
Microsoft SQL Server
native database drivers
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Technology
Allaire's products and services enable Web developers to build high-volume,
interactive Web sites and Web applications, including applications for
electronic commerce, content management and personalization. Allaire's
technology enables organizations to overcome Web development challenges by
making Web developers more productive in developing Web sites and applications,
by enabling Web sites and applications to readily incorporate key emerging Web
platforms and technologies, and by enabling these sites and applications, once
deployed, to be scalable and secure. Allaire intends to continue to introduce
additional innovative products for the development of application frameworks to
accelerate the creation of new Web-based business applications.
Productive Development
Allaire's technology is focused on increasing the productivity of Web developers
and development teams. ColdFusion includes a number of innovative features to
enhance individual and team development productivity, including the easy to use,
tag-based CFML, an integrated development environment and team development
capabilities.
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CFML is Allaire's tag-based server programming language. CFML uses the same tag
and attribute syntax as HTML and XML. HTML is the tag-based markup language used
for creating the majority of static Web pages and interfaces for interactive Web
applications. HTML is easy to learn and use, consisting of a limited number of
descriptive tags, each with a limited number of possible attributes. As a
result, a large number of people have been able to learn and use HTML
professionally to develop static Web pages and Web sites. XML is a rapidly
emerging markup language which uses the same tag and attribute syntax as HTML
for structuring and manipulating data on the Web platform.
Web developers rely more heavily on declarative tag-based development languages
than on traditional scripting languages. A number of the programming languages
that have migrated from client-server development or have emerged for developing
Web applications, such as Perl and JavaScript, however, use a non-declarative
scripting syntax. As a result, Web application developers are faced with the
prospect of having to code simultaneously in unfamiliar scripting languages and
declarative, tag-based languages. At the same time, developers creating Web
applications are often required to integrate a variety of enterprise
technologies, such as databases, directories, messaging servers, transaction
monitors and object middleware. Many of these technologies require the use of
complex programming interfaces that are difficult to learn.
CFML's similarity to HTML and XML makes it easy to learn and use, particularly
for Web developers who are familiar with HTML and are driving the adoption of
XML. When used in conjunction with HTML for creating user interfaces and XML for
data manipulation, CFML provides developers with a complete application
programming environment without requiring them to change programming syntax.
CFML tags also include high-level building blocks that encapsulate complex
processes to reduce programming effort and the amount of code and development
time required for advanced interactions with enterprise servers, such as
database, messaging, directory, Web and file servers.
Allaire's HomeSite 4.0 and ColdFusion 4.0 products provide a visual editing
environment to enable Web developers to quickly build state-of-the-art static
Web sites and interactive Web applications. Both tools provide two-way visual
programming, which enables Web developers to prototype and modify pages from
within a visual representation of the page itself. In addition, ColdFusion
Studio includes visual debugging capabilities. However, unlike the
"what-you-see-is-what-you-get" tools, HomeSite and ColdFusion Studio include
graphical support only where it is likely to enhance productivity. These
products focus on code development and maintaining the integrity of code
generated in the graphical editing mode. HomeSite and ColdFusion Studio both
include a number of additional productivity enhancements, and support emerging
Web technologies, including JavaScript, cascading style sheets, dynamic HTML and
XML. ColdFusion team development features permit geographically dispersed Web
development teams to work together productively and securely on large projects
across servers distributed throughout multiple locations.
Open Integration
Allaire specifically designs its products to be open by supporting key Web
client and Web server software platforms, technologies and protocols, as well as
key enterprise and client-server standards. ColdFusion is fully integrated with
a broad range of Internet protocols and technologies, enabling developers to
incorporate these technologies in ColdFusion applications through the use of
straightforward CFML tags. The CFML tag for XML supports automatic parsing of
XML data into CFML variables and the translation of query record sets into XML.
ColdFusion 4.0 enables interaction with any open database connectivity, or ODBC,
compliant relational database with a single CFQUERY tag. ColdFusion also
contains native database drivers for Oracle, Sybase or Microsoft SQL servers and
support for object linking and embedding database, or OLE-DB, which permits
ColdFusion applications to utilize additional datasource types such as Lotus
Notes and Microsoft Exchange. Additional tags enable interaction with other
servers, such as mail servers, for groupware and workflow applications.
ColdFusion supports a number of methods for extending ColdFusion applications to
interoperate with legacy systems and other enterprise technologies. ColdFusion
natively supports application components built using cross-platform enterprise
component object standards. CFML is also extensible through ColdFusion
extensions, or CFXs. CFXs can be used to extend the functionality provided by
the Allaire's core set of tags or to create a multi-tier component application
architecture in which advanced programmers can encapsulate complex logic or
database interaction into component building blocks to be used by other
developers.
Scalable, Secure Deployment
To successfully support large volume sites and transaction-intensive
applications, a Web application development system requires performance,
availability and scalability from the application server. ColdFusion 4.0
provides a high degree of cross-platform performance and fault-tolerance from
individual servers and multiple server clusters. ColdFusion runs as a 32-bit
multithreaded system service, which permits applications to experience an
increase in processing performance as processors are added to the server.
Clusters of multiple ColdFusion servers significantly enhance an application's
availability and scalability. ColdFusion automatically balances load among
servers deployed in a cluster, so that performance is optimized. ColdFusion
permits a cluster deployment to store client state information in a shared
repository, so it will not be lost when a server fails. If any machine in the
cluster fails or is heavily loaded, ColdFusion automatically transfers its
responsibilities to one of the remaining servers. Because ColdFusion clusters
use a
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software-based system for load balancing and fail-over, there is no single point
of failure.
ColdFusion provides a complete set of features for securely deploying
applications. Principal among these is the ability of ColdFusion to restrict
access to specific resources needed to run an application, including
directories, files, databases and components. Therefore, multiple applications
on the same server cannot access another application's resources. Other security
features include authentication and encryption for commercial Web applications.
Research and Development
Allaire devotes a substantial portion of its resources to developing new
products and product features, extending and improving its products and
technology, and strengthening its technological expertise. During 1996, 1997 and
1998, Allaire spent approximately $873,000, $2.7 million and $4.8 million,
respectively, on research and development. Allaire intends to continue to devote
substantial resources toward research and development. As of December 31, 1998,
Allaire had 31 employees engaged in research and development activities. Allaire
intends to hire additional skilled software engineers to further its research
and development efforts.
Sales, Marketing and Distribution
Allaire markets and sells its products and services to Web developers using a
combination of direct and indirect distribution channels, including a corporate
sales force, domestic and international distribution, electronic commerce and
sales through partners. During 1996, 1997 and 1998, 13%, 28% and 45%,
respectively, of Allaire's total revenue was generated through the indirect
distribution channel. As of December 31, 1998, Allaire had 67 sales and
marketing employees worldwide.
Corporate Sales Force. Allaire's corporate account sales force focuses on sales
to corporate customers worldwide. Corporate account sales can be filled either
directly by Allaire or through its distribution partners. The corporate account
sales force is comprised of field representatives and telesales representatives.
The field representatives market and sell to corporate customers primarily
interested in server products for commercial Web sites or intranets. The
telesales representatives develop and pursue leads generated from inquiries on
Allaire's Web site and from downloads of its application server products.
Indirect Distribution. Allaire has a number of domestic and international
distributors and resellers that market and sell its products. As of December 31,
1998, Allaire had 19 distributors in North America, Europe and Asia Pacific,
including Ingram Micro and Mitsubishi. In addition, as of December 31, 1998,
Allaire had over 500 corporate and catalog resellers, original equipment
manufacturers and value-added resellers. Allaire has an original equipment
manufacturer agreement with Macromedia pursuant to which HomeSite is bundled
with Macromedia's Dreamweaver. Allaire also has an original equipment
manufacturer agreement with NetObjects pursuant to which HomeSite is bundled
with NetObjects Fusion. None of Allaire's distribution partners have exclusive
distribution rights.
Electronic Commerce. Allaire's Web site allows users to download, evaluate and
purchase its products. A number of third-party electronic commerce sites,
including CNET's Buydirect.com, Beyond.com, RealStore.com and JapanMarket.com,
distribute commercial copies of Allaire's products for delivery by direct
download. Electronic distribution provides Allaire with a low-cost, globally
accessible, 24-hour sales channel.
Allaire Alliance. Allaire believes that establishing a large community of active
users of its products and technology representing key segments of the Web
platform is critical to its success. To further the development of this
community, Allaire has established the Allaire Alliance program. Allaire
Alliance members include solution developers, application developers and
Internet service providers. Allaire Alliance members also include the
distributors, corporate and catalog resellers, original equipment manufacturers
and value-added resellers referenced above. Allaire typically enters into
written agreements with its Allaire Alliance members. These agreements typically
do not provide for firm financial commitments from the member, but are intended
to establish the basis upon which the parties will work together to achieve
mutually beneficial objectives.
Marketing Programs. Allaire engages in a broad range of marketing activities,
including sponsoring seminars for potential customers, participating in trade
shows and conferences, providing product information through its Web site,
promoting special events and advertising its products and services in print and
electronic media. During 1998, Allaire held 108 seminars in 46 cities. Allaire's
marketing programs are aimed at informing customers of the capabilities and
benefits of its products and services, increasing brand name awareness and
stimulating demand across all market segments. Certain programs are designed to
encourage independent software developers to develop products and applications
that are compatible with Allaire's products and technology.
Customers
Allaire's products are marketed and distributed to a diverse group of customers,
ranging from small, independent consultants and Internet presence providers to
Web developers and information technology departments of large organizations.
Many of Allaire's customers are global organizations that use its products to
create Web sites and Web applications in areas such as electronic
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commerce, content management and personalization for Internet, intranet and
extranet use.
Revenue from customers outside North America, primarily Asia and Europe, was
approximately 17%, 20% and 13% of total revenue in 1996, 1997 and 1998,
respectively. Sales by Allaire to Ingram Micro accounted for approximately 29%
of Allaire's total revenue for 1998. No single customer accounted for 10% or
more of Allaire's total revenue for 1996 or 1997.
Support and Professional Services
Allaire offers a broad range of support and professional services to its
customers. Allaire believes that providing a high level of customer service and
technical support is necessary to achieve rapid product implementation which, in
turn, is essential to customer satisfaction and continued license sales and
revenue growth. Allaire's customers have a choice of support options depending
on the level of service desired. Allaire maintains a technical support hotline
staffed by engineers from 8:00 a.m. to 8:00 p.m., Eastern time, Monday through
Friday, from its corporate office in Cambridge, Massachusetts. Internationally,
distribution partners provide telephone support to customers with technical
assistance from Allaire. Allaire's support staff also responds to e-mail
inquiries. Allaire tracks support requests through a series of customer
databases, including current status reports and historical customer interaction
logs. Allaire uses customer feedback as a source of ideas for product
improvements and enhancements. Allaire also provides training and consulting to
assist its customers in the use of its products. As of December 31, 1998,
Allaire had 27 technical support engineers and professional services employees.
Competition
The Web development products market is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other
activities of market participants. Primary competitors include large Web and
database platform companies that offer a variety of software products, such as
Microsoft, IBM, Netscape, Sun Microsystems, Oracle, Sybase, Symantec, Informix
and Inprise Corporation (formerly Borland). In addition, Allaire experiences
competition from a number of medium-sized and start-up companies that have
introduced or are developing Web development products, such as NetDynamics,
which was recently acquired by Sun Microsystems, Vignette Corporation, HAHT
Software, GoLive Systems, WebLogic, which was recently acquired by BEA Systems,
BroadVision and SilverStream Software. In addition, Allaire has strategic
relationships with NetObjects and Macromedia. In some cases, these Web
development products vendors compete with Allaire, and there can be no assurance
that these strategic relationships will continue.
Allaire believes that additional competitors may enter the market with competing
products as the size and visibility of the market opportunity increases.
Increased competition could result in pricing pressures, reduced margins or the
failure of Allaire's products to achieve or maintain market acceptance, any of
which could have a material adverse effect on Allaire's business, operating
results and financial condition. Many of Allaire's current and potential
competitors have longer operating histories and substantially greater financial,
technical, marketing and other resources than Allaire. Therefore, they may be
able to respond more quickly than Allaire to new or changing opportunities,
technologies, standards or customer requirements. Many of these competitors also
have broader and more established distribution channels that may be used to
deliver competing products directly to customers through bundling or other
means. If competitors were to bundle competing products with their products, the
demand for Allaire's products might be substantially reduced and the ability of
Allaire to distribute its products successfully would be substantially
diminished.
Competitive factors in the Web development products market include:
o the quality and reliability of software;
o features for creating, editing and adapting content;
o ease of use and interactive user features;
o application server scalability, availability and performance;
o cost per user; and
o compatibility with the user's existing network components and software
systems.
To expand its user base and further enhance the user experience, Allaire must
continue to innovate and improve the performance of its products. Allaire
anticipates that consolidation will continue in the Web development products
industry and related industries such as computer software, media and
communications. Consequently, competitors may be acquired by, receive
investments from or enter into other commercial relationships with, larger,
well-established and well-financed companies. There can be no assurance that
Allaire can establish or sustain a leadership position in this market.
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Intellectual Property
Allaire's success and competitiveness are dependent to a significant degree on
the protection of its proprietary technology. Allaire relies primarily on a
combination of copyrights, trademarks, licenses, trade secret laws and
restrictions on disclosure to protect its intellectual property and trade
secrets. Allaire also enters into confidentiality agreements with its employees
and consultants, and generally controls access to and distribution of its
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise attain and use Allaire's
intellectual property or trade secrets without authorization. In addition,
Allaire relies in part on "shrinkwrap" and "clickwrap" licenses that are not
signed by the end user and, therefore, may be unenforceable under the laws of
certain jurisdictions. There can be no assurance that the precautions taken by
Allaire will prevent misappropriation or infringement of its technology. In
addition, there can be no assurance that others will not independently develop
substantially equivalent intellectual property. A failure by Allaire to protect
its intellectual property in a meaningful manner could have a material adverse
effect on Allaire's business, operating results and financial condition.
In addition, the laws of some foreign countries do not protect Allaire's
proprietary rights to the same extent as do the laws of the United States, and
effective patent, copyright, trademark and trade secret protection may not be
available in such jurisdictions. Allaire licenses certain of its proprietary
rights to third parties, and there can be no assurance that such licensees will
not fail to abide by compliance and quality control guidelines with respect to
such proprietary rights or take actions that would materially adversely affect
Allaire's business, operating results and financial condition.
Litigation may be necessary in the future to enforce Allaire's intellectual
property rights, to protect Allaire's trade secrets or to determine the validity
and scope of the proprietary rights of others. Such litigation, whether
successful or unsuccessful, could result in substantial costs and diversion of
management and technical resources, either of which could have a material
adverse effect on Allaire's business, operating results and financial condition.
Allaire attempts to avoid infringing known proprietary rights of third parties
in its product development efforts. However, Allaire has not conducted and does
not conduct comprehensive patent searches to determine whether the technology
used in its products infringes patents held by third parties. In addition,
product development is inherently uncertain in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies. If
Allaire were to discover that its products violated third party proprietary
rights, there can be no assurance that it would be able to obtain licenses to
continue offering such products without substantial reengineering or that any
effort to undertake such reengineering would be successful, or that any licenses
would be available on commercially reasonable terms.
Allaire pursues the registration of certain of its trademarks and service marks
in the United States and in certain other countries, although it has not secured
registration of all its marks. Allaire has registered United States trademarks
for "Cold Fusion" and a related design, and has an application pending for a
United States trademark for "HomeSite." A significant portion of Allaire's marks
contain the word "Fusion" (such as ColdFusion). Allaire is aware of other
companies that use "Fusion" in their marks alone or in combination with other
words, and Allaire does not expect to be able to prevent third party uses of the
word "Fusion" for competing goods and services. For example, NetObjects markets
its principal products for designing, building and updating Web sites under the
names "NetObjects Fusion" and "NetObjects Team Fusion."
Allaire currently licenses technology from third parties that it incorporates
into its products. Examples include licenses for the following:
o visual editing technology from Microsoft;
o load balancing and failover technology from Bright Tiger Technologies;
o security technology from Netegrity; and
o full-text indexing and searching technology from Verity.
In light of the rapidly evolving nature of the Web platform and Allaire's
strategy to pursue industry partnerships to ensure its support of and by the
emerging platform, Allaire expects that it will increasingly need to rely on
technology that it licenses from other vendors which is integrated with
internally developed software and used in Allaire's products to perform key
functions.
Employees
As of December 31, 1998, Allaire had 165 employees, 148 of whom were based at
Allaire's headquarters in Cambridge, Massachusetts. None of Allaire's employees
is subject to a collective bargaining agreement. Allaire believes that its
relations with its employees are good.
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Item 1A. Risk Factors
Allaire has a limited operating history on which to evaluate its prospects
Allaire commenced operations in May 1995 and recorded its first revenue upon
delivery of ColdFusion 1.5 to customers in February 1996. Accordingly, Allaire
has only a limited operating history on which to base an evaluation of Allaire's
business and prospects. In addition, Allaire's prospects must be considered in
light of the risks and uncertainties encountered by companies in an early stage
of development in new and rapidly evolving markets.
Allaire may not be profitable in the future
Since Allaire began operations, it has incurred substantial net losses in every
fiscal period. Allaire cannot be certain when it will become profitable, if at
all. Failure to achieve profitability may adversely affect the market price of
Allaire's common stock. In 1998, Allaire had a net loss of $10.8 million. As a
result of accumulated operating losses, at December 31, 1998, Allaire had an
accumulated deficit of $20.2 million. Allaire has generated relatively small
amounts of revenue until recent fiscal quarters, while increasing expenditures
in all areas, particularly in research and development and sales and marketing,
in order to execute its business plan. Although Allaire has experienced revenue
growth in recent periods, the growth has been off of a small base, and it is
unlikely that such growth rates are sustainable.
Allaire's quarterly results may fluctuate
Allaire's quarterly revenue and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If Allaire's quarterly
revenue or operating results fall below the expectations of investors or public
market analysts, the price of its common stock could fall substantially.
Allaire's quarterly revenue may fluctuate for several reasons, including the
following:
o the market for Web development products is in an early stage of development
and it is therefore difficult to accurately predict customer demand; and
o the sales cycle for Allaire's products and services varies substantially
from customer to customer and, if Allaire's average sales price increases
as expected, Allaire expects the sales cycle to lengthen. As a
result, Allaire has difficulty determining whether and when it will receive
license revenue from a particular customer.
In addition, because Allaire's revenue from training services is largely
correlated with Allaire's license revenue, a decline in license revenue could
also cause a decline in Allaire's services revenue in the same quarter or in
subsequent quarters. Other factors, many of which are outside Allaire's control,
could also cause variations in Allaire's quarterly revenue and operating
results.
Most of Allaire's expenses, such as employee compensation and rent, are
relatively fixed. Moreover, Allaire's expense levels are based, in part, on
Allaire's expectations regarding future revenue increases. As a result, any
shortfall in revenue in relation to Allaire's expectations could cause
significant changes in Allaire's operating results from quarter to quarter and
could result in quarterly losses.
The development of a market for Allaire's products is uncertain
If the market for Web development products does not grow at a significant rate,
Allaire's business, operating results and financial condition will be materially
adversely affected. Web technology has been used widely for only a short time,
and the market for Web development products is new and rapidly evolving. As is
typical for new and rapidly evolving industries, demand for recently introduced
products is highly uncertain.
Allaire's performance will depend on the growth and commercial acceptance of the
Internet
Allaire's future success will depend substantially upon the widespread adoption
of the Internet as a primary medium for commerce and business applications. If
the Internet does not become a viable and substantial commercial medium,
Allaire's business, operating results and financial condition will be materially
adversely affected. The Internet has experienced, and is expected to continue to
experience, significant user and traffic growth, which has, at times, caused
user frustration with slow access and download times. The Internet
infrastructure may not be able to support the demands placed on it by continued
growth. Moreover, critical issues concerning the commercial use of the Internet,
such as security, reliability, cost, accessibility and quality of service,
remain unresolved and may negatively affect the growth of Internet use or the
attractiveness of commerce and business communication on the Internet. In
addition, the Internet could lose its viability due to delays in the development
or adoption of new standards and protocols to handle increased activity or due
to increased government regulation and taxation of Internet commerce.
9
<PAGE>
Allaire competes with Microsoft while simultaneously supporting Microsoft
technologies
Allaire currently competes with Microsoft in the market for Web development
products while simultaneously maintaining a working relationship with Microsoft.
Microsoft has a longer operating history, a larger installed base of customers
and substantially greater financial, distribution, marketing and technical
resources than Allaire. As a result, Allaire may not be able to compete
effectively with Microsoft now or in the future, and Allaire's business,
operating results and financial condition may be materially adversely affected.
Allaire expects that Microsoft's commitment to and presence in the Web
development products market will substantially increase competitive pressure in
the market. Allaire believes that Microsoft will continue to incorporate Web
application server technology into its operating system software and certain of
its server software offerings, possibly at no additional cost to its users.
Allaire believes that it must maintain a working relationship with Microsoft to
achieve success. Most of Allaire's customers use Microsoft-based operating
platforms, so it is critical to Allaire's success that Allaire's products be
closely integrated with Microsoft technologies. Notwithstanding Allaire's
historical and current support of the Microsoft platform, Microsoft may in the
future promote technologies and standards more directly competitive with or not
compatible with Allaire's technology.
Allaire faces significant competition from other technology companies
The Web development products market is intensely competitive. Many of Allaire's
current and potential competitors have longer operating histories and
substantially greater financial, technical, marketing, distribution and other
resources than Allaire does and therefore may be able to respond more quickly
than Allaire can to new or changing opportunities, technologies, standards or
customer requirements. In addition to Microsoft, Allaire competes with other
large Web and database platform companies that offer a variety of software
products. Allaire also competes with a number of medium-sized and start-up
companies that have introduced or that are developing Web development products.
In addition, Allaire has strategic relationships with NetObjects, a
majority-owned subsidiary of IBM, and Macromedia. In some cases, these vendors
compete with Allaire, and there can be no assurance that these strategic
relationships will continue.
Allaire expects that additional competitors will enter the market with competing
products as the size and visibility of the market opportunity increases.
Increased competition could result in pricing pressures, reduced margins or the
failure of Allaire's products to achieve or maintain market acceptance.
If, in the future, a competitor chooses to bundle a competing Web development
product with other products, the demand for Allaire's products might be
substantially reduced. In addition, new technologies will likely increase the
competitive pressures that Allaire faces. The development of competing
technologies by market participants or the emergence of new industry standards
may adversely affect Allaire's competitive position. As a result of these and
other factors, Allaire may not be able to compete effectively with current or
future competitors, which would have a material adverse effect on Allaire's
business, operating results and financial condition.
Allaire's success depends on its ability to expand its sales force and
distribution channels
To increase Allaire's revenue, Allaire must increase the size of its sales force
and the number of its indirect channel partners, including original equipment
manufacturers, value-added resellers and systems integrators. A failure to do so
could have a material adverse effect on Allaire's business, operating results
and financial condition. There is intense competition for sales personnel in
Allaire's business, and there can be no assurance that Allaire will be
successful in attracting, integrating, motivating and retaining new sales
personnel. Allaire's existing or future channel partners may choose to devote
greater resources to marketing and supporting the products of other companies.
In addition, Allaire will need to resolve potential conflicts among its sales
force and channel partners.
Allaire's success depends on ongoing sales through a limited number of
distributors
Allaire derives a substantial portion of its revenue from a limited number of
distributors. For 1998, revenue from Allaire's indirect distribution channel
accounted for approximately 45% of Allaire's total revenue, and one distributor,
Ingram Micro, accounted for approximately 29% of Allaire's total revenue. The
loss of, or a reduction in orders from, Ingram Micro or any other significant
distributor could have a material adverse effect on Allaire's business,
operating results and financial condition. Because Allaire does not deal
directly with end users when selling through distributors, Allaire is dependent
upon the ability of distributors to accurately forecast demand and maintain
appropriate levels of inventory. If a distributor purchases excess product,
Allaire may be obligated to accept the return of some products.
Allaire may experience lost or delayed sales as its sales cycle lengthens
A longer sales cycle reduces Allaire's ability to forecast revenue levels. Any
delay or loss in sales of Allaire's products could have a material adverse
effect on Allaire's business, operating results and financial condition, and
could cause its operating results to vary
10
<PAGE>
significantly from quarter to quarter. As Allaire increases its marketing focus
on larger purchases by larger customers, Allaire expects that increased
executive-level involvement of information technology officers and other senior
managers of Allaire's customers will occur. Potential large sales may be
delayed, or lost altogether, because Allaire will have to provide a more
comprehensive education to prospective customers regarding the use and benefits
of Allaire's products. Allaire's customers' purchase decisions may be subject to
delays over which Allaire may have little or no control, including budgeting
constraints, internal purchase approval review procedures and the inclusion or
exclusion of Allaire's products on customers' approved standards list.
Allaire's performance will depend on continued market acceptance of its products
If Allaire's products do not continue to satisfy the Web developer community or
otherwise fail to sustain sufficient market acceptance, its business, operating
results and financial condition would be materially adversely affected. Allaire
believes that a significant contributing factor to Allaire's initial growth has
been its ability to create and maintain strong relationships with the community
of Web developers that initially adopted Allaire's products. This community of
early adopters demands rapid improvements in the performance, features and
reliability of Allaire's products, as well as a high level of customer service.
Due in part to the emerging nature of the Web development products market and
the substantial resources available to many market participants, Allaire
believes there is a time-limited opportunity to achieve and maintain market
share in the Web development products market.
Allaire's efforts to develop brand awareness may be unsuccessful
Allaire believes that developing and maintaining awareness of the "Allaire,"
"ColdFusion" and "HomeSite" brand names is critical to achieving widespread
acceptance of Allaire's products. If Allaire fails to promote and maintain its
brands or incurs significant related expenses, Allaire's business, operating
results and financial condition could be materially adversely affected. To
promote its brands, Allaire may find it necessary to increase its marketing
budget or otherwise increase its financial commitment to creating and
maintaining brand awareness among potential customers. Although Allaire has
obtained a United States registration of the trademark "Cold Fusion," Allaire is
aware of other companies, including competitors, that use the word "Fusion" in
their marks alone or in combination with other words, and Allaire does not
expect to be able to prevent third party uses of the word "Fusion" for competing
goods and services. For example, NetObjects markets its principal products for
designing, building and updating Web sites under the names "NetObjects Fusion"
and "NetObjects Team Fusion." Competitors that use marks that are similar to
Allaire's brand names may cause confusion among actual and potential customers,
which could prevent Allaire from achieving significant brand recognition.
Allaire's performance depends on the success of ColdFusion and HomeSite
Allaire derives almost all of its revenue from licenses of Allaire's ColdFusion
and HomeSite software products and related services. Any competitive pressures
or other factors that adversely affect market acceptance of ColdFusion or
HomeSite software would have a material adverse effect on Allaire's business,
operating results and financial condition.
Allaire's future success will depend on Allaire's ability to enhance existing
products and develop new products
To be competitive, Allaire must develop and introduce product enhancements and
new products which increase Allaire's customers' ability to build and deploy Web
applications. In the past, Allaire has been forced to delay introduction of
several new products. If Allaire fails to develop and introduce new products and
enhancements successfully and on a timely basis, it could have a material
adverse effect on Allaire's business, operating results and financial condition.
The emerging nature of the Web development products market requires that Allaire
continually improve the performance, features and reliability of Allaire's
products, particularly in response to competitive offerings and evolving
customer needs. Allaire must also introduce enhancements to existing products as
quickly as possible and prior to the introduction of competing products.
Allaire depends on third parties for technology in its products
Allaire licenses technology that is incorporated into Allaire's products from
third parties. The loss of access to such technology could result in delays in
Allaire's development and introduction of new products or enhancements until
equivalent or replacement technology could be accessed, if available, or
developed internally, if feasible. These delays could have a material adverse
effect on Allaire's business, operating results and financial condition. In
light of the rapidly evolving nature of Web technology and Allaire's strategy to
pursue industry partnerships, Allaire believes that it will increasingly need to
rely on technology from third party vendors, such as Microsoft, which may also
be competitors. There can be no assurance that technology from others will
continue to be available to Allaire on commercially reasonable terms, if at all.
Moreover, although Allaire is generally indemnified against claims that such
third party technology infringes the proprietary rights of others, such
indemnification is not always available for all types of intellectual property
rights (for example, patents may be excluded) and in some cases the scope of
such indemnification is limited. Even if Allaire receives broad indemnification,
third party indemnitors are not always well capitalized and may not be able to
indemnify Allaire in the event of infringement, resulting in substantial
exposure to Allaire. There can be no assurance that infringement or invalidity
claims arising from the incorporation of third party technology,
11
<PAGE>
and claims for indemnification from Allaire's customers resulting from such
claims, will not be asserted or prosecuted against Allaire. Such claims, even if
not meritorious, could result in the expenditure of significant financial and
managerial resources in addition to potential product redevelopment costs and
delays, all of which could materially adversely affect Allaire's business,
operating results and financial condition.
Allaire may have difficulty managing its growth
Allaire has been experiencing a period of rapid growth that has been placing a
significant strain on all of Allaire's resources. Allaire's 1998 fourth quarter
revenue is more than double that of the fourth quarter of 1997. During the year
ended December 31, 1998, the number of Allaire's employees increased from 95 to
165. To manage future growth effectively Allaire must maintain and enhance its
financial and accounting systems and controls, integrate new personnel and
manage expanded operations. Any failure to do so could have a material adverse
effect on the quality of Allaire's products, Allaire's ability to retain key
personnel and Allaire's business, operating results and financial condition.
Allaire is dependent on Joseph Allaire and David Orfao
Allaire's future success depends to a significant degree on the skills,
experience and efforts of Joseph J. Allaire, Allaire's founder, Chairman of the
Board, Chief Technology Officer and Executive Vice President, and David J.
Orfao, Allaire's President and Chief Executive Officer. The loss of the services
of Mr. Allaire or Mr. Orfao could have a material adverse effect on Allaire's
business, operating results and financial condition. Allaire also depends on the
ability of its executive officers and other members of senior management to work
effectively as a team. Allaire does not have employment agreements with any of
its executive officers, and does not have any key person life insurance other
than for Mr. Allaire and Mr. Orfao.
Allaire must hire and retain skilled personnel in a tight labor market
Qualified personnel are in great demand throughout the software industry.
Allaire's success depends in large part upon Allaire's ability to attract,
train, motivate and retain highly skilled employees, particularly sales and
marketing personnel, software engineers and other senior personnel. Allaire's
failure to attract and retain the highly trained technical personnel that are
integral to its direct sales, product development, service and support teams may
limit the rate at which Allaire can generate sales and develop new products or
product enhancements. This could have a material adverse effect on Allaire's
business, operating results and financial condition.
Allaire's success depends on its ability to protect its proprietary technology
Allaire's success depends to a significant degree upon the protection of its
software and other proprietary technology. The unauthorized reproduction or
other misappropriation of Allaire's proprietary technology could enable third
parties to benefit from Allaire's technology without paying Allaire for it. This
could have a material adverse effect on Allaire's business, operating results
and financial condition.
Although Allaire has taken steps to protect its proprietary technology, they may
be inadequate. Existing trade secret, copyright and trademark laws offer only
limited protection. In addition, Allaire relys in part on "shrinkwrap" and
"clickwrap" licenses that are not signed by the end user and, therefore, may be
unenforceable under the laws of certain jurisdictions. Moreover, the laws of
other countries in which Allaire markets its products may afford little or no
effective protection of Allaire's intellectual property.
If Allaire resorts to legal proceedings to enforce its intellectual property
rights, the proceedings could be burdensome and expensive and could involve a
high degree of risk.
Other companies may claim that Allaire infringes their proprietary technology
Although Allaire attempts to avoid infringing known proprietary rights of third
parties, Allaire is subject to the risk of claims alleging infringement of third
party proprietary rights. If Allaire were to discover that any of its products
violated third party proprietary rights, there can be no assurance that Allaire
would be able to obtain licenses on commercially reasonable terms to continue
offering the product without substantial reengineering or that any effort to
undertake such reengineering would be successful. Allaire does not conduct
comprehensive patent searches to determine whether the technology used in its
products infringes patents held by third parties. In addition, product
development is inherently uncertain in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies.
Any claim of infringement could cause Allaire to incur substantial costs
defending against the claim, even if the claim is invalid, and could distract
Allaire's management from Allaire's business. Furthermore, a party making such a
claim could secure a judgment that requires Allaire to pay substantial damages.
A judgment could also include an injunction or other court order that could
prevent Allaire from selling its products. Any of these events could have a
material adverse effect on Allaire's business, operating results and financial
condition.
12
<PAGE>
Allaire's business could be adversely affected if Allaire's products contain
errors
Software products as complex as Allaire's may contain undetected errors or
"bugs," which result in product failures. The occurrence of errors could result
in loss of or delay in revenue, loss of market share, failure to achieve market
acceptance, diversion of development resources, injury to Allaire's reputation,
or damage to Allaire's efforts to build brand awareness, any of which could have
a material adverse effect on Allaire's business, operating results and financial
condition.
Allaire could be subject to product liability claims relating to its customers'
critical business operations
Many of the Web applications developed and deployed with Allaire's products are
critical to the operations of Allaire's customers' businesses. Any failure in a
customer's Web application could result in a claim for substantial damages
against Allaire, regardless of Allaire's responsibility for such failure.
Although Allaire maintains general liability insurance, including coverage for
errors and omissions, there can be no assurance that such coverage will continue
to be available on reasonable terms or will be available in amounts sufficient
to cover one or more large claims, or that the insurer will not disclaim
coverage as to any future claim.
Allaire may be subject to risks associated with future acquisitions
From time to time, Allaire may pursue acquisitions to obtain complementary
products, services and technologies. An acquisition may not produce the revenue,
earnings or business synergies that Allaire anticipated, and an acquired
product, service or technology might not perform as Allaire expected. If Allaire
pursues any acquisition, Allaire's management could spend a significant amount
of time and effort in identifying and completing the acquisition. If it
completes an acquisition, Allaire would probably have to devote a significant
amount of management resources to integrating the acquired business with
Allaire's existing business.
To pay for an acquisition, Allaire might use capital stock or cash, including
proceeds of the initial public offering. Alternatively, Allaire might borrow
money from a bank or other lender. If Allaire uses capital stock, Allaire's
stockholders would experience dilution of their ownership interests. If Allaire
uses cash or debt financing, Allaire's financial liquidity will be reduced.
Allaire may be affected by unexpected Year 2000 problems
Many existing computer systems and software products do not properly recognize
dates after December 31, 1999. This "Year 2000" problem could result in
miscalculations, data corruption, system failures or disruptions of operations.
Allaire is subject to potential Year 2000 problems affecting its products,
internal systems and the systems of its vendors and distributors, any of which
could have a material adverse effect on Allaire's business, operating results
and financial condition.
Because ColdFusion does not involve data storage, the ability of a Web
application built with ColdFusion to comply with Year 2000 requirements is
largely dependent on whether the database underlying the application is Year
2000 compliant. Therefore, there can be no assurance that Web applications
developed using Allaire's products will comply with Year 2000 requirements. For
example, if ColdFusion is connected to a database that is not Year 2000
compliant, the information received by a ColdFusion application may be
incorrect.
Changing purchasing patterns of customers impacted by Year 2000 issues may
result in reduced funds available for Web development activities.
In addition, there can be no assurance that Year 2000 errors or defects will not
be discovered in Allaire's internal software systems and, if such errors or
defects are discovered, there can be no assurance that the costs of making such
systems Year 2000 compliant will not be material.
Year 2000 errors or defects in the internal systems maintained by Allaire's
vendors or distributors could require Allaire to incur significant unanticipated
expenses to remedy any problems or replace affected vendors and could reduce
Allaire's revenue from its indirect distribution channel.
Allaire's existing stockholders will exercise significant control over Allaire
Allaire's officers, directors and greater than 10 percent stockholders together
control approximately 49% of the outstanding common stock. As a result, these
stockholders, if they act together, are able to influence Allaire's management
and affairs and all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing a
change in control of Allaire and might affect the market price of the common
stock.
Certain provisions of Allaire's charter and of Delaware law make a takeover of
Allaire more difficult
Allaire's corporate documents and Delaware law contain provisions that might
enable its management to resist a takeover of Allaire. These provisions might
discourage, delay or prevent a change in the control of Allaire or a change in
Allaire's management. These provisions could also discourage proxy contests and
make it more difficult for stockholders to elect directors and take other
corporate actions. The existence of these provisions could limit the price that
investors might be willing to pay in the future for shares of common stock.
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<PAGE>
Future sales by existing security holders could depress the market price of the
common stock
Immediately after the initial public offering in January 1999, the public market
for the common stock included only the 2,875,000 shares that Allaire sold in the
offering. At that time, there were an additional 7,958,260 shares of common
stock outstanding. The persons that hold these shares are able to sell some of
them in the public market following the offering. If these stockholders sell a
large number of shares, the market price of the common stock could decline
significantly. Moreover, the perception in the public market that these
stockholders might sell shares of common stock could depress the market price of
the common stock.
Of the 7,958,260 additional shares held by Allaire's existing stockholders,
7,860,524 shares are subject to "lock-up" agreements with the representatives of
the underwriters. When the 180-day "lock-up" period expires (or earlier with the
consent of Credit Suisse First Boston), Allaire's existing stockholders and
optionholders will be able to sell approximately an additional 7,525,000 shares
in the public market.
Some of Allaire's existing stockholders have the right to force Allaire to
register their shares of common stock with the Securities and Exchange
Commission. If Allaire registers their shares of common stock, they can sell
those shares in the public market.
Allaire intends to register approximately 4,986,000 shares of common stock that
Allaire has issued or may issue under Allaire's stock plans. Once Allaire
registers these shares, they can be sold in the public market upon issuance,
subject to the "lock-up" agreements described above.
Allaire will have broad discretion in using the proceeds from the initial
public offering
Allaire has not identified specific uses for the proceeds from the offering, and
Allaire will have broad discretion in how it uses them. Investors will not have
the opportunity to evaluate the economic, financial or other information on
which Allaire bases its decisions on how to use the proceeds.
Investors will be subject to market risks
The stock market in general has recently experienced extreme price and volume
fluctuations. The market prices of securities of technology companies,
particularly Internet-related companies, have been extremely volatile, and have
experienced fluctuations that have often been unrelated or disproportionate to
the operating performance of such companies. These broad market fluctuations
could adversely affect the market price of the common stock.
Recently, when the market price of a stock has been volatile, holders of that
stock have often instituted securities class action litigation against the
company that issued the stock. If any of Allaire's stockholders brought such a
lawsuit against Allaire, Allaire could incur substantial costs defending the
lawsuit. The lawsuit could also divert the time and attention of Allaire
management.
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Item 2. Properties
Allaire's headquarters is located in Cambridge, Massachusetts. Allaire has two
leases for approximately 79,000 square feet of space in separate office
buildings in Cambridge. The first lease, which covers approximately 54,000
square feet of space, expires in March 2003. The second lease, which covers
approximately 25,000 square feet of space, expires in December 2003. Allaire
currently intends to sublet or locate a new tenant for the 25,000 square feet of
space under the second lease. Allaire also leases office space in other cities
for its sales personnel. Allaire believes that these existing facilities are
adequate to meet its current foreseeable requirements or that suitable
additional or substitute space will be available on commercially reasonable
terms.
Item 3. Legal Proceedings
From time to time Allaire has been, and expects to continue to be, subject to
legal proceedings and claims in the ordinary course of its business, including
claims of alleged infringement of third party trademarks and other intellectual
property rights by Allaire and its licensees. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources. Allaire is not aware of any legal proceedings or claims
that it believes will have, individually or in the aggregate, a material adverse
effect on its business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth
quarter of 1998.
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Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Allaire has one class of stock outstanding, its common stock, which has a par
value of $.01 per share. Allaire effected its initial public offering in January
1999 at a price of $20.00 per share. Since that date, Allaire's common stock has
traded on the Nasdaq National Market under the symbol "ALLR."
Allaire sold 2,875,000 shares of its common stock, in the initial public
offering, pursuant to a Registration Statement on Form S-1 (File No. 333-68639),
which was declared effective by the Securities and Exchange Commission on
January 22, 1999. The managing underwriters of the offering were Credit Suisse
First Boston, Dain Rauscher Wessels, a division of Dain Rauscher Incorporated,
and NationsBanc Montgomery Securities LLC. The aggregate gross proceeds of the
offering were $57.5 million. Allaire's total expenses in connection with the
offering were $5.2 million, of which $4.0 million was for underwriting discounts
and commissions and $1.2 million was for other expenses paid to persons other
than directors or officers of Allaire, persons owning more than 10 percent of
any class of equity securities of Allaire, or affiliates of Allaire. Allaire's
net proceeds from the offering were $52.3 million.
In the fourth quarter of 1998, Allaire issued and sold 4,600 shares of its
common stock for aggregate consideration of $3,450 pursuant to the exercise of
previously granted stock options by one employee of Allaire. On December 7,
1998, Allaire issued and sold 31,250 shares of Series A Convertible Preferred
Stock to MC Silicon Valley, Inc., a subsidiary of Mitsubishi Corporation,
Allaire's Japanese distributor for aggregate consideration of $500,000. Each of
these 31,250 shares of Series A Convertible Stock were automatically converted
into one share of Allaire's common stock upon the closing of Allaire's initial
public offering. The issuances in the fourth quarter of 1998 described in this
Item 5 were made in reliance upon the exemption from registration set forth in
Section 4(2) of the Securities Act relating to sales by an issuer not involving
any public offering. None of these issuances involved a distribution or public
offering. No underwriters were engaged in connection with the foregoing
issuances of securities, and no underwriting discounts or commissions were paid.
Holders of Record
As of March 2, 1999, there were 146 holders of record of Allaire's common stock.
Dividends
Allaire has never declared or paid any cash dividends on its capital stock and
does not anticipate paying cash dividends in the foreseeable future. Allaire
currently intends to retain future earnings, if any, to fund the expansion and
growth of its business. Payment of future dividends, if any, will be at the
discretion of Allaire's Board of Directors after taking into account various
factors, including Allaire's financial condition, operating results, current and
anticipated cash needs and plans for expansion.
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Item 6. Selected Financial Data
The selected financial data set forth below has been derived from Allaire's
audited financial statements. This data should be read in conjunction with
Allaire's financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," appearing
elsewhere in this document.
Unaudited pro forma basic and diluted net loss per share have been calculated
assuming the conversion of all outstanding preferred stock into common stock, as
if the shares had converted immediately upon their issuance.
<TABLE>
<CAPTION>
Period from Inception Year Ended December 31,
(May 5, 1995) through --------------------------------------------------------
December 31, 1995 1996 1997 1998
----------------- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Software license fees $-- $2,358 $7,116 $17,187
Services -- -- 534 3,325
-- -- --- -----
Total revenue -- 2,358 7,650 20,512
-- ----- ----- ------
Cost of revenue:
Software license fees -- 234 961 1,915
Services -- -- 1,453 4,081
-- -- ----- -----
Total cost of revenue -- 234 2,414 5,996
-- --- ----- -----
Gross profit -- 2,124 5,236 14,516
-- ----- ----- ------
Operating expenses:
Research and development 65 873 2,702 4,782
Sales and marketing 49 1,576 7,272 16,157
General and administrative 74 1,387 2,874 4,313
-- ----- ----- -----
Total operating expenses 188 3,836 12,848 25,252
--- ----- ------ ------
Loss from operations (188) (1,712) (7,612) (10,736)
Interest income (expense), net -- 14 187 (34)
-- -- --- ----
Net loss $(188) $(1,698) $(7,425) $(10,770)
====== ======== ======== =========
Basic and diluted net loss per share $(0.09) $(0.97) $(4.40) $(3.67)
Shares used in computing basic and diluted
net loss per share 2,200 1,743 1,687 2,938
Unaudited pro forma basic and diluted net
loss per share $(1.38) $(1.51)
Shares used in computing unaudited pro forma
basic and diluted net loss per share 5,378 7,139
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $17 $526 $5,521 $1,847
Working capital (deficit) (231) 224 1,492 (8,513)
Total assets 119 2,038 9,697 9,953
Total long-term debt, net of current portion -- -- 499 1,193
Total redeemable convertible preferred stock -- 2,800 12,673 12,673
Total stockholders' deficit (181) (1,768) (9,153) (18,475)
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes,""anticipates,""plans,""expects" and similar
expressions are intended to identify forward-looking statements. The
forward-looking statements involve known and unknown risks, uncertainties and
other factors, including the factors set forth above in "Item 1A. Risk Factors,"
that may cause the actual results, performance and achievements of Allaire to
differ materially from those indicated by the forward-looking statements.
Overview
Allaire develops, markets and supports software for a wide range of Web
development, from building static Web pages to developing high-volume,
interactive Web applications. Allaire was established in May 1995 and recorded
its first revenue upon delivery of ColdFusion 1.5 to its customers in February
1996. Also in 1996, Allaire moved its headquarters from Minnesota to Cambridge,
Massachusetts. In March 1997, Allaire expanded its product offerings by
acquiring the HomeSite HTML design tool through the purchase of substantially
all of the assets of Bradbury Software L.L.C. ("Bradbury"). In November 1998,
Allaire introduced the Enterprise version of its Cold Fusion Server products, as
well as versions 4.0 of its other ColdFusion and HomeSite software products.
Allaire's revenue is derived principally from license fees for software products
and, to a lesser extent, fees for a range of services complementing these
products, primarily training and technical support. Software license fees
include sales of licenses for the then-current version of Allaire's products,
product upgrades and subscriptions. Subscriptions entitle the customer to all
new releases for a specific product during the subscription period, generally 12
months.
Revenue from sales of licenses to use Allaire's software products and product
upgrades is recognized upon delivery to customers, provided no significant
post-delivery obligations or uncertainties remain and collection of the related
receivable is probable. Revenue under arrangements where multiple products or
services are sold together under one contract is allocated to each element based
on their relative fair values, with these fair values being determined using the
price charged when that element is sold separately. For agreements with
specified upgrade rights, the revenue related to such upgrade rights is deferred
until the specified upgrade is delivered. Allaire provides most of its
distributors with rights of return. An allowance for estimated future returns is
recorded at the time revenue is recognized based on Allaire's historical
experience. Revenue from subscription sales is recognized ratably over the term
of the subscription period. Services revenue is recognized as services are
rendered or ratably over the term of the service agreement.
In October 1997, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SoP") 97-2, Software Revenue Recognition, which provides guidance on
the timing and amount of revenue recognition when licensing, selling, leasing or
otherwise marketing computer software and related services. Allaire adopted SoP
97-2 for all transactions entered into after December 31, 1997. Subsequently, in
March 1998, the Financial Accounting Standards Board ("FASB") approved SoP 98-4,
Deferral of the Effective Date of a Provision of SoP 97-2, Software Revenue
Recognition. SoP 98-4 provides for the one-year deferral of certain provisions
of SoP 97-2 pertaining to its requirements for what constitutes vendor specific
objective evidence of the fair value of multiple elements included in an
arrangement. In December 1998, the FASB issued SoP 98-9, Modification of SoP
97-2, Software Revenue Recognition, With Respect to Certain Transactions, which
retained the limitations of SoP 97-2 on what constitutes vendor specific
objective evidence of fair value. SoP 98-9 is effective for transactions entered
into in fiscal years beginning after March 15, 1999. Based upon its
interpretation of SoP 97-2, 98-4 and 98-9, Allaire believes that its current
revenue recognition policies and practices are consistent with the provisions of
the new guidance. Adoption of SoP 97-2 and SoP 98-4 did not have a material
impact on Allaire's financial condition or results of operation. Adoption of SoP
98-9 is not expected to have a material impact on Allaire's financial condition
or results of operation.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed, costs associated with the development of computer software are
expensed prior to the establishment of technological feasibility and capitalized
thereafter when material. No software development costs have been capitalized
because costs eligible for capitalization have not been material to Allaire's
financial condition or results of operations.
Allaire generates its revenue through direct sales of licenses to end users and
through its indirect distribution channel. Direct revenue is generated by
Allaire's direct sales force and via Allaire's Web site. The indirect
distribution channel includes distributors, direct and original equipment
manufacturer resellers, system integrators and Allaire Alliance members. During
the second half of 1997, Allaire established relationships with its primary
distribution partners in North America, Europe and Asia Pacific. Revenue
generated by the indirect distribution channel accounted for 13%, 28% and 45% of
total revenue for 1996, 1997 and 1998, respectively. Allaire anticipates that
revenue derived from the indirect distribution channel will continue to
represent a significant percentage of total revenue. Allaire primarily derives
its international revenue through its indirect distribution channel.
International revenue accounted for 17%, 20% and 13% of total revenue for 1996,
1997 and 1998, respectively.
18
<PAGE>
Allaire has experienced substantial net losses in each fiscal period since its
inception and, as of December 31, 1998, had an accumulated deficit of $20.2
million. Such net losses and accumulated deficit resulted from Allaire's lack of
substantial revenue and the significant costs incurred in the development of
Allaire's products and in the preliminary establishment of Allaire's
infrastructure. Allaire expects to increase its expenditures in all areas in
order to execute its business plan, particularly in research and development and
sales and marketing. The planned increase in sales and marketing expense will
primarily result from the hiring of additional sales force personnel to focus on
major account sales and marketing programs to increase brand awareness.
Allaire's limited operating history and the undeveloped nature of the market for
Web development products make predicting future revenue difficult. Allaire's
expense levels are based, in part, on its expectations regarding future revenue
increases, and to a large extent such expenses are fixed, particularly in the
short term. There can be no assurance that Allaire's expectations regarding
future revenue are accurate. Moreover, Allaire may be unable to adjust spending
in a timely manner to compensate for any unexpected revenue shortfall.
Accordingly, any significant shortfall of revenue in relation to Allaire's
expectations would likely cause significant declines in Allaire's quarterly
operating results.
Allaire is also increasing its sales and marketing efforts focused on larger
purchases by larger customers. Such transactions are generally more complex and
may increase the length of Allaire's average sales cycle. Allaire anticipates
that an increasing portion of its revenue could be derived from larger orders,
in which case the timing of receipt and fulfillment of any such orders could
cause fluctuations in Allaire's operating results, particularly on a quarterly
basis.
Due to the foregoing factors, Allaire's operating results are difficult to
forecast. Allaire believes that period-to-period comparisons of its historical
operating results are not meaningful and should not be relied upon as an
indication of future performance. Also, Allaire's operating results may fall
below its expectations or the expectations of securities analysts or investors
in some future quarter. In such event, the market price of Allaire's common
stock would likely be materially adversely affected.
Results of Operations
The following table sets forth for the periods indicated the percentage of total
revenue of certain line items included in Allaire's statement of operations.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenue:
Software license fees 100.0% 93.0% 83.8%
Services 0.0 7.0 16.2
--- --- ----
Total revenue 100.0 100.0 100.0
----- ----- -----
Cost of revenue:
Cost of software license fees 9.9 12.6 9.3
Cost of services 0.0 19.0 19.9
--- ---- ----
Total cost of revenue 9.9 31.6 29.2
--- ---- ----
Gross profit 90.1 68.4 70.8
---- ---- ----
Operating expenses:
Research and development 37.1 35.3 23.3
Sales and marketing 66.8 95.1 78.8
General and administrative 58.8 37.5 21.0
---- ---- ----
Total operating expenses 162.7 167.9 123.1
----- ----- -----
Loss from operations (72.6) (99.5) (52.3)
Interest income (expense), net 0.6 2.4 (0.2)
--- --- -----
Net loss (72.0)% (97.1)% (52.5)%
======= ======= =======
</TABLE>
19
<PAGE>
Years Ended December 31, 1997 and 1998
Revenue
Total revenue increased 168% from $7.7 million for 1997 to $20.5 million for
1998.
Software License Fees. Revenue from software license fees increased 142% from
$7.1 million for 1997 to $17.2 million for 1998. The increase was primarily due
to an increase in the number of licenses sold to use Allaire's software products
including HomeSite, which Allaire began selling in March 1997, and ColdFusion
Studio, which was released in November 1997. The growth in unit sales was also
attributable to the establishment of relationships with key domestic and
international distribution partners during the second half of 1997. To a lesser
degree, the increase in revenue from software license fees resulted from an
increase in product price associated with the release of new versions of
Allaire's products during the second half of 1997 and the fourth quarter of
1998.
Services. Revenue from services increased 523% from $534,000 for 1997 to $3.3
million for 1998. The increase was primarily attributable to growth in training
revenue resulting from an increase in Allaire's installed customer base.
Cost of Revenue
Cost of Software License Fees. Cost of software license fees includes costs of
product media duplication, manuals, packaging materials, licensed technology and
fees paid to third party vendors and agents for order fulfillment. Cost of
software license fees increased 99% from $961,000 for 1997 to $1.9 million for
1998. The increase in absolute dollars was due to higher unit sales volume. The
improvement in software license fees gross margins from 86% for 1997 to 89% for
1998 was primarily attributable to economies of scale achieved with higher sales
volume in 1998. In the future, Allaire expects that additional economies of
scale may be offset by increased licensed technology costs related to new
versions of ColdFusion.
Cost of Services. Cost of services consists primarily of personnel costs. Cost
of services increased 181% from $1.5 million for 1997 to $4.1 million for 1998.
The increase in absolute dollars resulted primarily from the hiring of
additional employees and the use of contract trainers to support increased
customer demand for training classes and technical support. The improvement in
services gross margins from (172)% for 1997 to (23)% for 1998 was primarily
attributable to the substantial growth in services revenue. Continued
improvement in services gross margins is contingent upon an increase in future
demand for the services offered by Allaire.
Overall gross margins are primarily affected by the mix of products licensed,
sales through direct versus indirect distribution channels, software license
fees revenue versus services revenue, and international versus domestic revenue.
Allaire typically realizes higher gross margins on direct sales relative to
indirect distribution channel sales and higher gross margins on software license
fees relative to services revenue. As services revenue or revenue derived
through indirect distribution channels increase as a percentage of total
revenue, Allaire's gross margins may be adversely affected.
Operating Expenses
Research and Development. Research and development expenses consist primarily of
employee salaries, fees for outside consultants and related costs associated
with the development of new products, the enhancement and localization of
existing products, quality assurance and testing. Research and development
expenses increased 77% from $2.7 million for 1997 to $4.8 million for 1998. The
increase primarily resulted from salaries associated with newly hired
development personnel and consulting costs related to product localization.
Allaire anticipates that research and development expenses will continue to
increase in absolute dollars.
Sales and Marketing. Sales and marketing expenses consist primarily of employee
salaries, commissions and costs associated with marketing programs such as trade
shows, seminars, advertising and new product launch activities. Sales and
marketing expenses increased 122% from $7.3 million for 1997 to $16.2 million
for 1998. The increase was primarily attributable to costs associated with
additional direct sales, pre-sales support and marketing personnel, and, to a
lesser extent, an increase in marketing programs, including trade shows,
seminars and product launch activities. Allaire anticipates that sales and
marketing expenses will continue to increase in absolute dollars as it continues
to expand its marketing programs and sales force to support its brand awareness,
product launches, international expansion and increased focus on major account
sales.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and other personnel-related costs for executive
and financial personnel, as well as legal, accounting and insurance costs.
General and administrative expenses increased 50% from $2.9 million for 1997 to
$4.3 million for 1998. The increase was primarily attributable to salaries
associated with newly hired personnel and related costs required to manage
Allaire's growth and facilities expansion. In addition, Allaire incurred a
charge of $400,000 in the fourth quarter of 1998 for costs relating to exiting a
facilities lease. Allaire expects that its general and administrative expenses
will increase in absolute dollars as it continues to expand its staffing to
support expanded operations and facilities, and incurs expenses relating to its
new responsibilities as a public company.
20
<PAGE>
Interest Income (Expense), Net. Interest income (expense), net decreased from
net interest income of $187,000 for 1997 to net interest expense of $34,000 for
1998. The decrease was primarily due to an increase in interest expense
attributable to Allaire's capital lease and notes payable obligations.
Provision for Income Taxes. Allaire has incurred significant operating losses
for all periods from inception through December 31, 1998. Allaire has recorded a
valuation allowance for the full amount of its net deferred tax assets as the
future realization of the tax benefit is not sufficiently assured.
Years Ended December 31, 1996 and 1997
Revenue
Allaire's total revenue increased 224% from $2.4 million for 1996 to $7.7
million for 1997.
Software License Fees. Revenue from software license fees increased 202% from
$2.4 million for 1996 to $7.1 million for 1997. The increase was primarily due
to an increase in the number of licenses sold to use Allaire's software products
including HomeSite, which Allaire began selling in March 1997. The growth in
unit sales was also attributable to the establishment of relationships with key
domestic and international distribution partners during the second half of 1997.
To a lesser degree, the increase in revenue from software license fees resulted
from an increase in product price associated with the release of new versions of
Allaire's products during the second half of 1997 and the introduction of
subscription sales in the fourth quarter of 1996.
Services. Prior to 1997, Allaire provided minimal technical support to its
customers and recognized no revenue from such services during 1996. During 1997,
Allaire introduced training and fee-based technical support to its customers.
Cost of Revenue
Cost of Software License Fees. Cost of software license fees increased 311% from
$234,000 for 1996 to $961,000 for 1997. The increase in absolute dollars was due
to higher unit sales volume. The decrease in software license fee gross margins
from 90% for 1996 to 86% for 1997 was primarily attributable to an increase in
licensed technology costs and fees paid to third-party agents for order
fulfillment.
Cost of Services. Allaire recognized no revenue from services during 1996. The
cost of services incurred during 1997 related to the establishment of Allaire's
training organization and the hiring of additional technical support personnel.
Operating Expenses
Research and Development. Research and development expenses increased 210% from
$873,000 for 1996 to $2.7 million for 1997. The increase primarily resulted from
salaries associated with newly hired development personnel and consulting costs
related to product localization.
Sales and Marketing. Sales and marketing expenses increased 361% from $1.6
million for 1996 to $7.3 million for 1997. The increase was primarily
attributable to costs associated with additional direct sales, pre-sales support
and marketing personnel, and, to a lesser extent, an increase in marketing
programs, including trade shows, seminars and product launch and brand awareness
activities.
General and Administrative. General and administrative expenses increased 107%
from $1.4 million for 1996 to $2.9 million for 1997. The increase was primarily
due to employee salaries associated with the hiring of executive and financial
personnel to help manage Allaire's growth. Allaire also settled a wrongful
termination action with a former employee and agreed to pay the plaintiff a
one-time cash settlement of $285,000.
Interest Income, Net. Interest income, net of interest expense, increased from
$14,000 for 1996 to $187,000 for 1997. The increase was primarily attributable
to interest earned on cash received from financing activities during 1997,
partially offset by interest expense attributable to Allaire's capital lease
obligations.
Liquidity and Capital Resources
From its inception through December 31, 1998, Allaire funded its operations
primarily through net cash proceeds from private placements of preferred stock
totaling $12.8 million. At December 31, 1998, Allaire had cash and cash
equivalents totaling $1.8 million. In January 1999, Allaire sold 2,875,000
shares of its common stock through an initial public offering. Net proceeds from
the offering were approximately $52.3 million after deducting the underwriting
discount and offering expenses.
21
<PAGE>
Cash used for operating activities for 1997 was $3.3 million, primarily due to a
net loss of $7.4 million, partially offset by increases in accounts payable,
accrued expenses and deferred revenue. Cash used for operating activities for
1998 was $3.4 million, primarily due to a net loss of $10.8 million, partially
offset by increases in accrued expenses and deferred revenue.
Cash used for investing activities for 1997 and 1998 was $1.8 million and $2.5
million, respectively. Investing activities for the periods were primarily
purchases of equipment, consisting largely of computer servers, workstations and
networking equipment.
Cash provided by financing activities for 1997 was $10.0 million, primarily due
to the issuance of preferred stock for net proceeds totaling $9.6 million. Cash
provided by financing activities for 1998 was $2.2 million, primarily due to the
issuance of notes payable of $1.6 million, the proceeds of $541,000 from the
exercise of common stock options, and the proceeds of $496,000 from the issuance
of preferred stock.
In March 1997, Allaire acquired substantially all of the assets of Bradbury,
including all rights to the HomeSite HTML design tool in exchange for $252,000
in cash and 13,000 shares of Series A Preferred Stock. In order to finance the
acquisition, Allaire issued 10% convertible notes payable totaling $252,000 and
warrants to purchase 6,300 shares of common stock at a price of $4.00 per share
to two stockholders of Allaire. In addition, as part of the acquisition
agreement, Allaire paid Bradbury's former owner $165,000 in October 1998, based
on the length of time he had been employed by Allaire.
At December 31, 1998, Allaire was party to a line of credit agreement which
provided for borrowings up to $2.0 million for working capital purposes and for
the issuance of letters of credit. Amounts available under the line were
determined based upon eligible accounts receivable. All borrowings and letters
of credit were collateralized by substantially all of Allaire's assets and all
borrowings bore interest at the bank's prime rate (7.75% as of December 31,
1998) plus 1%. As of December 31, 1998, letters of credit totaling $487,000 had
been issued against the line and $1.5 million was available for additional
borrowings. The original terms of the line of credit required the maintenance of
certain minimum financial ratios and conditions; however, these financial
covenants were waived for the period from May 1998 through the termination of
the line of credit. The line of credit terminated upon the closing of Allaire's
initial public offering in January 1999.
In May 1998, Allaire entered into an equipment loan line agreement to borrow up
to $2.0 million for the purchase of fixed assets through December 1998. The
initial term of each loan is 36 months from the borrowing date. Monthly payments
are equal to 3.155% of the original amount borrowed, for an effective interest
rate of approximately 15%. At the end of the term, Allaire may choose to make
one additional payment of 15% of the original amount funded or, if no default
has occurred, the term may be extended for an additional six months at the
original monthly payment rate. At December 31, 1998, Allaire had $1.5 million
outstanding under the line, which was collateralized by previous purchases of
furniture and equipment.
As of December 31, 1998, Allaire's primary commitments consisted of obligations
related to operating leases, $1.5 million of notes payable under the equipment
loan line and $499,000 of capital lease obligations.
As of December 31, 1998, Allaire had net operating loss carryforwards of
approximately $18.1 million available for federal purposes to reduce future
taxable income expiring at various dates through 2018. Under the provisions of
the Internal Revenue Code, certain substantial changes in Allaire's ownership
may have limited, or may limit in the future, the amount of net operating loss
carryforwards which could be utilized annually to offset future taxable income.
Allaire expects to experience significant growth in its operating expenses for
the foreseeable future in order to execute its business plan, particularly
research and development and sales and marketing expenses. As a result, Allaire
anticipates that such operating expenses, as well as planned capital
expenditures, will constitute a material use of its cash resources. In addition,
Allaire may utilize cash resources to fund acquisitions or investments in
complementary businesses, technologies or product lines. Allaire believes that
the net proceeds from the closing of the initial public offering, together with
its existing cash and cash equivalents, will be sufficient to meet its
anticipated cash requirements for working capital and capital expenditures for
the foreseeable future.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. The use of software and computer systems that are not Year
2000 compliant could result in system failures or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. As a result, many companies' software and computer systems may need
to be upgraded or replaced in order to comply with Year 2000 requirements.
Because ColdFusion does not involve data storage, the ability of a Web
application built with ColdFusion to comply with Year 2000 requirements is
largely dependent on whether the database underlying the application is Year
2000 compliant. If ColdFusion is connected to a database that is not Year 2000
compliant, the information received by a ColdFusion application may be
incorrect. Therefore, although Allaire believes its products are Year 2000
compliant, there can be no assurance that Web applications developed using its
products will comply with Year 2000 requirements.
22
<PAGE>
The purchasing patterns of customers or potential customers may be affected by
Year 2000 issues as companies expend significant resources to correct their
current systems for Year 2000 compliance. These expenditures may result in
reduced funds available for Web development activities, which could have a
material adverse effect on Allaire's business, operating results and financial
condition. Year 2000 complications may disrupt the operations, viability or
commercial acceptance of the Internet, which could have a material adverse
impact on Allaire's business, operating results and financial condition.
In connection with Allaire's installation of new internal software systems in
October 1998, Allaire received verbal confirmations from software vendors that
the software it installed is Year 2000 compliant, and it is in the process of
obtaining written certifications from such vendors to the same effect. Based on
the foregoing, Allaire currently has no reason to believe that its internal
software systems are not Year 2000 compliant. To date, Allaire has not incurred
significant incremental costs in order to comply with Year 2000 requirements and
does not believe it will incur significant incremental costs in the foreseeable
future. However, there can be no assurance that Year 2000 errors or defects will
not be discovered in Allaire's internal software systems and, if such errors or
defects are discovered, there can be no assurance that the costs of making such
systems Year 2000 compliant will not have a material adverse effect on Allaire's
business, operating results and financial condition.
Allaire relies on third party vendors which may not be Year 2000 compliant for
certain equipment and services. In addition, many of Allaire's distributors are
dependent on commercially available operating systems, which may be impacted by
Year 2000 complications. To date, Allaire has not conducted a Year 2000 review
of its vendors or distributors. Failure of systems maintained by Allaire's
vendors or distributors to operate properly with regard to the Year 2000 and
thereafter could require Allaire to incur significant unanticipated expenses to
remedy any problems or replace affected vendors, could reduce Allaire's revenue
from its indirect distribution channel and could have a material adverse effect
on Allaire's business, operating results and financial condition.
Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. This statement changes the way
that public business enterprises report segment information, including financial
and descriptive information about their selected segment information. Under SFAS
No. 131, operating segments are defined as revenue-producing components of the
enterprise which are generally used internally for evaluating segment
performance. SFAS No. 131 is effective for Allaire's fiscal year ending December
31, 1998 and relates to disclosure only.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits and is
effective for Allaire's fiscal year ending December 31, 1998. SFAS No. 132
relates to disclosure only and did not affect Allaire's financial condition or
results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Allaire does not
expect SFAS No. 133 to have a material effect on its financial condition or
results of operations.
In February 1998, the AcSEC issued SoP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SoP 98-1 establishes
the accounting for costs of software products developed or purchased for
internal use, including when such costs should be capitalized. Allaire does not
expect SOP 98-1, which is effective for Allaire beginning January 1, 1999, to
have a material effect on its financial condition or results of operations.
In April 1998, the AcSEC issued SoP 98-5, Reporting on the Costs of Start-Up
Activities. Start-up activities are defined broadly as those one-time activities
relating to opening a new facility, introducing a new product or service,
conducting business in a new territory, conducting business with a new class of
customer, commencing some new operation or organizing a new entity. Under SoP
98-5, the cost of start-up activities should be expensed as incurred. SoP 98-5
is effective for Allaire's fiscal 1999 financial statements and Allaire does not
expect its adoption to have a material effect on its financial condition or
results of operations.
Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 1998, Allaire was exposed to market risks which primarily
include changes in U.S. interest rates. Allaire maintains a significant portion
of its cash and cash equivalents in financial instruments with purchased
maturities of three months or less. These financial instruments are subject to
interest rate risk and will decline in value if interest rates increase. Due to
the short duration of these financial instruments, an immediate increase in
interest rates would not have a material effect on Allaire's financial condition
or results of operations.
23
<PAGE>
Item 8. Financial Statements and Supplementary Data
ALLAIRE CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
Financial Statements:
Report of Independent Accountants...................................... 25
Balance Sheet as of December 31, 1997 and 1998......................... 26
Statement of Operations for the Years Ended
December 31, 1996, 1997 and 1998..................................... 27
Statement of Redeemable Convertible Preferred
Stock and Stockholders' Deficit for the Years
Ended December 31, 1996, 1997 and 1998............................... 28
Statement of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998..................................... 29
Notes to Financial Statements.......................................... 30
Financial Statement Schedule:
For the Years Ended December 31, 1996, 1997 and 1998
Schedule II-Valuation and Qualifying Accounts........................ 52
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Allaire Corporation
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Allaire
Corporation at December 31, 1997 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 3, 1999
25
<PAGE>
ALLAIRE CORPORATION
BALANCE SHEET
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, Pro Forma
-------------------- December 31,
1997 1998 1998
---------- -------- ------------
(Note 14)
unaudited)
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents .................................................. $ 5,521 $ 1,847 $ 54,815
Accounts receivable, net of allowance for doubtful accounts and
sales returns of $487 and $479 at December 31, 1997
and 1998, respectively .................................................. 1,413 3,142 3,142
Prepaid expenses and other current assets .................................. 236 1,060 421
-------- -------- --------
Total current assets .................................................. 7,170 6,049 58,378
Property and equipment, net ................................................ 2,209 3,484 3,484
Other assets, net .......................................................... 318 420 420
-------- -------- --------
Total assets .................................................................. $ 9,697 $ 9,953 $ 62,282
======== ======== ========
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders' Deficit
Current liabilities
Current portion of capital lease obligations ............................... $ 315 $ 340 $ 340
Current portion of notes payable ........................................... -- 418 418
Accounts payable ........................................................... 1,601 3,256 3,256
Accrued expenses ........................................................... 1,320 3,712 3,712
Accrued employee compensation and benefits ................................. 1,130 2,189 2,189
Deferred revenue ........................................................... 1,312 4,647 4,647
-------- -------- --------
Total current liabilities ..................................................... 5,678 14,562 14,562
Capital lease obligations .................................................. 499 159 159
Notes payable .............................................................. -- 1,034 1,034
-------- -------- --------
Total liabilities ..................................................... 6,177 15,755 15,755
-------- -------- --------
Redeemable convertible preferred stock:
Series B, $.01 par value;
Authorized: 514,306 shares at December 31, 1997 and December 31,
1998 actual and pro forma
Issued and outstanding: 514,306 shares at December 31, 1997 and
December 31, 1998 actual; no shares issued and outstanding
at December 31, 1998 pro forma ........................................ 2,325 2,325 --
Series C, $.01 par value;
Authorized: 169,200 shares at December 31, 1997 and December 31,
1998 actual and pro forma
Issued and outstanding: 169,200 shares at December 31, 1997 and
December 31, 1998 actual; no shares issued and outstanding
at December 31, 1998 pro forma ....................................... 1,000 1,000 --
Series D, $.01 par value;
Authorized: 2,500,000 shares at December 31, 1997 and
December 31, 1998 actual and pro forma
Issued and outstanding: 2,336,909 shares at December 31, 1997 and
December 31, 1998 actual; no shares issued and outstanding
at December 31, 1998 pro forma ........................................ 9,348 9,348 --
-------- -------- --------
Total redeemable convertible preferred stock .................................. 12,673 12,673 --
-------- -------- --------
Stockholders' equity (deficit):
Series A convertible preferred stock, $.01 par value;
Authorized: 200,000 shares at
December 31, 1997 and December 31, 1998 actual and pro forma
Issued and outstanding: 56,557 shares at December 31, 1997;
88,463 at December 31, 1998 actual; no shares issued and
outstanding at December 31, 1998 pro forma ............................ 255 751 --
Common stock, $.01 par value;
Authorized: 10,000,000 shares at December 31, 1997,
35,000,000 at December 31, 1998 actual and pro forma
Issued and outstanding: 3,002,500 shares at December 31, 1997, 4,148,586
issued and 4,145,169 outstanding at December 31, 1998 actual; 10,872,527
issued and 10,869,110 outstanding at December 31, 1998 pro forma ....... 30 41 109
Additional paid-in capital ................................................. 13 1,804 67,489
Deferred compensation ...................................................... -- (850) (850)
Accumulated deficit ........................................................ (9,435) (20,205) (20,205)
Stock subscriptions receivable ............................................. (16) (16) (16)
-------- -------- --------
Total stockholders' equity (deficit)........................................ (9,153) (18,475) 46,527
-------- -------- --------
Commitments and contingencies (Note 13)
-------- -------- --------
Total liabilities, redeemable conertible preferred stock and
stockholders' equity (deficit)...................................... $ 9,697 $ 9,953 $ 62,282
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
ALLAIRE CORPORATION
STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Software license fees .................... $ 2,358 $ 7,116 $ 17,187
Services ................................. -- 534 3,325
-------- -------- --------
Total revenue ......................... 2,358 7,650 20,512
-------- -------- --------
Cost of revenue:
Software license fees .................... 234 961 1,915
Services ................................. -- 1,453 4,081
-------- -------- --------
Total cost of revenue ................. 234 2,414 5,996
-------- -------- --------
Gross profit .................................. 2,124 5,236 14,516
-------- -------- --------
Operating expenses:
Research and development ................. 873 2,702 4,782
Sales and marketing ...................... 1,576 7,272 16,157
General and administrative ............... 1,387 2,874 4,313
-------- -------- --------
Total operating expenses .............. 3,836 12,848 25,252
-------- -------- --------
Loss from operations .......................... (1,712) (7,612) (10,736)
Interest income (expense), net ................ 14 187 (34)
-------- -------- --------
Net loss ...................................... $ (1,698) $ (7,425) $(10,770)
======== ======== ========
Basic and diluted net loss per share .......... $ (0.97) $ (4.40) $ (3.67)
Shares used in computing basic and
diluted net loss per share ............... 1,743 1,687 2,938
Unaudited pro forma basic and diluted
net loss per share ....................... $ (1.38) $ (1.51)
Shares used in computing unaudited pro
forma basic and diluted net loss per share 5,378 7,139
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
ALLAIRE CORPORATION
STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(In thousands, except share data)
<TABLE>
<CAPTION>
Redeemable
convertible Convertible
preferred stock preferred stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balance, December 31, 1995 -- $ -- -- $ --
Issuance of common stock in exchange
for stock subscriptions receivable
Issuance of Series A convertible preferred stock upon conversion
of notes payable and accrued interest 43,557 177
Issuance of Series B redeemable convertible preferred stock,
net of issuance costs of $55 508,849 2,300
Forgiveness of stock subscriptions receivable in exchange
for cancellation of shares of common stock
Repurchase and cancellation of shares of common stock
Issuance of Series C redeemable convertible preferred stock,
net of issuance costs of $12 84,600 500
Exercise of employee stock options
Net loss
---------- ---------- ---------- ----------
Balance, December 31, 1996 593,449 2,800 43,557 177
Issuance of Series A convertible preferred stock in
acquisition of Bradbury Software L.L.C 13,000 78
Issuance of Series C redeemable convertible preferred stock 84,600 500
Issuance of Series B redeemable convertible preferred stock 5,457 25
Issuance of Series D redeemable convertible preferred stock,
net of issuance costs of $42 2,272,719 9,091
Issuance of Series D redeemable convertible preferred stock upon
conversion of notes payable and accrued interest 64,190 257
Repayment of stock subscription receivable
Net loss
---------- ---------- ---------- ----------
Balance, December 31, 1997 3,020,415 12,673 56,557 255
Issuance of Series A convertible preferred stock,
net of issuance costs of $9 31,906 496
Exercise of employee stock options
Repurchase of common stock held in treasury
Deferred compensation relating to grants of stock options
Compensation relating to grants of stock options
Net loss
---------- ---------- ---------- ----------
Balance, December 31, 1998 3,020,415 $ 12,673 88,463 $ 751
========== ========== ========== ==========
<CAPTION>
Additional
Common stock paid-in Deferred
Shares Par value capital Compensation
<S> <C> <C> <C> <C>
Balance, December 31, 1995 2,200,000 $ 22 $ -- $ --
Issuance of common stock in exchange
for stock subscriptions receivable 1,800,000 18 27
Issuance of Series A convertible preferred stock upon conversion
of notes payable and accrued interest
Issuance of Series B redeemable convertible preferred stock,
net of issuance costs of $55
Forgiveness of stock subscriptions receivable in exchange
for cancellation of shares of common stock (920,000) (9) (14)
Repurchase and cancellation of shares of common stock (80,000) (1) (1)
Issuance of Series C redeemable convertible preferred stock,
net of issuance costs of $12
Exercise of employee stock options 2,500 -- 1
Net loss
--------- --------- --------- ---------
Balance, December 31, 1996 3,002,500 30 13 --
Issuance of Series A convertible preferred stock in
acquisition of Bradbury Software L.L.C
Issuance of Series C redeemable convertible preferred stock
Issuance of Series B redeemable convertible preferred stock
Issuance of Series D redeemable convertible preferred stock,
net of issuance costs of $42
Issuance of Series D redeemable convertible preferred stock upon
conversion of notes payable and accrued interest
Repayment of stock subscription receivable
Net loss
--------- --------- --------- ---------
Balance, December 31, 1997 3,002,500 30 13 --
Issuance of Series A convertible preferred stock,
net of issuance costs of $9
Exercise of employee stock options 1,146,086 11 530
Repurchase of common stock held in treasury (2)
Deferred compensation relating to grants of stock options 997 (997)
Compensation relating to grants of stock options 266 147
Net loss
--------- --------- --------- ---------
Balance, December 31, 1998 4,148,586 $ 41 $ 1,804 $ (850)
--------- --------- --------- ---------
<CAPTION>
Stock Total
Accumulated subscriptions stockholders'
deficit receivable deficit
<S> <C> <C> <C>
Balance, December 31, 1995 $ (203) $ -- $ (181)
Issuance of common stock in exchange
for stock subscriptions receivable (45) --
Issuance of Series A convertible preferred stock upon conversion
of notes payable and accrued interest 177
Issuance of Series B redeemable convertible preferred stock,
net of issuance costs of $55 (55) (55)
Forgiveness of stock subscriptions receivable in exchange
for cancellation of shares of common stock 23 --
Repurchase and cancellation of shares of common stock 2 --
Issuance of Series C redeemable convertible preferred stock,
net of issuance costs of $12 (12) (12)
Exercise of employee stock options 1
Net loss (1,698) (1,698)
--------- --------- ---------
Balance, December 31, 1996 (1,968) (20) (1,768)
Issuance of Series A convertible preferred stock in
acquisition of Bradbury Software L.L.C 78
Issuance of Series C redeemable convertible preferred stock
Issuance of Series B redeemable convertible preferred stock
Issuance of Series D redeemable convertible preferred stock,
net of issuance costs of $42 (42) (42)
Issuance of Series D redeemable convertible preferred stock upon
conversion of notes payable and accrued interest
Repayment of stock subscription receivable 4 4
Net loss (7,425) (7,425)
--------- --------- ---------
Balance, December 31, 1997 (9,435) (16) (9,153)
Issuance of Series A convertible preferred stock,
net of issuance costs of $9 496
Exercise of employee stock options 541
Repurchase of common stock held in treasury (2)
Deferred compensation relating to grants of stock options --
Compensation relating to grants of stock options 413
Net loss (10,770) (10,770)
--------- --------- ---------
Balance, December 31, 1998 $ (20,205) $ (16) $ (18,475)
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
ALLAIRE CORPORATION
STATEMENT OF CASH FLOWS
(In thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1996 1997 1998
-------- -------- ---------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (1,698) $ (7,425) $(10,770)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 94 726 1,378
Interest converted into shares of preferred stock 2 5 --
Compensation expense relating to issuance of
note payable under severance agreement 90 -- --
Compensation expense relating to issuance of
equity instruments -- -- 413
Changes in assets and liabilities:
Accounts receivable (577) (796) (1,729)
Prepaid expenses and other current assets (76) (149) (824)
Other assets (254) (55) (305)
Accounts payable 459 1,115 1,655
Accrued expenses 368 2,071 3,451
Deferred revenue (103) 1,204 3,335
-------- -------- --------
Total adjustments 3 4,121 7,374
-------- -------- --------
Net cash used for operating activities (1,695) (3,304) (3,396)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (598) (1,502) (2,450)
Payment for acquisition of Bradbury Software L.L.C -- (252) --
-------- -------- --------
Net cash used for investing activities (598) (1,754) (2,450)
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale leaseback transaction -- 421 --
Principal payments on capital lease obligations -- (165) (315)
Proceeds from issuance of convertible
notes payable 175 252 --
Proceeds from issuance of notes payable 88 -- 1,620
Principal payments on notes payable (195) (33) (168)
Proceeds from sale of common stock 1 -- 541
Proceeds from sale of redeemable convertible
preferred stock, net of issuance costs 2,733 9,574 --
Proceeds from sale of convertible preferred
stock, net of issuance costs -- -- 496
Payments to acquire treasury stock -- -- (2)
Payment received on stock subscription receivable -- 4 --
-------- -------- --------
Net cash provided by financing activities 2,802 10,053 2,172
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 509 4,995 (3,674)
Cash and cash equivalents, beginning of year 17 526 5,521
-------- -------- --------
Cash and cash equivalents, end of year $ 526 $ 5,521 $ 1,847
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 4 $ 46 $ 162
Supplemental disclosure of non-cash investing and financing activities:
Conversion of notes payable and related accrued
interest of $2 into 43,557 shares of Series A
convertible preferred stock $ 175 $ -- $ --
Series A convertible preferred stock issued in acquisition
of Bradbury Software L.L.C $ -- $ 78 $ --
Conversion of note payable and related accrued
interest of $5 into 64,190 shares of Series D redeemable
convertible preferred stock $ -- $ 252 $ --
Capital lease obligations $ -- $ 979 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Allaire Corporation develops, markets and supports software for a wide range of
Web development, from building static Web pages to developing high-volume,
interactive Web applications. Allaire's products and services enable
organizations to link their information systems to the Web, as well as to
develop new Web-based business applications in areas such as electronic
commerce, content management and personalization. Allaire's products
interoperate with emerging Web application technologies as well as key
enterprise information systems technologies.
Allaire was incorporated in the state of Minnesota in February 1996 as the
surviving entity of a reorganization of Allaire, L.L.C., a Minnesota limited
liability company originally formed in May 1995. At the time of the
reorganization, the members of Allaire, L.L.C. exchanged their existing
ownership interests for a proportionate number of shares of Allaire's common
stock and substantially all assets and liabilities of Allaire, L.L.C. were
transferred to Allaire at historical cost. In April 1997, Allaire was
reorganized as a Delaware corporation.
Allaire operates in one industry segment and is subject to risks and
uncertainties common to growing technology-based companies, including rapid
technological change, growth and commercial acceptance of the Internet,
dependence on principal products and third party technology, new product
development, new product introductions and other activities of competitors,
dependence on key personnel, reliance on a limited number of distributors,
international expansion, lengthening sales cycle and limited operating history.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Allaire considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Allaire invests its
excess cash in money market funds, commercial paper and U.S. Treasury securities
which are subject to minimal credit and market risk. Allaire's cash equivalents
are classified as available-for-sale and recorded at amortized cost which
approximates fair value.
Revenue Recognition
Allaire recognizes revenue from software license fees upon delivery to customers
provided no significant post-delivery obligations or uncertainties remain and
collection of the related receivable is probable. Allaire accrues insignificant
support costs associated with these licenses when revenue is recognized. Revenue
under arrangements where multiple products or services are sold together under
one contract is allocated to each element based on their relative fair values,
with these fair values being determined using the price charged when that
element is sold separately. For arrangements which include specified upgrade
rights, the fair value of such upgrade rights is deferred until the specified
upgrade is delivered. Allaire provides most of its distributors with certain
rights of return. An allowance for estimated future returns is recorded at the
time revenue is recognized based on Allaire's return policies and historical
experience. Allaire offers subscriptions which entitle customers to all new
releases for a specific product during the term of the subscription agreement.
Revenue from subscription sales is recognized ratably over the term of the
subscription agreement. Training and consulting services revenue is recognized
as services are rendered, and revenue under support agreements is recognized
ratably over the term of the support agreement.
Fair Value of Financial Instruments
The carrying amounts of Allaire's financial instruments, which include cash
equivalents, accounts receivable, accounts payable, accrued expenses, notes
payable and redeemable convertible preferred stock, approximate their fair
values at December 31, 1998.
Concentrations of Credit Risk and Significant Customers
Financial instruments which potentially expose Allaire to concentrations of
credit risk consist primarily of trade accounts receivable. To minimize this
risk, ongoing credit evaluations of customers' financial condition are
performed, although collateral generally is not required. One customer accounted
for 22% and 44% of gross accounts receivable at December 31, 1997 and 1998,
respectively. In addition, this same customer accounted for 29% of total revenue
for the year ended December 31, 1998. No single customer accounted for 10% of
total revenue for the years ended December 31, 1996 and 1997. Allaire maintains
reserves for potential credit losses and such losses, in the aggregate,
historically have not exceeded existing reserves.
30
<PAGE>
Research and Development and Software Development Costs
Costs incurred in the research and development of Allaire's products are
expensed as incurred, except for certain software development costs. Costs
associated with the development of computer software are expensed prior to the
establishment of technological feasibility (as defined by Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed") and capitalized thereafter
when material to Allaire's financial position or results of operations. No
software development costs have been capitalized by Allaire since costs eligible
for capitalization under SFAS No. 86 have been insignificant.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated
useful lives, generally three to five years, using the straight-line method.
Equipment held under capital leases are stated at the lower of fair market value
of the related asset or the present value of the minimum lease payments at the
inception of the lease and are amortized on a straight-line basis over the
shorter of the life of the related asset or the lease term. Repair and
maintenance costs are expensed as incurred.
Accounting for Stock-Based Compensation
Allaire accounts for stock-based awards to employees using the intrinsic value
method as prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recorded for options issued to employees
in fixed amounts and with fixed exercise prices at least equal to the fair
market value of Allaire's common stock at the date of grant. Allaire has adopted
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
through disclosure only (Note 9). All stock-based awards to non-employees are
accounted for at their fair value in accordance with SFAS No. 123.
Income Taxes
Prior to its reorganization as a C Corporation in February 1996 (Note 1),
Allaire was treated as a partnership for federal and state income tax purposes.
Accordingly, no provision for corporate income taxes was recorded during this
period and all losses were passed through to Allaire's members. At the time of
its reorganization, Allaire adopted the liability method of accounting for
income taxes as set forth in SFAS No. 109, "Accounting for Income Taxes."
Advertising Expense
Allaire recognizes advertising expense as incurred. Advertising expense was
$152,000, $643,000 and $763,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Net Loss Per Share
Net loss per share is computed under SFAS No. 128, "Earnings Per Share." Basic
net loss per share is computed using the weighted average number of shares of
common stock outstanding, excluding shares of common stock subject to
repurchase. Diluted net loss per share does not differ from basic net loss per
share since potential common shares from conversion of preferred stock, stock
options and warrants and outstanding shares of common stock subject to
repurchase are anti-dilutive for all periods presented. Pro forma basic and
diluted net loss per share have been calculated assuming the conversion of all
outstanding shares of preferred stock into common stock, as if the shares had
converted immediately upon their issuance.
31
<PAGE>
Comprehensive Income
Allaire adopted SFAS No. 130 in 1998. SFAS No. 130 requires that a full set of
general purpose financial statements be expanded to include the reporting of
"comprehensive income". Comprehensive income is comprised of two components, net
income and other comprehensive income. During the years ended December 31, 1996,
1997 and 1998, Allaire had no items qualifying as other comprehensive income;
accordingly, the adoption of SFAS No. 130 had no impact on Allaire's financial
statements.
Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." This statement changes the way
that public business enterprises report segment information, including financial
and descriptive information about their selected segment information. Under SFAS
No. 131, operating segments are defined as revenue-producing components of the
enterprise which are generally used internally for evaluating segment
performance. SFAS No. 131 is effective for Allaire's fiscal year ending December
31, 1998 and relates to disclosure only.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits and is
effective for Allaire's fiscal year ending December 31, 1998. SFAS No. 132
relates to disclosure only and did not affect Allaire's financial position or
results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Allaire does not
expect SFAS No. 133 to have a material affect on its financial position or
results of operations.
In February 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position ("SoP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. Allaire does not expect
SoP 98-1, which is effective for Allaire beginning January 1, 1999, to have a
material affect its financial position or results of operations.
In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of Start-Up
Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for Allaire's fiscal 1999 financial statements and Allaire
does not expect its adoption to have a material affect on its financial position
or results of operations.
3. ACQUISITION
In March 1997, Allaire acquired the business and substantially all of the assets
of Bradbury Software L.L.C. ("Bradbury"), including all rights to Bradbury's
HomeSite software product, in exchange for $252,000 in cash and 13,000 shares of
Allaire's Series A convertible preferred stock valued at $78,000. The Bradbury
acquisition was accounted for under the purchase method of accounting.
Accordingly, the purchase price was allocated based upon the fair value of
assets acquired and liabilities assumed. The excess of the purchase price over
the fair value of the net assets acquired totaled $315,000. This amount has been
included in other assets and is being amortized using the straight-line method
over a three-year period. Amortization expense relating to this excess purchase
price totaled $88,000 and $105,000 for the years ended December 31, 1997 and
1998, respectively. The operating results of Bradbury have been included in the
financial statements since the date of the acquisition. Pro forma presentations
have not been included as the acquisition was not material to the results of
operations of Allaire.
The former owner of Bradbury is entitled to additional cash payments of up to
$165,000, depending on the length of time he remains employed by Allaire. During
the years ended December 31, 1997 and 1998, a total of $82,000 and $83,000,
respectively, was earned and recorded as compensation expense under this
arrangement.
In order to finance the Bradbury acquisition, Allaire issued 10% convertible
notes payable totaling $252,000 and warrants to purchase 6,300 shares of
Allaire's common stock at a price of $4.00 per share to two stockholders (Note
8). All principal and accrued interest of $5,000 on these notes was converted
into 64,190 shares of Series D preferred stock in May 1997.
32
<PAGE>
4. INVESTMENT IN YESLER SOFTWARE, INC.
In July 1998, Allaire entered into an agreement under which it contributed
certain non-core technology and agreed to provide certain services to Yesler
Software, Inc. ("Yesler") in exchange for 907,591 shares of Yesler's voting
common stock, representing approximately 34% of the outstanding capital stock of
Yesler at that time. Subsequently, Allaire transferred 76,903 shares of Yesler
common stock to three of its employees. The value of the shares transferred was
not material at the date transferred. Of the shares acquired, an aggregate of
605,060 shares are subject to repurchase at a price of $0.10 per share under
certain circumstances. The number of shares subject to this repurchase right
will be reduced quarterly over a three-year period. Allaire has no obligation to
fund the future operations of Yesler and accounts for its investment under the
equity method.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1998
---- ----
<S> <C> <C>
Furniture and fixtures $574,000 $951,000
Furniture and fixtures under capital lease 127,000 78,000
Equipment 638,000 2,365,000
Equipment under capital lease 852,000 843,000
Software 316,000 470,000
Leasehold improvements 148,000 386,000
------- -------
2,655,000 5,093,000
Less: Accumulated depreciation and amortization (446,000) (1,609,000)
--------- -----------
$2,209,000 $3,484,000
========== ==========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1996,
1997 and 1998 was $80,000, $434,000 and $1,175,000, respectively.
Capital Lease
In December 1996, Allaire entered into an agreement with a leasing company to
establish a line of credit which enabled Allaire to finance up to $1,000,000 in
purchases of property and equipment under capital leases (the "Lease Line").
Each borrowing under the Lease Line is payable in equal monthly installments
over a period of 36 months. In connection with this agreement, Allaire issued
warrants to purchase shares of its Series A convertible preferred stock (Note
7). The Lease Line expired in December 1997.
During 1997, Allaire sold and immediately leased back certain equipment under
the Lease Line. The loss on this sale leaseback transaction was recorded in 1997
and was not material to Allaire's results of operations. Amortization of
property and equipment under capital leases totaled $181,000 and $297,000 for
the years ended December 31, 1997 and 1998, respectively. Accumulated
amortization on property and equipment under capital lease totaled $181,000 at
December 31, 1997 and $478,000 at December 31, 1998. Interest expense relating
to capital lease obligations totaled $38,000 and $51,000 for the years ended
December 31, 1997 and 1998, respectively.
6. LINES OF CREDIT
Working Capital Line
At December 31, 1998, Allaire was party to a line of credit agreement which
provided for borrowings of up to $2,000,000 for working capital purposes and for
the issuance of letters of credit. Amounts available under the line were
determined based upon eligible accounts receivable. All borrowings and letters
of credit were collateralized by substantially all of Allaire's assets and all
borrowings bore interest at the bank's prime rate (7.75% as of December 31,
1998) plus 1%. As of December 31, 1998, letters of credit totaling $487,000 had
been issued against the line and $1,513,000 was available for additional
borrowings. The original terms of the line of credit required the maintenance of
certain minimum financial ratios and conditions; however, these financial
covenants were waived for the period from May 1998 through the termination of
the line of credit. The line of credit terminated upon Allaire's initial public
offering in January 1999.
33
<PAGE>
Equipment Loan Line
In May 1998, Allaire entered into an equipment loan line agreement (the
"Equipment Loan Line") under which Allaire was able to borrow up to $2,000,000
to finance fixed asset purchases through December 1998. The initial term of each
loan is 36 months from the borrowing date. Monthly payments are equal to 3.155%
of the original amount borrowed, for an effective interest rate of approximately
15%. At the end of term, Allaire may choose to make one additional payment of
15% of the original amount funded or, if no default has occurred, the term may
be extended for an additional 6 months at the original monthly payment rate. The
Equipment Loan Line contains no financial covenants and there are no
cross-default provisions in connection with the equipment and working capital
line described above. All borrowings are collateralized by the purchased assets.
Allaire borrowed $1,406,000 in June 1998 and $214,000 in November 1998 under the
Equipment Loan Line, which was collateralized by previously purchased equipment.
The Equipment Loan Line expired in December 1998. At December 31, 1998, annual
cash payments on the borrowings under the Equipment Loan Line are as follows:
<TABLE>
<S> <C>
1999............................................ $ 613,000
2000............................................ 613,000
2001............................................ 583,000
-------
Total cash payments............................. 1,809,000
Less--amount representing interest.............. 357,000
-------
Present value of notes payable.................. $ 1,452,000
===========
</TABLE>
Other Lines of Credit
In December 1998, Allaire obtained a commitment from existing investors to
provide a $3.0 million working capital line of credit which terminated upon the
closing of Allaire's initial public offering in January 1999.
7. PREFERRED STOCK
The holders of the Series A, Series B, Series C and Series D preferred stock
(the "Preferred Stock") are hereinafter referred to collectively as the
"Preferred Stockholders" and the holders of the Series B, Series C and Series D
preferred stock (the "Redeemable Preferred Stock") are hereinafter referred to
collectively as the "Redeemable Preferred Stockholders." The Preferred
Stockholders have the following rights and privileges:
Voting Rights
The Preferred Stockholders generally vote together with all other classes and
series of stock as a single class on all matters and are entitled to a number of
votes equal to the number of shares of common stock into which each share of
such stock is convertible. With respect to the number of directors, only the
Redeemable Preferred Stockholders, voting as a single class, may vote on any
increase of the maximum number of directors constituting the Board of Directors
to a number in excess of five. With respect to the election of directors, the
Redeemable Preferred Stockholders, voting as a single class, may elect one
director and the common stockholders and Preferred Stockholders, voting as a
single class, may elect two directors. The remaining two directors shall be
elected by a combined vote of both the common stockholders and the Series A
preferred stockholders, voting as a single class, and the Redeemable Preferred
Stockholders, voting as a single class.
Conversion
Each share of Series A, Series B and Series C preferred stock is convertible, at
the option of the holder, into two shares of common stock, except for 31,906
shares of Series A preferred stock, each of which converts into one share of
common stock, subject to certain anti-dilution adjustments. Each share of Series
D Preferred Stock is convertible, at the option of the holder, into one share of
common stock, subject to certain anti-dilution adjustments. The Series A
preferred stock will automatically convert into shares of common stock upon the
closing of an underwritten public offering of Allaire's common stock involving
aggregate proceeds to Allaire of at least $2,000,000. The Series B, Series C and
Series D preferred stock will automatically convert into shares of common stock
upon the closing of an underwritten public offering of Allaire's common stock
involving aggregate proceeds to Allaire of at least $15,000,000 and a per share
price of not less than $11.30. All shares of Preferred Stock automatically
converted into 3,848,941 shares of common stock upon the closing of Allaire's
initial public offering in January 1999.
34
<PAGE>
Dividend Rights
The Preferred Stockholders are not entitled to receive any dividends unless
declared by Allaire's Board of Directors. In the event that dividends are paid
on the common stock, the Preferred Stockholders are entitled to receive
dividends at the same rate and at the same time as the common stockholders, with
each share of preferred stock being treated as equal to the number of shares of
common stock into which each share of such stock is convertible.
Liquidation Preferences
In the event of any liquidation, dissolution or winding up of Allaire, the
Preferred Stockholders are entitled to receive, in preference to the holders of
the common stock, an amount equal to the greater of the original purchase price
per share, respectively, subject to certain anti-dilution adjustments, or such
amount as would have been payable had such shares been converted to common stock
just prior to liquidation. The original purchase price per share of the Series
B, Series C and Series D preferred stock was $4.52, $5.91 and $4.00,
respectively. The original purchase price per share of the Series A preferred
stock was $4.07, except for 656 and 31,250 shares which had an original purchase
price per share of $8.00 and $16.00, respectively. Any assets remaining
following the initial distribution to the Preferred Stockholders shall be
available for distribution ratably among the common stockholders only.
Redemption
At the request of at least 50% of the holders of the Redeemable Preferred Stock
at any time beginning in June 2002, Allaire shall redeem one-third of the then
outstanding shares of each series of Redeemable Preferred Stock. Subsequently,
on the first and third anniversaries of the initial redemption date, Allaire
shall redeem 50% and 100%, respectively, of the remaining outstanding shares of
each series. Upon redemption, each holder of the Series B, Series C and Series D
preferred stock will be entitled to receive a cash payment equal to $4.52 per
share, $5.91 per share and $4.00 per share, respectively, plus any declared but
unpaid dividends.
Convertible Notes Payable
During 1996, Allaire issued 10% convertible notes payable totaling $175,000 to
two of Allaire's stockholders. All principal and accrued interest of $2,000 on
these notes was subsequently converted into 43,557 shares of Series A preferred
stock prior to December 31, 1996.
Preferred Stock Warrants
Pursuant to the terms of a capital lease line of credit (Note 5), Allaire issued
warrants to purchase 17,699 shares of Series A preferred stock at a price of
$4.52 per share, subject to certain anti-dilution adjustments. These warrants
are fully vested, exercisable at the option of the holder, in whole or in part,
and expire upon the earlier of ten years from the date of grant or five years
from the effective date of an initial public offering of Allaire's common stock.
The value ascribed to these warrants was not significant.
At December 31, 1998, Allaire has reserved 17,699 shares of its Series A
preferred stock for issuance upon exercise of outstanding warrants. These
warrants converted to warrants to purchase 35,398 shares of common stock upon
the closing of Allaire's initial public offering in January 1999.
Undesignated Preferred Stock
At December 31, 1998, Allaire has authorized the issuance of up to 1,616,494
shares of undesignated preferred stock. Issuances of the undesignated preferred
stock may be made at the discretion of the Board of Directors (without
stockholder approval) in one or more series and with such designations, rights
and preferences as determined by the Board. As a result, the undesignated
preferred stock may have dividend, liquidation, conversion, redemption, voting
or other rights which may be more expansive than the rights of the holders of
the Preferred Stock and the common stock.
8. COMMON STOCK
Treasury Shares
Of the common stock issued, an aggregate of 3,417 shares with a cost of $2,000
were held by Allaire as treasury shares and were included as a reduction to
additional paid-in capital at December 31, 1998.
35
<PAGE>
Stock Restriction Agreements
Allaire has executed stock restriction agreements with its founder and certain
of its employees. Under the terms of the founder's stock restriction agreement,
Allaire has the right to repurchase, at a price of $2.26 per share, any unvested
common shares in the event of the founder's voluntary resignation. All other
restriction agreements give Allaire the right to repurchase, for an amount equal
to the original consideration paid, any unvested common shares in the event of
voluntary resignation or termination of employment with Allaire for cause.
Allaire's repurchase rights lapse at various dates through January 31, 2000 or,
in the case of the founder, upon the closing of an initial public offering of
Allaire's common stock, which occurred in January 1999. At December 31, 1998, an
aggregate of 170,000 and 138,750 shares of Allaire's outstanding common stock
were subject to repurchase under the stock restriction agreements, at prices of
$2.26 and $.025 per share, respectively.
All employees who have been granted options by Allaire under the 1997 Stock
Incentive Plan are eligible to elect immediate exercise of all such options.
However, shares obtained by employees who elect to exercise prior to the
original option vesting schedule are subject to Allaire's right of repurchase,
at the option exercise price, in the event of termination. Allaire's repurchase
rights lapse at the same rate as the shares would have become exercisable under
the original vesting schedule. At December 31, 1998, Allaire had the right to
repurchase 364,895 shares of common stock issued under the 1997 Stock Incentive
Plan.
Stock Subscriptions Receivable
Allaire held notes receivable from certain stockholders at December 31, 1998 in
consideration for the purchase of Allaire common stock. The notes are due
February 1, 2001 and accrue interest at a rate of 5.61% per annum. These loans
are secured by the underlying common stock and, consequently, are reflected as
an offset to stockholders' equity.
Common Stock Warrants
Pursuant to the issuance of convertible notes payable in 1996 (Note 7), Allaire
issued warrants to purchase 8,599 shares of its common stock at a price of $2.03
per share, subject to certain anti-dilution adjustments. These warrants are
fully vested, exercisable at the option of the holders, in whole or in part, and
expire in December 2001. The value ascribed to these warrants was not
significant.
Pursuant to the issuance of convertible notes payable in 1997 (Note 3), Allaire
issued warrants to purchase 6,300 shares of its common stock at a price of $4.00
per share, subject to certain anti-dilution adjustments. These warrants are
fully vested, exercisable at the option of the holder, in whole or in part, and
expire in March 2002. The value ascribed to these warrants was not significant.
Authorized Shares
On August 10, 1998, Allaire's Board of Directors approved an increase in the
authorized shares of common stock, $.01 par value, to 35,000,000.
Reserved Shares
At December 31, 1998, Allaire had 5,570,052 shares of common stock reserved for
issuance upon the exercise of common stock warrants and options and conversion
of the outstanding preferred stock, including shares issuable upon the exercise
of preferred stock warrants and subsequent conversion into common stock.
9. STOCK OPTIONS
All options issued by Allaire during the year ended December 31, 1996 were
non-qualified, non-plan stock options issued to employees, advisors and
consultants of Allaire. All options granted by Allaire during this period of
time were issued at fair market value at the date of grant, vest either
immediately or over a four-year period and expire ten years from the date of
grant.
1997 Stock Incentive Plan
The 1997 Incentive Stock Plan (the "1997 Stock Plan") provides for the granting
of incentive and non-qualified stock options and stock bonus awards to officers,
directors, employees and consultants of Allaire. The maximum number of common
shares that may be issued pursuant to the 1997 Stock Plan, as amended, is
1,726,000.
The exercise price of each stock option issued under the 1997 Stock Plan shall
be specified by the Board of Directors at the time of grant. However, incentive
stock options may not be granted at less than the fair market value of Allaire's
common stock as determined by the Board of Directors at the date of grant or for
a term in excess of ten years. All options granted under the 1997 Stock Plan
through December 31, 1998 vest either immediately or over a four-year period for
employees or over the service period for non-employees and expire ten years from
the date of grant.
36
<PAGE>
1998 Stock Incentive Plan
The 1998 Incentive Stock Plan (the "1998 Stock Plan") provides for the issuance
of up to 1,900,000 shares of Allaire's common stock to eligible employees,
officers, directors, consultants and advisors of Allaire. Under the 1998 Stock
Plan, the Board of Directors may award incentive and non-qualified stock
options, stock appreciation rights, performance shares and restricted and
unrestricted stock. Incentive stock options may not be granted at less than the
fair market value of Allaire's common stock at the date of grant and for a term
not to exceed ten years. The exercise price under each non-qualified stock
option shall be specified by the Compensation Committee. Grants of stock
appreciation rights, performance shares, restricted stock and unrestricted stock
may be made at the discretion of the Compensation Committee with terms to be
defined therein.
During the years ended December 31, 1996 and 1997 compensation expense
recognized for stock option grants made by Allaire under APB Opinion No. 25 was
not significant. For the year ended December 31, 1998, compensation expense
recognized for stock option grants totaled $413,000. Had compensation cost for
Allaire's option grants been determined based on the fair value at the date of
grant consistent with the method prescribed by SFAS No. 123, Allaire's net loss
and net loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net loss:
As reported................................ $(1,698,000) $(7,425,000) $(10,770,000)
Pro forma.................................. (1,705,000) (7,485,000) (10,885,000)
Basic and diluted net loss per share:
As reported................................ $(0.97) $(4.40) $(3.67)
Pro forma.................................. $(0.98) $(4.44) $(3.70)
</TABLE>
Because the determination of the fair value of all options granted after the
closing of Allaire's initial public offering will include an expected volatility
factor, because additional option grants are expected to be made subsequent to
December 31, 1998, and because most options vest over several years, the pro
forma effects of applying the fair value method may be material to reported net
income or loss in future years.
Under SFAS No. 123, the fair value of each employee option grant is estimated on
the date of grant using the Black-Scholes option pricing model to apply the
minimum value method with the following weighted-average assumptions used for
grants made during the years ended December 31, 1996, 1997 and 1998: no dividend
yield; risk free interest rates of 5.9%, 6.1% and 5.1%, respectively; no
volatility; and an expected option term of 5 years.
Stock option activity during the years ended December 31, 1996, 1997 and 1998
was as follows:
<TABLE>
<CAPTION>
Outstanding options
-------------------
Number of Weighted average
shares exercise price
------ --------------
<S> <C> <C>
Outstanding--December 31, 1995........................................... -- $--
Granted (weighted average fair value of $.11).......................... 1,130,000 .44
Exercised.............................................................. (2,500) .50
Canceled............................................................... (7,500) .50
-------
Outstanding--December 31, 1996........................................... 1,120,000 .44
Granted (weighted average fair value of $.17).......................... 1,475,360 .54
Exercised.............................................................. -- --
Canceled............................................................... (221,260) .51
---------
Outstanding--December 31, 1997........................................... 2,374,100 .50
Granted (weighted average fair value of $2.95)......................... 558,450 6.73
Exercised.............................................................. (1,146,086) .47
Canceled............................................................... (113,650) 1.25
---------
Outstanding--December 31, 1998........................................... 1,672,814 $2.53
=========
</TABLE>
As of December 31, 1998, 184,867 and 1,681,400 shares were available for grant
under the 1997 Stock Plan and the 1998 Stock Plan, respectively.
37
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Vested and exercisable
----------------------
Weighted-average Number Weighted-average
remaining contractual of exercise
Exercise price Number outstanding life (in years) shares price
-------------- ------------------ --------------- ------ -----
<S> <C> <C> <C> <C>
$.25-.50 1,144,772 8.0 432,927 $.45
.75- 1.50 181,492 9.0 18,770 .75
4.00- 7.00 81,550 9.3 15,000 4.00
9.00-13.60 265,000 9.7 -- --
-------- -------
$.25-13.60 1,672,814 8.5 466,697 $.57
========= =======
</TABLE>
Deferred Compensation
During 1998, Allaire granted stock options to purchase 477,950 shares of its
common stock with exercise prices ranging from $.01 to $13.60. Allaire recorded
compensation expense and deferred compensation relating to these options
totaling $413,000 and $997,000, respectively, representing the difference
between the estimated fair market value of the common stock on the date of grant
and the exercise price. Compensation relating to options which vested
immediately upon grant was expensed in full at the date of grant, while
compensation related to options which vest over time was recorded as a component
of stockholders' deficit and is being amortized over the vesting periods of the
related options.
1998 Employee Stock Purchase Plan
The 1998 Employee Stock Purchase Plan (the "Purchase Plan") provides for the
issuance of up to 300,000 shares of Allaire's common stock to eligible
employees. Under the Purchase Plan, Allaire is authorized to make one or more
offerings during which employees may purchase shares of common stock through
payroll deductions made over the term of the offering. The per-share purchase
price at the end of each offering is equal to 85% of the fair market value of
the common stock at the beginning or end of the offering period (as defined by
the Purchase Plan), whichever is lower. Allaire expects that the first offering
period under the Purchase Plan will commence on July 1, 1999.
10. INCOME TAXES
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................ $583,000 $3,442,000 $7,355,000
Reserves not currently deductible............................... 87,000 216,000 248,000
Tax credit carryforwards........................................ 17,000 95,000 354,000
Other........................................................... 29,000 85,000 422,000
------ ------ -------
Total deferred tax assets..................................... 716,000 3,838,000 8,379,000
Deferred tax asset valuation allowance.......................... (716,000) (3,838,000) (8,379,000)
--------- ----------- -----------
$-- $-- $--
=== === ===
</TABLE>
Realization of total deferred tax assets is contingent upon the generation of
future taxable income. Due to the uncertainty of realization of these tax
benefits, Allaire has provided a valuation allowance for the full amount of its
deferred tax assets.
Income taxes computed using the federal statutory income tax rate differs from
Allaire's effective tax rate primarily due to the following:
<TABLE>
<CAPTION>
Year ended
December 31,
------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Income tax benefit at U.S. federal statutory tax rate $(594,000) $(2,599,000) $(3,770,000)
State taxes, net of federal tax impact.............................. (105,000) (455,000) (665,000)
Permanent differences............................................... 2,000 18,000 38,000
Tax credit carryforwards............................................ (18,000) (91,000) (195,000)
Other............................................................... (1,000) 5,000 51,000
Change in valuation allowance....................................... 716,000 3,122,000 4,541,000
------- --------- ---------
Provision for income taxes........................................ $-- $-- $--
=== === ===
</TABLE>
38
<PAGE>
At December 31, 1998, Allaire had federal and state net operating losses of
approximately $18.1 million and $17.0 million, respectively, and federal and
state tax credit carryforwards of approximately $178,000 and $176,000,
respectively, available to reduce future taxable income and future tax
liabilities. If not utilized, these carryforwards will expire at various dates
ranging from 2001 to 2018. Under the provisions of the Internal Revenue Code,
certain substantial changes in Allaire's ownership may be limited, or may limit
in the future, the amount of net operating loss and research and development tax
credit carryforwards which could be utilized annually to offset future taxable
income and income tax liability. The amount of any annual limitation is
determined based upon Allaire's value prior to an ownership change.
11. SEGMENT INFORMATION
Operating in one industry segment, Allaire develops, markets and supports
software for a wide range of Web development.
Revenue was distributed geographically as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
North America ............... $ 1,953,000 $ 6,153,000 $17,870,000
Europe ...................... 197,000 822,000 1,741,000
Other international ......... 208,000 675,000 901,000
----------- ----------- -----------
$ 2,358,000 $ 7,650,000 $20,512,000
=========== =========== ===========
</TABLE>
All of Allaire's sales to Europe and other international geographies are export
sales from the United States. Substantially all of Allaire's services revenue
for the years ended December 31, 1996, 1997 and 1998 was generated in North
America. All long-lived assets were located in North America at December 31,
1997 and 1998.
12. EMPLOYEE SAVINGS PLAN
During 1997, Allaire adopted an employee retirement savings plan under Section
401(k) of the Internal Revenue Code which covers substantially all employees.
Under the terms of the 401(k) Plan, employees may contribute a percentage of
their salary, up to a maximum of 15%. Allaire did not make any contributions to
the 401(k) Plan on behalf of its employees for the years ended December 31, 1997
or 1998.
13. COMMITMENTS AND CONTINGENCIES
Allaire leases its facilities and certain office equipment under noncancelable
operating lease agreements. Rent expense under these leases for the years ended
December 31, 1996, 1997 and 1998, totaled $163,000, $372,000 and $1,230,000,
respectively. In addition, Allaire also leases certain fixed assets under
capital leases, which expire at various dates through October 2000.
Future minimum commitments under noncancelable operating and capital leases at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Capital
leases leases
------ ------
<S> <C> <C>
1999............................................. 2,454,000 366,000
2000............................................. 2,393,000 163,000
2001............................................. 2,381,000 --
2002............................................. 2,379,000 --
2003............................................. 1,166,000 --
--------- --------
Total minimum lease payments.................... $10,773,000 529,000
===========
Less--amount representing interest................................... 30,000
------
Present value of capital lease obligations........................... $499,000
========
</TABLE>
39
<PAGE>
Letter of Credit
In connection with a facility lease Allaire is required to maintain, on behalf
of the landlord, an irrevocable letter of credit with a bank over the term of
the lease. As of December 31, 1998, letters of credit totaling $487,000 had been
issued against the line of credit (Note 6).
Legal Proceedings
In 1996, a wrongful termination action was brought against Allaire and its
founder by a former employee under which the plaintiff sought severance pay and
the right to 400,000 shares of Allaire's common stock which were canceled upon
termination. Although Allaire continues to deny any liability in this matter,
Allaire determined during 1997 that it was in the best interest of its
shareholders to settle this dispute out of court due to the rising legal costs,
distraction of management and uncertainty present in this litigation. As a
result, Allaire agreed to pay the plaintiff a cash settlement totaling $285,000
in exchange for the termination of all legal action against Allaire and its
founder. This amount was fully accrued at the time of the settlement.
In addition to the matter noted above, Allaire is from time to time subject to
legal proceedings and claims which arise in the normal course of its business.
In the opinion of management, the amount of ultimate liability with respect to
these actions will not have a material adverse effect on Allaire's financial
position or results of operations.
14. SUBSEQUENT EVENT
In January 1999, Allaire sold 2,875,000 shares of its common stock through an
initial public offering. Net proceeds from the offering were approximately $52.3
million after deducting the underwriting discount and offering expenses. At
December 31, 1998, Allaire's prepaid expenses and other current assets included
$639,000 of prepaid offering expenses. At the time of the initial public
offering, all of Allaire's outstanding preferred stock automatically converted
into 3,848,941 shares of common stock. These conversions and net offering
proceeds have been reflected in the unaudited pro forma balance sheet as of
December 31, 1998.
40
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 10. Directors and Executive Officers of the Registrant
The executive officers and directors of Allaire, and their ages and positions,
are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David J. Orfao.............................. 39 President, Chief Executive Officer and
Director
Joseph J. Allaire........................... 29 Chairman of the Board of Directors, Chief
Technology Officer and Executive Vice
President, Products
David A. Gerth.............................. 47 Vice President, Finance and Operations,
Chief Financial Officer and Treasurer
Amy E. Lewis................................ 41 Vice President, Worldwide Sales
Stephen F. Clark............................ 33 Vice President, Marketing
Jack P. Lull................................ 40 Vice President, Engineering and
Development
Maria Morrissey............................. 41 Vice President, Worldwide Services and
Support
Jonathan A. Flint........................... 47 Director
John J. Gannon.............................. 44 Director
Thomas A. Herring........................... 48 Director
Mitchell Kapor.............................. 48 Director
</TABLE>
David J. Orfao has served as Allaire's President and Chief Executive Officer and
as a director since February 1997. From November 1995 until December 1996, Mr.
Orfao served as Senior Vice President, Worldwide Sales, Marketing and Service
for SQA, Inc. From August 1993 until October 1995, he served as Senior Vice
President, Worldwide Sales, Support and Channel Marketing for Claris
Corporation. Prior to that, Mr. Orfao held a series of sales and operational
positions of increasing responsibility at Frame Technology Corporation since
1988.
Joseph J. Allaire founded Allaire in May 1995 and served as Chairman of the
Board of Directors, Chief Executive Officer and President from inception to
January 1997. Since January 1997, Mr. Allaire has continued to serve as Chairman
of the Board of Directors, as well as Chief Technology Officer and Executive
Vice President, Products. From September 1993 to June 1995, Mr. Allaire
performed software engineering services for several private companies.
David A. Gerth has served as Allaire's Vice President, Finance and Operations,
Chief Financial Officer and Treasurer since April 1997. From November 1995 to
April 1997, Mr. Gerth served as Chief Financial Officer for Visibility Software,
Inc., a software company. From July 1995 to November 1995, he served as Chief
Financial Officer for Computron Software, Inc., a software company. From April
1994 to July 1995, Mr. Gerth served as Director of Finance for Powersoft. Prior
to that, Mr. Gerth served in a number of financial roles of increasing
responsibility for Computervision Corporation since 1981.
Amy E. Lewis has served as Allaire's Vice President, Worldwide Sales since April
1997. From June 1995 to March 1997, Ms. Lewis served as Director, North America
Field Sales for Claris Corporation. Prior to that, Ms. Lewis served as Manager,
North America Channel Sales for Apple Computer since April 1994. From February
1987 to December 1993, she was Director of Sales for Farallon Communications,
Inc., a networking hardware and software company.
Stephen F. Clark has served as Allaire's Vice President, Marketing since
September 1998. From January 1996 through September 1998, Mr. Clark held a
number of marketing positions of increasing responsibility at Sybase, a computer
software company, including Vice President, Tools and Application Servers and
Vice President and General Manager, Design Tools. From June 1993 to December
1995, Mr. Clark was a Product Marketing Manager for Powersoft.
Jack P. Lull has served as Allaire's Vice President, Engineering and Development
since December 1996. From January 1996 to
41
<PAGE>
August 1996, Mr. Lull served as Director of Development for Integrated
Industrial Information, Inc., a computer consulting company. From January 1993
to December 1995, Mr. Lull served as Director of Development for Powersoft.
Maria Morrissey has served as Allaire's Vice President, Worldwide Services and
Support since September 1996. From February 1996 to July 1996, Ms. Morrissey
served as Vice President, Product Development for Computer Channel, Inc., an
education software company. From December 1992 to January 1996, she served as
Director, Professional Services for Powersoft.
Jonathan A. Flint has served as a director of Allaire since June 1996. Since May
1995, Mr. Flint has been a founder and a General Partner of Polaris Venture
Partners, a management company affiliated with the Polaris entities. Prior to
that, Mr. Flint was a General Partner of certain funds managed by Burr, Egan,
Deleage & Co., a venture capital firm and the lead venture investor in
Powersoft, a leading provider of application development tools. Mr. Flint served
as a director of Powersoft from 1991 to 1995.
John J. Gannon has served as a director of Allaire since December 1996. Since
June 1998, Mr. Gannon has served as a General Partner and Chief Financial
Officer of Polaris Venture Partners, a management company affiliated with the
Polaris entities. From June 1996 to April 1998, Mr. Gannon served as the Chief
Financial Officer for Firefly Network, Inc., an Internet software company. From
October 1992 to June 1996, Mr. Gannon worked for Powersoft, where he held
several positions including Chief Financial Officer and Vice President of
Finance and Administration.
Thomas A. Herring has served as a director of Allaire since June 1997. In
October 1998, Mr. Herring joined Polaris Venture Partners, a management company
affiliated with the Polaris entities, as a Venture Partner. From December 1997
until October 1998, Mr. Herring served as Senior Vice President of Compuware
Corporation, which acquired Nu-Mega Technologies, Inc. in December 1997. From
May 1996 to December 1997, Mr. Herring was the President and Chief Executive
Officer of Nu-Mega Technologies. From July 1995 to June 1996, Mr. Herring was
Vice President of Corporate Marketing for Sybase. Prior to that, he was Vice
President, Worldwide Marketing and Business Development for Powersoft since June
1990. Mr. Herring also serves as a director of PSW Technologies, Inc.
Mitchell Kapor has served as a director of Allaire since March 1997. Mr. Kapor
co-founded the Electronic Frontier Foundation, a nonprofit Internet
organization, in 1990, and served as its Chairman from 1993 to 1995 and as a
director from 1995 to 1996. Mr. Kapor designed Lotus 1-2-3, and founded Lotus
Development Corporation in 1982 and served as its President and Chief Executive
Officer from 1982 to 1986. Mr. Kapor also serves as a director of RealNetworks,
Inc.
Executive officers of Allaire are appointed by and serve at the discretion of
the Board of Directors. There are no family relationships among any of the
executive officers or directors of Allaire.
42
<PAGE>
Item 11. Executive Compensation
The following table sets forth the total compensation paid or accrued for 1998
for Allaire's Chief Executive Officer and the four other most highly compensated
executive officers who were employed by Allaire at December 31, 1998
(collectively, the "Named Executive Officers"). For Mr. Orfao, the number of
securities underlying options excludes 50,000 shares of common stock underlying
a below-market option granted in 1998 in lieu of a cash bonus for services
rendered in 1997. Ms. Lewis' bonus of $84,533 represents commissions earned.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------- ------
Number of Securities
Name and Principal Position Salary Bonus Underlying Options
--------------------------- ------ ----- ------------------
<S> <C> <C> <C>
David J. Orfao........................................ $167,355 $58,800 0
President, Chief Executive Officer
and Director
Joseph J. Allaire..................................... $162,124 $59,963 0
Chairman of the Board of Directors,
Chief Technology Officer and
Executive Vice President, Products
Amy E. Lewis.......................................... $114,636 $84,533 0
Vice President, Worldwide Sales
David A. Gerth........................................ $151,159 $30,329 0
Vice President, Finance and Operations
Chief Financial Officer and Treasurer
Jack P. Lull.......................................... $133,033 $26,400 0
Vice President, Engineering and
Development
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth grants of stock options to each of the Named
Executive Officers during 1998. No stock appreciation rights were granted during
1998. The amounts reported as the potential realizable values for Mr. Orfao's
option grant represent hypothetical values that may be realized upon exercise of
the options immediately prior to the expiration of their term assuming the
specified compound rates of appreciation (5% and 10%) compounded annually over
the term of the option. These numbers are calculated based on rules promulgated
by the Securities and Exchange Commission. Actual gains, if any, on stock option
exercises and common stock holdings are dependent on the timing of such exercise
and the future performance of the common stock. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that the
amounts reflected will be received by the individuals.
<TABLE>
<CAPTION>
Individual Grants
-----------------
Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Exercise Annual Rates of
Underlying Granted to or Base Stock Price
Options Employees in Price Expiration Appreciation for
Granted Fiscal Year Per Share Date Option Term
------- ----------- --------- ---- -----------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C>
David J. Orfao................... 50,000 9.0% $0.01 1/15/08 $243,834 $388,561
Joseph J. Allaire................ 0 -- -- -- -- --
Amy E. Lewis..................... 0 -- -- -- -- --
David A. Gerth................... 0 -- -- -- -- --
Jack P. Lull..................... 0 -- -- -- -- --
</TABLE>
43
<PAGE>
Option Exercises and Fiscal Year-End Values
The following table sets forth certain information regarding stock options
exercised by Named Executive Officers in 1998, and exercisable and unexercisable
stock options held as of December 31, 1998 by each of the Named Executive
Officers. Certain of the shares acquired on exercise listed below remained
subject to Allaire's right to repurchase as of December 31, 1998. Although the
options listed as unexercisable were in fact exercisable at December 31, 1998,
the shares of common stock issuable upon exercise of these options would be
subject to Allaire's right to repurchase at the option exercise price. Such
right of repurchase expires according to the original option vesting schedule.
The value of unexercised in-the-money options has been calculated by determining
the difference between the exercise price per share payable upon exercise of
such options and the initial public offering price of $20.00.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Year-End at Fiscal Year-End
Acquired Value ------------------- ------------------
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David J. Orfao............. 305,000 $787,000 -- 255,000 -- $4,972,500
Joseph J. Allaire.......... -- -- -- -- -- --
Amy E. Lewis............... 105,000 $262,500 -- -- -- --
David A. Gerth............. 105,000 $262,500 -- -- -- --
Jack P. Lull............... -- -- 129,375 100,625 $2,522,813 $1,962,188
</TABLE>
Director Compensation
Directors of Allaire are reimbursed for expenses incurred in attending meetings
of the Board of Directors. Directors of Allaire generally are not paid any
separate fees for serving as directors. On December 31, 1996, Allaire granted to
Mr. Gannon an option to purchase 25,000 shares of common stock at an exercise
price of $.50 per share. On March 21, 1997, Allaire granted to Mr. Kapor an
option to purchase 35,000 shares of common stock at an exercise price of $.50
per share. On June 18, 1997, Allaire granted to Mr. Herring an option to
purchase 25,000 shares of common stock at an exercise price of $.50 per share.
These options become exercisable for shares of common stock not subject to
repurchase by Allaire according to the following schedule: 25% of the option
shares one year from the grant date, and 1/36 of the remaining shares on the
first of each month thereafter for 36 months. These options have maximum terms
of 10 years measured from the grant date, subject to earlier termination
following the cessation of the respective director's Board service.
Severance Arrangement; Change in Control Arrangements
Mr. Orfao is entitled to continue to receive his base salary and benefits for 12
months in the event he is involuntarily terminated for reasons other than cause.
Additionally, Mr. Orfao is entitled to accelerated vesting of his unvested
options to purchase common stock in the event there is a change in control, as
defined in Mr. Orfao's option agreement, of Allaire and
o he is terminated without cause within six months of the change in control;
o he is not offered a position with the successor comparable to his current
position with Allaire after the change in control; or
o he is removed from a comparable position within six months of the change in
control.
The 1997 plan and the underlying option agreements provide for the accelerated
vesting of all unvested options and other rights granted pursuant to the plan in
the event there is a merger or consolidation involving Allaire, unless
appropriate provision shall be made for outstanding options and other rights by
the substitution of options, stock appreciation rights and appropriate voting
common stock of the corporation surviving any such merger or consolidation (or
the parent of such surviving corporation).
Benefit Plans
1997 Stock Incentive Plan
In 1997, the Board of Directors adopted and Allaire's stockholders approved the
1997 Stock Incentive Plan. A total of 1,726,000 shares of common stock have been
reserved for issuance under the 1997 plan. The 1997 plan authorizes the grant of
options to purchase common stock intended to qualify as incentive stock options,
as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and the grant of options that do not so qualify. The exercise price of
incentive options granted under the 1997 plan must be at least equal to the fair
market value of the common stock on the date of grant. The exercise price of
incentive options granted to an optionee who owns stock possessing more than 10%
of the voting power of Allaire's outstanding capital stock must be at least
equal to 110% of the fair market value of the common stock on the date of grant,
and such optionee must exercise his or her option within five years from the
date of the grant of such option. The exercise price of nonqualified options
granted under the 1997 plan must be at least equal to 50% of the fair market
value of the common stock on the date of grant. The 1997 plan provides,
44
<PAGE>
that, upon a merger or consolidation of Allaire, all outstanding plan options
and other awards must be substituted for with similar options or awards of the
corporation surviving any such merger or consolidation, or such options or
awards shall become immediately exercisable in full. The 1997 plan also provides
for awards of stock appreciation rights, performance shares, restricted stock
and other stock-based awards.
The 1997 plan is administered by the Compensation Committee. The Compensation
Committee selects the individuals to whom options will be granted and determines
the option exercise price and other terms of each award, subject to the
provisions of the 1997 plan. Incentive options may be granted under the 1997
plan to key employees of Allaire and its affiliates within the meaning of the
Code, including officers and directors of Allaire and its affiliates who are
also employees. Nonqualified options may be granted under the 1997 plan to
officers and other employees and to directors and other individuals providing
services to Allaire, whether or not they are employees of Allaire.
1998 Stock Incentive Plan
The Board of Directors has adopted and Allaire's stockholders have approved the
1998 Stock Incentive Plan. A total of 1,900,000 shares of common stock have been
reserved for issuance under the 1998 plan. The 1998 plan authorizes the grant of
incentive options and nonqualified options. The exercise price of incentive
options granted under the 1998 plan must be at least equal to the fair market
value of the common stock of Allaire on the date of grant. The exercise price of
incentive options granted to an optionee who owns stock possessing more than 10%
of the voting power of Allaire's outstanding capital stock must be at least
equal to 110% of the fair market value of the common stock on the date of grant,
and such optionee must exercise his or her option within five years from the
date of the grant of such option. There are no limits on the exercise price of
nonqualified options granted under the 1998 plan. The 1998 plan provides, that,
upon a change in control of Allaire, all outstanding plan options and other
awards may be substituted for similar options or awards of the corporation
surviving any such change in control, may become immediately exercisable in full
or terminate as of the effective date of such change in control, provided that
the holders of such options or awards have the right to exercise such options or
awards to the extent the same are then exercisable. The 1998 plan also provides
for awards of stock appreciation rights, performance shares, restricted stock
and other stock-based awards.
The 1998 plan is administered by the Compensation Committee. The Compensation
Committee selects the individuals to whom options will be granted and determines
the option exercise price and other terms of each award, subject to the
provisions of the 1998 plan. Incentive options may be granted under the 1998
plan to key employees of Allaire and its affiliates within the meaning of the
Code, including officers and directors of Allaire and its affiliates who are
also employees. Nonqualified options may be granted under the 1998 plan to
directors, officers and employees of Allaire and other individuals providing
services to Allaire.
1998 Employee Stock Purchase Plan
The Board of Directors has adopted and Allaire's stockholders have approved the
1998 Employee Stock Purchase Plan. The stock purchase plan authorizes the
issuance of up to an aggregate of 300,000 shares of common stock to
participating employees. The stock purchase plan will be administered by the
Compensation Committee.
Under the terms of the stock purchase plan, all employees of Allaire (other than
seasonal employees) who have completed three months of employment with Allaire
and whose customary employment is more than part-time (i.e. more than 20 hours
per week and more than five months in the calendar year) will be eligible to
participate in the stock purchase plan. Employees who own stock, and/or hold
outstanding options to purchase stock, representing 5% or more of the total
combined voting power or value of all classes of stock of Allaire will not be
eligible to participate in the stock purchase plan.
The right to purchase common stock under the stock purchase plan will be made
available through a series of offerings. On the first day of an offering period,
Allaire will grant to each eligible employee who has elected in writing to
participate in the stock purchase plan an option to purchase shares of common
stock. The employee will be required to authorize an amount (between 1% and 10%
of the employee's compensation) to be deducted from the employee's pay during
the offering period. On the last day of the offering period, the employee will
be deemed to have exercised the option, at the option exercise price, to the
extent of accumulated payroll deductions. Under the terms of the stock purchase
plan, the option exercise price is an amount equal to 85% of the fair market
value of one share of common stock on either the first or last day of the
offering period, whichever is lower.
No employee may be granted an option that would permit the employee's rights to
purchase common stock to accrue at a rate in excess of $25,000 of the fair
market value of the common stock, determined as of the date the option is
granted, in any calendar year.
Allaire expects that the first offering period under the stock purchase plan
will commence on July 1, 1999.
Allaire Corporation 401(k) Plan
Allaire maintains a 401(k) plan, qualified under Section 401(k) of the Code. All
employees of Allaire who are at least 21 years of age are eligible to make
salary reduction contributions pursuant to the 401(k) plan. A participant may
contribute a maximum of 15% of his or her pre-tax salary, commissions and
bonuses through payroll deductions (up to the statutorily prescribed annual
limit of $10,000 in
45
<PAGE>
1998) to the 401(k) plan. The percentage elected by more highly compensated
participants may be required to be lower. Allaire may also make discretionary
profit-sharing contributions on behalf of participants who are at least 21 years
of age and who either have completed at least 500 hours of service during the
fiscal year or are employed by Allaire on the last day of the fiscal year. Any
profit-sharing contribution is allocated to eligible participants as a
percentage of their total compensation (up to the statutorily prescribed maximum
of $160,000 in 1998). While a participant's contribution amount is always 100%
vested, the amount attributable to profit sharing contributions is not fully
vested until the participant has three full years of service with Allaire.
Allaire determines the level of the discretionary contributions on an annual
basis. Through December 31, 1998, Allaire made no profit-sharing contributions
to the 401(k) plan.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee takes recommendations concerning salaries and
incentive compensation for employees of and consultants to Allaire and
administers and grants stock options pursuant to Allaire's stock option plans.
No executive officer of Allaire has served as a director or member of the
compensation committee (or other committee serving an equivalent function) of
any other entity, whose executive officers served as a director of or member of
the Compensation Committee of Allaire.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of Allaire's common stock as of March 2, 1999 by: (a) each person
known by Allaire to be the beneficial owner of more than 5% of its common stock;
(b) each Named Executive Officer; (c) each of Allaire's directors; and (d) all
executive officers and directors as a group. Unless otherwise noted below, the
address of each person listed on the table is c/o Allaire Corporation, One
Alewife Center, Cambridge, MA 02140.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The following are deemed to be beneficially
owned and outstanding for purposes of calculating the number of shares and the
percentage beneficially owned by that person or entity:
o shares of common stock issuable by Allaire pursuant to options which may be
exercised within 60 days after March 2, 1999 and not subject to repurchase by
Allaire; and
o shares of common stock issuable by Allaire pursuant to warrants which may be
exercised within 60 days after March 2, 1999.
However, these shares are not deemed to be beneficially owned and outstanding
for purposes of computing the percentage beneficially owned by any other person
or entity.
Except as otherwise indicated, each stockholder named in the table has sole
voting and investment power with respect to the shares set forth opposite such
stockholder's name. For purposes of calculating the percentage beneficially
owned, the number of shares deemed outstanding: (a) 10,875,877 shares of common
stock outstanding as of March 2, 1999 and the presently exercisable options and
presently exercisable warrants held by that person.
<TABLE>
<CAPTION>
Number of Shares Percentage of Common
Name of Beneficial Owner Beneficially Owned Stock Outstanding
------------------------ ------------------ -----------------
<S> <C> <C>
Joseph J. Allaire....................................... 2,005,000 18.4%
Entities affiliated with Polaris Venture
Management Co., LLC (1)............................... 1,390,836 12.8%
1000 Winter Street, Suite 3350
Waltham, MA 02154
Jonathan A. Flint (2)................................... 1,390,836 12.8%
1000 Winter Street, Suite 3350
Waltham, MA 02154
BancBoston Ventures Inc. (3)............................ 1,010,500 9.3%
175 Federal Street
Boston, MA 02110
Peter R. Roberts (4).................................... 1,010,500 9.3%
175 Federal Street
Boston, MA 02110
David J. Orfao.......................................... 305,500 2.8%
Amy E. Lewis............................................. 105,500 1.0%
David A. Gerth........................................... 105,500 1.0%
Jack P. Lull............................................. 151,042 1.4%
46
<PAGE>
John J. Gannon........................................... 18,578 *
1000 Winter Street, Suite 3350
Waltham, MA 02154
Thomas A. Herring........................................ 25,500 *
1000 Winter Street, Suite 3350
Waltham, MA 02154
Mitchell Kapor........................................... 216,675 2.0%
One Broadway
Cambridge, MA 02142
All executive officers and directors as a
group (12 persons)..................................... 5,391,631 48.8%
</TABLE>
* Represents beneficial ownership of less than 1%.
(1) Polaris Venture Management Co., LLC manages Polaris Venture Partners L.P.
and Polaris Founders' Fund. Mr. Flint, a director of Allaire, is a General
Partner of Polaris Venture Management Co., LLC and has shared voting and
investment power with respect to the shares held by the Polaris entities.
However, Mr. Flint disclaims his beneficial ownership of all such shares, except
to the extent of his pecuniary interest therein.
(2) Includes shares owned beneficially by Polaris Venture Management Co., LLC
(see note 1).
(3) Mr. Roberts, a director of Allaire at March 2, 1999, is a managing director
of BancBoston Ventures and has shared voting and investment power with respect
to the shares held by BancBoston Ventures. However, Mr. Roberts disclaims
beneficial ownership of all such shares, except to the extent of his pecuniary
interest therein. Mr. Roberts resigned from the Board of Directors on March 19,
1999.
(4) Includes shares owned beneficially by BancBoston Ventures (see note 3).
47
<PAGE>
Item 13. Certain Relationships and Related Transactions
Organization of Allaire
In connection with its formation, Allaire issued 2,040,000 shares of common
stock to founder Joseph J. Allaire for cash consideration of $51,000, and 40,000
shares to Jeremy D. Allaire, the brother of Joseph J. Allaire, for cash
consideration of $1,000. Prior to the closing of the initial public offering,
Joseph J. Allaire's shares were subject to a stock restriction agreement.
Sales of Stock
Beginning in June 1996, Allaire issued an aggregate of 514,306 shares of its
Series B Redeemable Convertible Preferred Stock ("Series B Preferred Stock") to
private investors for aggregate consideration of $2,324,664. Allaire issued
364,684 shares of Series B Preferred Stock to Polaris Venture Partners Limited
Partnership ("Polaris Venture Partners L.P.") for $1,648,372, and 22,484 shares
of Series B Preferred Stock to Polaris Venture Partners Founders' Fund Limited
Partnership ("Polaris Founders' Fund"; and together with Polaris Venture
Partners L.P., the "Polaris entities") for $101,628. The Polaris entities own
beneficially more than 5% of the outstanding shares of stock of Allaire. In
addition, Jonathan A. Flint, John Gannon and Thomas Herring, who are directors
of Allaire, are affiliated with the Polaris entities. Pursuant to Allaire's
Certificate of Incorporation, each share of Series B Preferred Stock
automatically converted into two shares of common stock upon the closing of the
initial public offering in January 1999.
Beginning in June 1996, Allaire issued an aggregate of 169,200 shares of its
Series C Redeemable Convertible Preferred Stock ("Series C Preferred Stock") to
private investors for aggregate consideration of $999,972. Allaire issued 79,687
shares of Series C Preferred Stock for $470,950 to Polaris Venture Partners L.P.
and 4,913 shares of Series C Preferred Stock for $29,036 to Polaris Founders'
Fund. Allaire also issued 84,600 shares of Series C Preferred Stock in April
1997 for $499,986 to Mitchell Kapor, a director of Allaire. Pursuant to
Allaire's Certificate of Incorporation, each share of Series C Preferred Stock
automatically converted into two shares of common stock upon the closing of the
initial public offering in January 1999.
In May and June 1997, Allaire issued an aggregate of 2,336,909 shares of its
Series D Redeemable Convertible Preferred Stock ("Series D Preferred Stock") to
private investors for aggregate consideration of $9,347,636. In this
transaction, Allaire issued 57,894 shares of Series D Preferred Stock for
$231,576 to Mitchell Kapor, 413,910 shares of Series D Preferred Stock for
$1,655,640 to Polaris Venture Partners L.P., 23,590 shares of Series D Preferred
Stock for $94,360 to Polaris Founders' Fund, and 1,000,000 shares of Series D
Preferred Stock for $4,000,000 to BancBoston Ventures Inc. ("BancBoston").
BancBoston owns beneficially more than 5% of the outstanding shares of stock of
Allaire, and Peter R. Roberts, a director of Allaire until March 19, 1999, is a
managing director of BancBoston. Pursuant to Allaire's Certificate of
Incorporation, each share of Series D Preferred Stock will automatically convert
into one share of common stock upon the closing of the offering. Two months
prior to the issuance of the Series D Preferred Stock, Polaris Venture Partners
L.P. lent Allaire $238,412 pursuant to a Promissory Note at an interest rate of
10%, and Polaris Founders' Fund lent Allaire $13,588 pursuant to a Promissory
Note at an interest rate of 10% (collectively, the "Polaris Notes"). The Polaris
Notes were converted in connection with the issuance of Series D Preferred Stock
to the Polaris entities.
Issuance of Warrants
In connection with the issuance of the Polaris Notes, in March 1997 Allaire
issued a warrant to Polaris Venture Partners L.P. to purchase 5,960 shares of
common stock at an exercise price of $4.00 per share, and a warrant to Polaris
Founders' Fund to purchase 340 shares of common stock at an exercise price of
$4.00 per share. Both warrants are currently exercisable in whole or in part, at
any time or from time to time, until March 7, 2002, and both contain certain
protections against dilution resulting from stock splits, stock dividends and
similar events.
Stock Restriction Agreement
In May 1997, Allaire entered into an amended and restated stock restriction
agreement with the Polaris entities, BancBoston and certain other stockholders
(collectively, the "Holders"), and Joseph J. Allaire. Pursuant to this
agreement, Allaire and the Holders have a right of participation in and a right
of first refusal with respect to certain sales of shares of common stock by Mr.
Allaire. The agreement also grants Allaire the right to purchase a certain
number of Mr. Allaire's shares, at a price of $2.26 per share, in the event he
ceases to be affiliated with Allaire. In addition, the parties agreed to fix the
number of directors of Allaire at seven and to elect to the Board of Directors
the following individuals:
o Mr. Allaire, for as long as he is affiliated with Allaire;
o one member designated by Polaris Venture Partners L.P.;
o one member designated by BancBoston;
48
<PAGE>
o Allaire's Chief Executive Officer;
o John J. Gannon; and
o Mitchell Kapor.
The directors designa
ted pursuant to this agreement were Joseph J. Allaire,
Jonathan A. Flint, Peter R. Roberts, David J. Orfao, John J. Gannon and Mitchell
Kapor. This agreement automatically terminated upon the closing of Allaire's
initial public offering in January 1999. This termination eliminated Allaire's
right to purchase any of Mr. Allaire's shares of common stock.
Working Capital Line of Credit
In December 1998, the Polaris entities provided Allaire with a commitment to
provide a working capital line of credit in the event Allaire had not completed
its initial public offering or obtained other financing in excess of $3.0
million by February 28, 1999. The line of credit would have allowed Allaire to
borrow up to $3.0 million and would bear interest at a mutually agreed upon rate
between 5% and 20%. The line of credit commitment expired upon the closing of
Allaire's initial public offering in January 1999.
Yesler Software, Inc.
Allaire is a party to certain agreements with Yesler Software, Inc. Initially
capitalized in July 1998, Yesler was created to develop, market and sell a
commercial software application, conceived by Allaire, and designed for use by
end-users to create multimedia web-based presentations (the "Yesler Software").
The principal stockholders of Yesler are Allaire, Weld, Brown LLC and the
Polaris entities.
Allaire acquired its ownership interest in Yesler pursuant to a Contribution and
Restricted Stock Purchase Agreement dated July 14, 1998, between Allaire and
Yesler. Pursuant to this agreement, Allaire acquired 907,591 shares of Yesler
common stock, representing on that date approximately 34% of the outstanding
shares of capital stock of Yesler. The stock acquired by Allaire is subject to
vesting requirements, a right of repurchase by Yesler and certain transfer
restrictions. In exchange for the shares of Yesler common stock, Allaire
assigned its rights to the Yesler Software source code to Yesler, agreed to
provide Yesler with technical, sales and marketing support and agreed not to
compete with Yesler. Also in connection with its acquisition of the Yesler
common stock, Allaire entered into an original equipment manufacturer agreement
with Yesler whereby Allaire granted Yesler the right to obtain, at a 95%
discount, certain of Allaire's commercial software products for distribution
together with the Yesler Software as a single commercial unit. In addition,
Allaire entered into a Voting Agreement with Weld Brown and the Polaris entities
which grants Allaire the right to designate one member of Yesler's four-person
board of directors. Allaire's designee to the Yesler board is Joseph J. Allaire.
Yesler also granted Allaire registration, information and certain other rights
pursuant to an Investor Rights Agreement among Yesler, Allaire, Weld Brown and
the Polaris entities. In August 1998, Allaire transferred 76,903 shares of
Yesler common stock owned by Allaire to three of its employees, including 38,451
shares of Yesler common stock to Maria Morrissey, Vice President, Worldwide
Services and Support. The fair value of the shares transferred was not material
at the time of transfer.
On the date Allaire entered into the Yesler Agreement, the Polaris entities
purchased for $750,000 preferred stock of Yesler representing approximately 33%
of the outstanding shares of capital stock of Yesler on that date. Jonathan A.
Flint and Thomas Herring, who are directors of Allaire, are directors of Yesler.
See Note 4 of Notes to Financial Statements.
Allaire believes that all transactions set forth above were made on terms no
less favorable to it than would have been obtained from unaffiliated third
parties.
49
<PAGE>
PART IV
Item 14. Exhibits and Financial Statement Schedules
(a) The following documents are filed as a part of this report:
1. Financial Statements:
The financial statements filed as part of this report are listed on
the Index to Financial Statements included in Item 8 and are
incorporated herein by reference.
2. Financial Statement Schedules:
The financial statement schedules filed as part of this report are
listed on the Index to Financial Statements included in Item 8 and are
incorporated herein by reference.
3. Exhibits
The following exhibits are filed as part of, or incorporated by
reference into, this Form 10-K
<TABLE>
<CAPTION>
Exhibit Exhibit Title
- - ------- -------------
Number
- - ------
<S> <C>
1.1 Form of Underwriting Agreement (1)
3.3 Amended and Restated Certificate of Incorporation of Allaire (1)
3.5 Amended and Restated By-Laws of Allaire (1)
4.1 Specimen certificate for the Common Stock of Allaire (1)
10.1 1997 Stock Incentive Plan as amended (1)
10.2 1998 Stock Incentive Plan (1)
10.3 1998 Employee Stock Purchase Plan (1)
10.4 Option Agreement for David J. Orfao (1)
10.5 Form of Option Agreement for other executive officers (1)
10.6 Office Lease Agreement between Allaire and One Alewife Center Realty Trust, dated November 5, 1997 (1)
10.7 Lease Agreement between Allaire and CambridgePark Two, L.P., dated May 21, 1998 (1)
10.8 Loan and Security Agreement between Allaire and Silicon Valley Bank, dated March 26, 1998 (1)
10.9 Negative Pledge Agreement between Allaire and Silicon Valley Bank, dated March 26, 1998 (1)
10.10 Loan Modification Agreement between Allaire and Silicon Valley Bank, dated August 6, 1998 (1)
10.11 Loan Modification Agreement between Allaire and Silicon Valley Bank, dated December 9, 1998 (1)
10.12 Senior Loan and Security Agreement between Allaire and Phoenix Leasing Incorporated, dated May 1, 1998 (1)
10.13 Warrant Agreement between Allaire and Comdisco, Inc., dated August 21, 1998 (1)
10.14 Warrant Agreement between Allaire and Gregory Stento, dated August 21, 1998 (1)
10.15 Warrant Agreement between Allaire and Polaris Venture Partners, L.P., dated March 7, 1997 (1)
10.16 Warrant Agreement between Allaire and Polaris Venture Partners Founders' Fund, L.P., dated March 7, 1997 (1)
10.17 Amended and Restated Registration Rights Agreement, dated May 15, 1997 (1)
10.18 Waiver and Amendment No. 1 to Amended and Restated Registration Rights Agreement, dated December 7, 1998 (1)
10.19 Letter of Offer of Employment from Allaire to David J. Orfao, dated December 23, 1996 (1)
10.20 Contribution and Restricted Stock Purchase Agreement between Allaire and Yesler Software, Inc., dated July
14, 1998 (1)
10.21 Working Capital Line of Credit Letter from Polaris Ventures Partners, L.P., and Polaris Venture Partners
Founders' Fund, L.P., dated December 4, 1998 (1)
11.1 Statement re computation of net loss per share and unaudited pro forma net loss per share
27.1 Financial Data Schedule
</TABLE>
(1) Previously filed with the Securities and Exchange Commission as the
identically numbered exhibit to Allaire's Registration Statement on Form S-1
(File No. 333-68639)
(b) Reports on Form 8-K:
None
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ALLAIRE CORPORATION
By: /s/ DAVID J ORFAO
---------------------------------
David J. Orfao
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indcated.
Signature Title Date
--------- ----- ----
/s/ Joseph J. Allaire
- - ------------------------ Chairman of the Board March 30, 1999
Joseph J. Allaire
/s/ David J. Orfao President, Chief Executive Officer
- - ------------------------ and Director (principal executive March 30, 1999
David J. Orfao officer)
Vice President, Finance and
/s/ David A. Gerth Operations, Treasurer and Chief March 30, 1999
- - ------------------------ Financial Officer (principal
David A. Gerth financial and accounting officer)
/s/ Jonathan A. Flint
- - ------------------------ Director March 30, 1999
Jonathan A. Flint
/s/ John J. Gannon
- - ------------------------ Director March 30, 1999
John J. Gannon
/s/ Thomas A. Herring
- - ------------------------ Director March 30, 1999
Thomas A. Herring
/s/ Mitchell Kapor
- - ------------------------ Director March 30, 1999
Mitchell Kapor
51
<PAGE>
Schedule II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Allowance for Doubtful Accounts and
Sales Returns Year ended December 31,
-----------------------------------
1996 1997 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance at beginning of period .............. $ 10 $ 220 $ 487
Additions:
Charged to expense ....................... 165 164 53
Charged against other accounts ........... 45 165 38
Deductions:
Write-offs and returns ................... -- (62) (99)
----- ----- -----
Balance at end of period .................... $ 220 $ 487 $ 479
===== ===== =====
</TABLE>
52
Exhibit 11.1
Statement re Computation of net loss per share and unaudited pro forma net loss
per share
<TABLE>
<CAPTION>
Year ended
December 31,
1996 1997 1998
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Basic and diluted net loss per share:
Net loss $ (1,698) $ (7,425) $(10,770)
========= ========= ========
Basic and diluted weighted average
common shares outstanding 1,743 1,687 2,938
========= ========= ========
Basic and diluted net loss per share $ (0.97) $ (4.40) $ (3.67)
========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
Year ended
December 31,
1997 1998
---- ----
(in thousands, except per share data)
<S> <C> <C>
Unaudited pro forma basic and diluted net loss per share:
Net loss $ (7,425) $(10,770)
======== ========
Unaudited pro forma basic and diluted weighted average shares outstanding:
Shares attributable to common stock (1) 2,515 3,321
Shares attributable to the assumed
conversion of Preferred Stock upon
closing of an initial public offering 2,863 3,818
-------- --------
Unaudited pro forma basic and diluted
weighted average shares 5,378 7,139
======== ========
Unaudited pro forma basic and diluted
net loss per share $ (1.38) $ (1.51)
======== ========
</TABLE>
(1) Includes outstanding common stock subject to repurchase under a stock
restriction agreement which lapsed upon the consummation of the initial public
offering in January 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLAIRE
CORPORATION'S FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001016139
<NAME> ALLAIRE CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,847
<SECURITIES> 0
<RECEIVABLES> 3,621
<ALLOWANCES> 287
<INVENTORY> 141
<CURRENT-ASSETS> 6,049
<PP&E> 5,093
<DEPRECIATION> (1,609)
<TOTAL-ASSETS> 9,953
<CURRENT-LIABILITIES> 14,562
<BONDS> 0
12,673
751
<COMMON> 41
<OTHER-SE> (19,267)
<TOTAL-LIABILITY-AND-EQUITY> 9,953
<SALES> 17,187
<TOTAL-REVENUES> 20,512
<CGS> 1,915
<TOTAL-COSTS> 5,996
<OTHER-EXPENSES> 25,252
<LOSS-PROVISION> 53
<INTEREST-EXPENSE> 170
<INCOME-PRETAX> (10,770)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,770)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,770)
<EPS-PRIMARY> (3.67)
<EPS-DILUTED> (3.67)
</TABLE>
