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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 1999
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ALLAIRE CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 7372 41-1830792
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
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ONE ALEWIFE CENTER
CAMBRIDGE, MASSACHUSETTS 02140
(617) 761-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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DAVID J. ORFAO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ALLAIRE CORPORATION
ONE ALEWIFE CENTER
CAMBRIDGE, MASSACHUSETTS 02140
(617) 761-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
ROBERT L. BIRNBAUM, ESQ.
WILLIAM R. KOLB, ESQ.
FOLEY, HOAG & ELIOT LLP
One Post Office Square
Boston, Massachusetts 02109
(617) 832-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM MAXIMUM
TITLE OF EACH CLASS OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE PER OFFERING REGISTRATION
REGISTERED REGISTERED SHARE PRICE FEE
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Common Stock, $.01 par value per share 288,583 $47.75 (1) $13,779,839 $3,831
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933 based on the
average of the high and low sale prices of the Registrant's Common Stock on
June 9, 1999, as reported on the Nasdaq Stock Market's National Market.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
288,583 SHARES OF COMMON STOCK
ALLAIRE CORPORATION
The 288,583 shares (the "Shares") of common stock, par value $.01 per share,
of Allaire Corporation covered by this prospectus are being offered by certain
stockholders of Allaire (the "Selling Stockholders") on a delayed or continuous
basis, pursuant to the exercise of registration rights. See "Selling
Stockholders."
Allaire will not receive any proceeds from the offering. Allaire will bear
the costs relating to the registration of the Shares offered hereby (other than
selling commissions).
The Selling Stockholders named herein or any pledgees, donees, transferees
or other successors in interest, may offer the Shares, from time to time during
the effectiveness of this registration statement, for sale through the Nasdaq
Stock Market's National Market, in the over-the-counter market, in one or more
negotiated transactions, or through a combination of methods of sale, at prices
and on terms then prevailing or at negotiated prices. Sales may be effected to
or through broker-dealers, who may receive compensation in the form of
discounts, concessions or commissions in connection therewith. See "Plan of
Distribution."
The common stock is traded on the Nasdaq Stock Market's National Market
under the symbol "ALLR." On June 9, 1999, the closing price for the common
stock, as reported on the Nasdaq Stock Market's National Market, was $49.00 per
share.
Investing in the common stock involves certain risks. See "Risk Factors"
beginning on page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
All securities to be registered hereby are to be offered by the Selling
Stockholders.
Prospectus dated June 15, 1999.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY............................................................................ 3
RISK FACTORS.................................................................................. 5
PRICE RANGE OF COMMON STOCK................................................................... 18
DIVIDEND POLICY............................................................................... 18
CAPITALIZATION................................................................................ 19
SELECTED FINANCIAL DATA....................................................................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 21
BUSINESS...................................................................................... 36
MANAGEMENT.................................................................................... 49
CERTAIN TRANSACTIONS.......................................................................... 58
PRINCIPAL STOCKHOLDERS........................................................................ 60
DESCRIPTION OF CAPITAL STOCK.................................................................. 62
SELLING STOCKHOLDERS.......................................................................... 67
PLAN OF DISTRIBUTION.......................................................................... 69
LEGAL MATTERS................................................................................. 70
EXPERTS....................................................................................... 70
ADDITIONAL INFORMATION........................................................................ 70
INDEX TO FINANCIAL STATEMENTS................................................................. F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
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"Cold Fusion" and "Bright Tiger" are federally registered trademarks of
Allaire. Allaire has applied for federal registration of the trademarks
"Allaire" and "HomeSite". The Allaire, Cold Fusion and HomeSite logos are
trademarks of Allaire. Other trademarks or service marks appearing in this
prospectus are the property of their respective holders.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER
BEFORE INVESTING IN THE COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY.
ALLAIRE
We develop, market and support software for a wide range of Web development,
from building static Web pages to developing high-volume, interactive Web
applications. Our 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. Our products interoperate with emerging Web application
technologies as well as key enterprise information systems technologies. Our
flagship ColdFusion product line employs an easy to learn software development
language that allows developers to quickly and efficiently create Web
applications.
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 specifically designed for creating applications. The ease of
using languages such as HTML and XML, which use declarative, English-like tags,
has enabled nontraditional programmers to develop complex Web sites and Web
applications. ColdFusion uses the same easy to learn syntax as HTML and XML. By
using ColdFusion, Web developers avoid having to code simultaneously in
scripting languages and in tag-based markup languages.
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. Our principal executive offices are located at One Alewife
Center, Cambridge, Massachusetts 02140, and our telephone number at that
location is (617) 761-2000.
3
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THE OFFERING
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Common Stock offered by the Selling Stockholders....................... 288,583 shares
Common Stock outstanding (as of May 31, 1999).......................... 11,213,858 shares
Nasdaq National Market symbol.......................................... ALLR
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
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PERIOD FROM THREE MONTHS ENDED
INCEPTION
(MAY 5, 1995) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------------------- --------------------
1995 1996 1997 1998 1998 1999
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(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Total revenue..................................... $ -- $ 2,358 $ 7,650 $ 20,512 $ 4,032 $ 7,836
Total cost of revenue............................. -- 234 2,414 5,973 1,120 1,959
Gross profit...................................... -- 2,124 5,236 14,539 2,912 5,877
Total operating expenses.......................... 188 3,836 12,848 25,275 5,168 7,887
Loss from operations.............................. (188) (1,712) (7,612) (10,736) (2,256) (2,010)
Net loss.......................................... (188) (1,698) (7,425) (10,770) (2,211) (1,684)
Basic and diluted net loss per share.............. $ (0.09) $ (0.97) $ (4.40) $ (3.67) $ (0.89) $ (0.19)
Shares used in computing basic and diluted net
loss per share.................................. 2,200 1,743 1,687 2,938 2,477 8,819
Pro forma basic and diluted net loss per share.... $ (1.38) $ (1.51) $ (0.32) $ (0.17)
Shares used in per share computation of pro forma
basic and diluted net loss per share............ 5,378 7,139 6,804 9,757
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DECEMBER 31,
------------------------------------------- MARCH 31, 1999
1995 1996 1997 1998 --------------
--------- --------- --------- ---------- (UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 17 $ 526 $ 5,521 $ 1,847 $ 53,246
Working capital (deficit)............................... (231) 224 1,492 (8,513) 41,428
Total assets............................................ 119 2,038 9,697 9,953 61,373
Total long-term debt, net of current portion............ -- -- 499 1,193 989
Total redeemable convertible preferred stock............ -- 2,800 12,673 12,673 --
Total stockholders' equity (deficit).................... (181) (1,768) (9,153) (18,475) 44,936
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RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE
YOU PURCHASE ANY COMMON STOCK.
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WE HAVE A LIMITED OPERATING We commenced operations in May 1995 and we recorded our
HISTORY ON WHICH TO EVALUATE first revenue upon delivery of ColdFusion 1.5 to customers
OUR PROSPECTS in February 1996. Accordingly, we have only a limited
operating history on which you can base your evaluation of
our business and prospects. In addition, our 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.
WE MAY NOT BE PROFITABLE IN Since we began operations, we have incurred substantial net
THE FUTURE losses in every fiscal period. We cannot be certain when we
will become profitable, if at all. Failure to achieve
profitability may adversely affect the market price of our
common stock. At March 31, 1999, we had an accumulated
deficit of $21.9 million. We have 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 our business plan. Although we have 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.
OUR QUARTERLY RESULTS MAY Our quarterly revenue and operating results are difficult to
FLUCTUATE predict and may fluctuate significantly from quarter to
quarter. If our quarterly revenue or operating results fall
below the expectations of investors or public market
analysts, the price of our common stock could fall
substantially.
Our quarterly revenue may fluctuate for several reasons,
including the following:
- the market for Web development products is in an early
stage of development and it is therefore difficult to
accurately predict customer demand; and
- the sales cycle for our products and services varies
substantially from customer to customer and, if our
average sales price increases as we expect, we expect
the sales cycle to lengthen. As a result, we have
difficulty determining whether and when we will
receive license revenue from a particular customer.
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In addition, because our revenue from training services is
largely correlated with our license revenue, a decline in
license revenue could also cause a decline in our services
revenue in the same quarter or in subsequent quarters. Other
factors, many of which are outside our control, could also
cause variations in our quarterly revenue and operating
results.
Most of our expenses, such as employee compensation and
rent, are relatively fixed. Moreover, our expense levels are
based, in part, on our expectations regarding future revenue
increases. As a result, any shortfall in revenue in relation
to our expectations could cause significant changes in our
operating results from quarter to quarter and could result
in quarterly losses.
THE DEVELOPMENT OF A MARKET If the market for Web development products does not grow at
FOR OUR PRODUCTS IS UNCERTAIN a significant rate, our 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.
OUR PERFORMANCE WILL DEPEND Our future success will depend substantially upon the
ON THE GROWTH AND COMMERCIAL widespread adoption of the Internet as a primary medium for
ACCEPTANCE OF THE INTERNET commerce and business applications. If the Internet does not
become a viable and substantial commercial medium, our
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.
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WE COMPETE WITH MICROSOFT We currently compete with Microsoft in the market for Web
WHILE SIMULTANEOUSLY development products while simultaneously maintaining a
SUPPORTING MICROSOFT working relationship with Microsoft. Microsoft has a longer
TECHNOLOGIES operating history, a larger installed base of customers and
substantially greater financial, distribution, marketing and
technical resources than Allaire. As a result, we may not be
able to compete effectively with Microsoft now or in the
future, and our business, operating results and financial
condition may be materially adversely affected.
We expect that Microsoft's commitment to and presence in the
Web development products market will substantially increase
competitive pressure in the market. We believe 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.
We believe that we must maintain a working relationship with
Microsoft to achieve success. Most of our customers use
Microsoft-based operating platforms, so it is critical to
our success that our products be closely integrated with
Microsoft technologies. Notwithstanding our 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 our technology.
WE FACE SIGNIFICANT The Web development products market is intensely
COMPETITION FROM OTHER competitive. Many of our current and potential competitors
TECHNOLOGY COMPANIES have longer operating histories and substantially greater
financial, technical, marketing, distribution and other
resources than we do and therefore may be able to respond
more quickly than we can to new or changing opportunities,
technologies, standards or customer requirements. In
addition to Microsoft, we compete with other large Web and
database platform companies that offer a variety of software
products. We also compete with a number of medium-sized and
start-up companies that have introduced or that are
developing Web development products. In addition, we have
strategic relationships with NetObjects, a majority-owned
subsidiary of IBM, and Macromedia. In some cases, these
vendors compete with us, and there can be no assurance that
these strategic relationships will continue.
We expect 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 our products to achieve or maintain market acceptance.
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If, in the future, a competitor chooses to bundle a
competing Web development product with other products, the
demand for our products might be substantially reduced. In
addition, new technologies will likely increase the
competitive pressures that we face. The development of
competing technologies by market participants or the
emergence of new industry standards may adversely affect our
competitive position. As a result of these and other
factors, we may not be able to compete effectively with
current or future competitors, which would have a material
adverse effect on our business, operating results and
financial condition.
OUR SUCCESS DEPENDS ON OUR To increase our revenue, we must increase the size of our
ABILITY TO EXPAND OUR SALES sales force and the number of our indirect channel partners,
FORCE AND DISTRIBUTION including original equipment manufacturers, value-added
CHANNELS resellers and systems integrators. A failure to do so could
have a material adverse effect on our business, operating
results and financial condition. There is intense
competition for sales personnel in our business, and there
can be no assurance that we will be successful in
attracting, integrating, motivating and retaining new sales
personnel. Our existing or future channel partners may
choose to devote greater resources to marketing and
supporting the products of other companies. In addition, we
will need to resolve potential conflicts among our sales
force and channel partners.
OUR SUCCESS DEPENDS ON We derive a substantial portion of our revenue from a
ONGOING SALES THROUGH A limited number of distributors. For the quarter ended March
LIMITED NUMBER OF 31, 1999, revenue from our indirect distribution channel
DISTRIBUTORS accounted for approximately 54% of our total revenue, and
one distributor, Ingram Micro, accounted for approximately
31% of our total revenue. For 1998, revenue from our
indirect distribution channel accounted for approximately
45% of our total revenue, and Ingram Micro accounted for
approximately 29% of our 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 our business, operating results and financial condition.
Because we do not deal directly with end users when selling
through distributors, we are dependent upon the ability of
distributors to accurately forecast demand and maintain
appropriate levels of inventory. If a distributor purchases
excess product, we may be obligated to accept the return of
some products.
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WE MAY EXPERIENCE LOST OR A longer sales cycle reduces our ability to forecast revenue
DELAYED SALES AS OUR SALES levels. Any delay or loss in sales of our products could
CYCLE LENGTHENS have a material adverse effect on our business, operating
results and financial condition, and could cause our
operating results to vary significantly from quarter to
quarter. As we increase our marketing focus on larger
purchases by larger customers, we expect that increased
executive-level involvement of information technology
officers and other senior managers of our customers will
occur. Potential large sales may be delayed, or lost
altogether, because we will have to provide a more
comprehensive education to prospective customers regarding
the use and benefits of our products. Our customers'
purchase decisions may be subject to delays over which we
may have little or no control, including budgeting
constraints, internal purchase approval review procedures
and the inclusion or exclusion of our products on customers'
approved standards list.
OUR PERFORMANCE WILL DEPEND If our products do not continue to satisfy the Web developer
ON CONTINUED MARKET community or otherwise fail to sustain sufficient market
ACCEPTANCE OF OUR PRODUCTS acceptance, our business, operating results and financial
condition would be materially adversely affected. We believe
that a significant contributing factor to our initial growth
has been our ability to create and maintain strong
relationships with the community of Web developers that
initially adopted our products. This community of early
adopters demands rapid improvements in the performance,
features and reliability of our 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,
we believe there is a time-limited opportunity to achieve
and maintain market share in the Web development products
market.
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OUR EFFORTS TO DEVELOP BRAND We believe that developing and maintaining awareness of the
AWARENESS MAY BE UNSUCCESSFUL "Allaire," "ColdFusion" and "HomeSite" brand names is
critical to achieving widespread acceptance of our products.
If we fail to promote and maintain our brands or incur
significant related expenses, our business, operating
results and financial condition could be materially
adversely affected. To promote our brands, we may find it
necessary to increase our marketing budget or otherwise
increase our financial commitment to creating and
maintaining brand awareness among potential customers.
Although we have obtained a United States registration of
the trademark "Cold Fusion," we are aware of other
companies, including competitors, that use the word "Fusion"
in their marks alone or in combination with other words, and
we do 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 our brand
names may cause confusion among actual and potential
customers, which could prevent us from achieving significant
brand recognition.
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OUR PERFORMANCE DEPENDS ON We derive almost all of our revenue from licenses of our
THE SUCCESS OF COLDFUSION AND ColdFusion and HomeSite software products and related
HOMESITE services. Any competitive pressures or other factors that
adversely affect market acceptance of ColdFusion or HomeSite
software would have a material adverse effect on our
business, operating results and financial condition.
OUR FUTURE SUCCESS WILL To be competitive, we must develop and introduce product
DEPEND ON OUR ABILITY TO enhancements and new products which increase our customers'
ENHANCE EXISTING PRODUCTS AND ability to build and deploy Web applications. In the past,
DEVELOP NEW PRODUCTS we have been forced to delay introduction of several new
products. If we fail to develop and introduce new products
and enhancements successfully and on a timely basis, it
could have a material adverse effect on our business,
operating results and financial condition. The emerging
nature of the Web development products market requires that
we continually improve the performance, features and
reliability of our products, particularly in response to
competitive offerings and evolving customer needs. We must
also introduce enhancements to existing products as quickly
as possible and prior to the introduction of competing
products.
WE DEPEND ON THIRD PARTIES We license technology that is incorporated into our products
FOR TECHNOLOGY IN OUR from third parties. The loss of access to such technology
PRODUCTS could result in delays in our 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 our business, operating results
and financial condition. In light of the rapidly evolving
nature of Web technology and our strategy to pursue industry
partnerships, we believe that we 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 us on commercially reasonable terms, if at all.
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Moreover, although we are 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
we receive broad indemnification, third party indemnitors
are not always well capitalized and may not be able to
indemnify us in the event of infringement, resulting in
substantial exposure to us. There can be no assurance that
infringement or invalidity claims arising from the
incorporation of third party technology, and claims for
indemnification from our customers resulting from such
claims, will not be asserted or prosecuted against us. 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 our business, operating results and financial
condition.
WE MAY HAVE DIFFICULTY We have been experiencing a period of rapid growth that has
MANAGING OUR GROWTH been placing a significant strain on all of our resources.
The number of our employees increased from 95 at December
31, 1997 to 181 at March 31, 1999. To manage future growth
effectively we must maintain and enhance our 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 our products,
our ability to retain key personnel and our business,
operating results and financial condition.
WE ARE DEPENDENT ON JOSEPH Our future success depends to a significant degree on the
ALLAIRE AND DAVID ORFAO skills, experience and efforts of Joseph J. Allaire, our
founder, Chairman of the Board, Chief Technology Officer and
Executive Vice President, and David J. Orfao, our President
and Chief Executive Officer. The loss of the services of Mr.
Allaire or Mr. Orfao could have a material adverse effect on
our business, operating results and financial condition. We
also depend on the ability of our executive officers and
other members of senior management to work effectively as a
team. We do not have employment agreements with any of our
executive officers, and we do not have any key person life
insurance other than for Mr. Allaire and Mr. Orfao.
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WE MUST HIRE AND RETAIN Qualified personnel are in great demand throughout the
SKILLED PERSONNEL IN A TIGHT software industry. Our success depends in large part upon
LABOR MARKET our ability to attract, train, motivate and retain highly
skilled employees, particularly sales and marketing
personnel, software engineers and other senior personnel.
Our failure to attract and retain the highly trained
technical personnel that are integral to our direct sales,
product development, service and support teams may limit the
rate at which we can generate sales and develop new products
or product enhancements. This could have a material adverse
effect on our business, operating results and financial
condition.
OUR SUCCESS DEPENDS ON OUR Our success depends to a significant degree upon the
ABILITY TO PROTECT OUR protection of our software and other proprietary technology.
PROPRIETARY TECHNOLOGY The unauthorized reproduction or other misappropriation of
our proprietary technology could enable third parties to
benefit from our technology without paying us for it. This
could have a material adverse effect on our business,
operating results and financial condition.
Although we have taken steps to protect our proprietary
technology, they may be inadequate. Existing trade secret,
copyright and trademark laws offer only limited protection.
In addition, we rely 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 we market our products may afford little or no
effective protection of our intellectual property.
If we resort to legal proceedings to enforce our
intellectual property rights, the proceedings could be
burdensome and expensive and could involve a high degree of
risk.
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OTHER COMPANIES MAY CLAIM Although we attempt to avoid infringing known proprietary
THAT WE INFRINGE THEIR rights of third parties, we are subject to the risk of
PROPRIETARY TECHNOLOGY claims alleging infringement of third party proprietary
rights. If we were to discover that any of our products
violated third party proprietary rights, there can be no
assurance that we 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. We do
not conduct comprehensive patent searches to determine
whether the technology used in our 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 us to incur
substantial costs defending against the claim, even if the
claim is invalid, and could distract our management from our
business. Furthermore, a party making such a claim could
secure a judgment that requires us to pay substantial
damages. A judgment could also include an injunction or
other court order that could prevent us from selling our
products. Any of these events could have a material adverse
effect on our business, operating results and financial
condition.
OUR BUSINESS COULD BE Software products as complex as ours may contain undetected
ADVERSELY AFFECTED IF OUR errors or "bugs," which result in product failures. Errors
PRODUCTS CONTAIN ERRORS in certain of Allaire's products have been detected after
the release of the product. 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 our reputation, or damage
to our efforts to build brand awareness, any of which could
have a material adverse effect on our business, operating
results and financial condition.
WE COULD BE SUBJECT TO Many of the Web applications developed and deployed with our
PRODUCT LIABILITY CLAIMS products are critical to the operations of our customers'
RELATING TO OUR CUSTOMERS' businesses. Any failure in a customer's Web application
CRITICAL BUSINESS OPERATIONS could result in a claim for substantial damages against us,
regardless of our responsibility for such failure. Although
we maintain 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.
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
WE MAY HAVE DIFFICULTY On April 12, 1999, we acquired Bright Tiger Technologies,
INTEGRATING THE BUSINESS OF Inc. ("Bright Tiger"). Pursuant to the acquisition, Bright
BRIGHT TIGER Tiger became, and remains, a wholly-owned subsidiary of
Allaire. Based in Acton, Massachusetts, Bright Tiger has 15
employees and designs and markets Web site resource
management products to allow its customers to build and
manage fast, reliable Web sites. There can be no assurance
that we will be able to absorb and effectively manage the
foregoing acquisition. There can be no assurance that we
will be able to develop, market and sell the Bright Tiger
products successfully. The difficulty and management
distraction inherent in integrating the acquired business,
the substantial charges expected to be incurred in
connection with such acquisition, including costs of
integrating the business and transaction expenses arising
from the acquisition, the risks of entering markets in which
we have no or limited direct prior experience, the potential
loss of key employees of the acquired company and the risk
that the benefits sought in the acquisition will not be
fully achieved, could have a material adverse effect on our
business, operating results and financial condition.
WE MAY BE SUBJECT TO RISKS From time to time, we may pursue acquisitions to obtain
ASSOCIATED WITH FUTURE complementary products, services and technologies. On June
ACQUISITIONS 14, 1999, Allaire signed a definitive merger agreement to
acquire Live Software, Inc. for approximately 550,000 shares
of Allaire common stock. Closing of the acquisition of Live
Software is subject to the satisfaction of customary closing
conditions. An acquisition may not produce the revenue,
earnings or business synergies that we anticipated, and an
acquired product, service or technology might not perform as
we expected. In pursuing any acquisition, our management
could spend a significant amount of time and effort in
identifying and completing the acquisition. If we complete
an acquisition, we would probably have to devote a
significant amount of management resources to integrating
the acquired business with our existing business.
To pay for an acquisition, we might use capital stock or
cash. Alternatively, we might borrow money from a bank or
other lender. If we use capital stock, our stockholders
would experience dilution of their ownership interests. If
we use cash or debt financing, our financial liquidity will
be reduced.
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
WE MAY BE AFFECTED BY Many existing computer systems and software products do not
UNEXPECTED YEAR 2000 PROBLEMS properly recognize dates after December 31, 1999. This "Year
2000" problem could result in miscalculations, data
corruption, system failures or disruptions of operations. We
are subject to potential Year 2000 problems affecting our
products, our internal systems and the systems of our
vendors and distributors, any of which could have a material
adverse effect on our 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 our 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 our 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 our vendors or distributors could require us
to incur significant unanticipated expenses to remedy any
problems or replace affected vendors and could reduce our
revenue from our indirect distribution channel.
ALLAIRE'S EXISTING Our officers, directors and greater than ten percent
STOCKHOLDERS WILL EXERCISE stockholders together control approximately 39% of the
SIGNIFICANT CONTROL OVER outstanding common stock as of May 31, 1999. As a result,
ALLAIRE these stockholders, if they act together, will be able to
influence our 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.
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
CERTAIN PROVISIONS OF OUR Our corporate documents and Delaware law contain provisions
CHARTER AND OF DELAWARE LAW that might enable our management to resist a takeover of
MAKE A TAKEOVER OF ALLAIRE Allaire. These provisions might discourage, delay or prevent
MORE DIFFICULT a change in the control of Allaire or a change in our
management. These provisions could also discourage proxy
contests and make it more difficult for you and other
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.
FUTURE SALES BY EXISTING Of the 11,213,858 total outstanding shares of common stock
SECURITY HOLDERS COULD held by our existing stockholders as of May 31, 1999,
DEPRESS THE MARKET PRICE OF 7,860,524 shares are subject to "lock-up" agreements with
THE COMMON STOCK the representatives of the underwriters in our initial
public offering in January 1999. Beginning July 22, 1999,
the holders of these shares subject to such "lock-up"
agreements may be able to sell approximately an additional
7,525,000 shares in the public market. 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.
Some of our existing stockholders have the right to force us
to register their shares of common stock with the Securities
and Exchange Commission. If we register their shares of
common stock, they can sell those shares in the public
market.
INVESTORS WILL BE SUBJECT TO The stock market in general has recently experienced extreme
MARKET RISKS 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 our stockholders brought such a
lawsuit against us, we could incur substantial costs
defending the lawsuit. The lawsuit could also divert the
time and attention of our management.
</TABLE>
17
<PAGE>
PRICE RANGE OF COMMON STOCK
Allaire's common stock is quoted in the Nasdaq Stock Market's National
Market under the symbol "ALLR". The following table sets forth for the periods
indicated the high and low sales prices per share of the common stock as
reported on the Nasdaq Stock Market's National Market since January 22, 1999,
the date on which the common stock commenced trading.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ---------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
March 31, 1999 (from January 22, 1999)............................................ $ 71.25 $ 36.00
June 30, 1999 (through June 9, 1999).............................................. $ 78.25 $ 39.875
</TABLE>
The last reported sale price of the common stock on the Nasdaq Stock
Market's National Market on June 9, 1999 was $49.00 per share. The number of
stockholders of record on May 31, 1999 was 177.
DIVIDEND POLICY
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.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Allaire as of March 31,
1999:
This information should be read in conjunction with Allaire's financial
statements and notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE
AND PER SHARE
DATA)
<S> <C>
Capital lease obligations, net of current obligations....................... $ 70
Note payable, net of current obligations.................................... 919
--------------
Total long term debt........................................................ 989
--------------
Stockholders' Equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized.............. 0
Common stock, $.01 par value; 35,000,000 shares authorized, 10,875,877
shares issued and 10,861,523 outstanding................................ 109
Additional paid-in capital................................................ 67,622
Deferred compensaton...................................................... (906)
Accumulated deficit....................................................... (21,889)
--------------
Total stockholders' equity.................................................. 44,936
--------------
Total capitalization........................................................ $ 45,925
--------------
--------------
</TABLE>
19
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below 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 prospectus. The statement of operations data for the
years ended December 31, 1996, 1997 and 1998, and the balance sheet data as of
December 31, 1997 and 1998, are derived from, and are qualified by reference to,
audited financial statements included elsewhere in this prospectus. The
statement of operations data for the period from Allaire's inception (May 5,
1995) through December 31, 1995 and the balance sheet data as of December 31,
1995 are derived from audited financial statements of Allaire that do not appear
in this prospectus. The statement of operations data for the three months ended
March 31, 1998 and 1999, and the balance sheet data as of March 31, 1999, are
derived from unaudited financial statements of Allaire appearing elsewhere in
this prospectus. The unaudited financial statements have been prepared on the
same basis as the audited financial statements and, in the opinion of Allaire's
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information set forth
therein. The historical results are not necessarily indicative of the operating
results to be expected in the future.
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 THREE MONTHS
INCEPTION YEAR ENDED ENDED
(MAY 5, 1995) DECEMBER 31, MARCH 31,
THROUGH ------------------------------- -------------
DECEMBER 31, 1995 1996 1997 1998 1998
------------------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software license fees.................................. $ -- $ 2,358 $ 7,116 $ 17,187 $ 3,568
Services............................................... -- -- 534 3,325 464
------- --------- --------- --------- -------------
Total revenue........................................ -- 2,358 7,650 20,512 4,032
------- --------- --------- --------- -------------
Cost of revenue:
Software license fees.................................. -- 234 961 1,915 421
Services............................................... -- -- 1,453 4,058 699
------- --------- --------- --------- -------------
Total cost of revenue................................ -- 234 2,414 5,973 1,120
------- --------- --------- --------- -------------
Gross profit............................................. -- 2,124 5,236 14,539 2,912
------- --------- --------- --------- -------------
Operating expenses:
Research and development............................... 65 873 2,702 4,772 1,024
Sales and marketing.................................... 49 1,576 7,272 16,099 3,115
General and administrative............................. 74 1,387 2,874 3,992 868
Stock-based compensation............................... -- -- -- 412 161
------- --------- --------- --------- -------------
Total operating expenses........................... 188 3,836 12,848 25,275 5,168
------- --------- --------- --------- -------------
Loss from operations..................................... (188) (1,712) (7,612) (10,736) (2,256)
Interest income (expense), net........................... -- 14 187 (34) 45
------- --------- --------- --------- -------------
Net loss................................................. $ (188) $ (1,698) $ (7,425) $ (10,770) $ (2,211)
------- --------- --------- --------- -------------
------- --------- --------- --------- -------------
Basic and diluted net loss per share..................... $ (0.09) $ (0.97) $ (4.40) $ (3.67) $ (0.89)
Shares used in computing basic and diluted net loss per
share.................................................. 2,200 1,743 1,687 2,938 2,477
Unaudited pro forma basic and diluted net loss per
share.................................................. $ (1.38) $ (1.51) $ (0.32)
Shares used in computing unaudited pro forma basic and
diluted net loss per share............................. 5,378 7,139 6,804
<CAPTION>
1999
---------
<S> <C>
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software license fees.................................. $ 6,124
Services............................................... 1,712
---------
Total revenue........................................ 7,836
---------
Cost of revenue:
Software license fees.................................. 454
Services............................................... 1,505
---------
Total cost of revenue................................ 1,959
---------
Gross profit............................................. 5,877
---------
Operating expenses:
Research and development............................... 1,630
Sales and marketing.................................... 5,138
General and administrative............................. 1,052
Stock-based compensation............................... 67
---------
Total operating expenses........................... 7,887
---------
Loss from operations..................................... (2,010)
Interest income (expense), net........................... 326
---------
Net loss................................................. $ (1,684)
---------
---------
Basic and diluted net loss per share..................... $ (0.19)
Shares used in computing basic and diluted net loss per
share.................................................. 8,819
Unaudited pro forma basic and diluted net loss per
share.................................................. $ (0.17)
Shares used in computing unaudited pro forma basic and
diluted net loss per share............................. 9,757
</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' equity (deficit)........................................... (181) (1,768) (9,153) (18,475)
<CAPTION>
MARCH 31
1999
-----------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................................... $ 53,246
Working capital (deficit)...................................................... 41,428
Total assets................................................................... 61,373
Total long-term debt, net of current portion................................... 989
Total redeemable convertible preferred stock................................... --
Total stockholders' equity (deficit)........................................... 44,936
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF ALLAIRE SHOULD BE READ IN CONJUNCTION WITH "SELECTED FINANCIAL
DATA" AND ALLAIRE'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS.
THIS PROSPECTUS 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 "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.
21
<PAGE>
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 operations.
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, and 39%and 54% of total
revenue for the quarters ended March 31, 1998 and 1999, 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 and 13% and 16% of total revenue for the
quarters ended March 31, 1998 and 1999, respectively.
In April 1999, Allaire completed a merger with Bright Tiger by issuing
approximately 300,000 shares of Allaire common stock for all of the outstanding
equity securities of Bright Tiger. Bright Tiger provides software designed to
enhance the performance, availability and manageability of large-scale Internet
sites and Web applications. Allaire had previously licensed technology from
Bright Tiger that was incorporated in certain Allaire ColdFusion products.
Allaire expects to incur a non-recurring charge of approximately $2.2 million in
the
22
<PAGE>
quarter ended June 30, 1999 primarily related to professional fees, severance
packages and related costs associated with the acquisition.
On June 14, 1999 Allaire signed a definitive merger agreement to acquire
Live Software, Inc. ("Live Software") for approximately 550,000 shares of
Allaire common stock. The transaction is expected to be accounted for as a
pooling of interests. Closing of the acquisition, which is expected to occur by
July 15, 1999, is subject to satisfaction of customary closing conditions. Live
Software develops, markets and supports server-side Java development and
deployment technology. Live Software's principal product, JRUN, is a leading
server-side Java development and deployment engine.
Allaire has experienced substantial net losses in each fiscal period since
its inception and, as of March 31, 1999, had an accumulated deficit of $21.9
million. Such net losses and accumulated deficit resulted primarily from 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 large orders, in
which case 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.
23
<PAGE>
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>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Software license fees.................................................... 100.0% 93.0% 83.8% 88.5% 78.2%
Services................................................................. 0.0 7.0 16.2 11.5 21.8
------ ------ ------ ------ ------
Total revenue.......................................................... 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------
Cost of revenue:
Software license fees.................................................... 9.9 12.6 9.3 10.5 5.8
Services................................................................. 0.0 19.0 19.8 17.3 19.2
------ ------ ------ ------ ------
Total cost of revenues................................................. 9.9 31.6 29.1 27.8 25.0
------ ------ ------ ------ ------
Gross profit............................................................. 90.1 68.4 70.9 72.2 75.0
------ ------ ------ ------ ------
Operating expenses:
Research and development................................................. 37.1 35.3 23.2 25.4 20.8
Sales and marketing...................................................... 66.8 95.1 78.5 77.2 65.6
General and administrative............................................... 58.8 37.5 19.5 21.6 13.4
Stock-based Compensation................................................. 0.0 0.0 2.0 4.0 0.9
------ ------ ------ ------ ------
Total operating expenses............................................... 162.7 167.9 123.2 128.2 100.7
------ ------ ------ ------ ------
Loss from operations....................................................... (72.6) (99.5) (52.3) (56.0) (25.7)
Interest income (expense), net............................................. 0.6 2.4 (0.2) 1.2 4.1
------ ------ ------ ------ ------
Net loss................................................................... (72.0)% (97.1)% (52.5)% (54.8)% (21.6)%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
QUARTERS ENDED MARCH 31, 1998 AND 1999
REVENUE
Total revenue increased 94% from $4.0 million for the quarter ended March
31, 1998 to $7.8 million for the quarter ended March 31, 1999.
SOFTWARE LICENSE FEES. Revenue from software license fees increased 72%
from $3.6 million for the quarter ended March 31, 1998 to $6.1 million for the
quarter ended March 31, 1999. This increase was primarily due to an increase in
the number of licenses sold to use Allaire's ColdFusion software products and
from an increase in product price associated with the release of new versions of
Allaire's products during the fourth quarter of 1998.
SERVICES. Revenue from services increased 269% from $464,000 for the
quarter ended March 31, 1998 to $1.7 million in the quarter ended March 31,
1999. The increase was primarily attributable to growth in training revenue
resulting from an increase in Allaire's installed customer base.
24
<PAGE>
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 8% from $421,000 for the quarter ended March 31,
1998 to $454,000 for the quarter ended March 31, 1999. The increase in absolute
dollars was due to higher unit sales volume. The improvement in software license
fees gross margins from 88% for the quarter ended March 31, 1998 to 93% for the
quarter ended March 31, 1999 was primarily attributable to economies of scale
achieved with Allaire's higher sales volume.
COST OF SERVICES. Cost of services consists primarily of personnel costs.
Cost of services increased 115% from $699,000 for the quarter ended March 31,
1998 to $1.5 million for the quarter ended March 31, 1999. 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
(51)% for the quarter ended March 31, 1998 to 12% for the quarter ended March
31, 1999 was primarily attributable to the substantial growth in training
revenue. Continued improvement in services gross margins is dependent upon the
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 59% from $1.0 million for the quarter ended March
31, 1998 to $1.6 million for the quarter ended March 31, 1999. The increase
primarily resulted from salaries associated with newly hired development
personnel. Allaire anticipates that research and development expenses will
increase significantly due to the addition of employees in the second quarter of
1999 in connection with the Bright Tiger acquisition and increased product
development consulting costs.
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 65% from $3.1 million for the quarter
ended March 31, 1998 to $5.1 million for the quarter ended March 31, 1999. The
increase was primarily attributable to costs associated with additional direct
sales, pre-sales support and marketing personnel, and an increase in marketing
programs, including promotions and advertising. Allaire anticipates that sales
and marketing expenses will continue to increase in absolute dollars as it
continues to expand its
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<PAGE>
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 21% from $868,000 for the quarter
ended March 31, 1998 to $1.1 million for the quarter ended March 31, 1999. The
increase was primarily attributable to salaries associated with newly hired
personnel and related costs required to manage Allaire's growth and facilities
expansion. 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.
STOCK-BASED COMPENSATION. The amount that the estimated fair market value
of Allaire's common stock exceeds the exercise price of stock options on the
date of grant is recorded as deferred compensation and amortized to stock-based
compensation expense as the options vest. Allaire recognized $161,000 for the
quarter ended March 31, 1998 compared to $67,000 of stock based compensation for
the quarter ended March 31, 1999. The decrease was primarily attributable to the
grant of a fully vested option with an exercise price substantially below fair
market value during the quarter ended March 31, 1998.
INTEREST INCOME (EXPENSE), NET. Interest income, net of interest expense,
increased from $45,000 for the quarter ended March 31, 1998 to $326,000 for the
quarter ended March 31, 1999. The increase was due to interest income earned
from the investment of the net cash proceeds from Allaire's initial public
offering in January 1999.
PROVISION FOR INCOME TAXES. Allaire incurred significant operating losses
for all periods from inception through March 31, 1999. 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, 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.
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<PAGE>
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.
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 (23.0)% for 1998 was primarily
attributable to the substantial growth in services revenue.
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.
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 121% from $7.3 million for 1997 to $16.1
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.
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 39% from $2.9 million for 1997 to
$4.0 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.
STOCK-BASED COMPENSATION. The amount that the estimated fair market value
of Allaire's common stock exceeds the exercise price of stock options on the
date of grant is recorded as deferred compensation and amortized to stock-based
compensation expense as the options vest. Allaire recognized zero and $412,000
of stock based compensation for 1997 and 1998, respectively.
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
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<PAGE>
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
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<PAGE>
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.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth a summary of Allaire's unaudited quarterly
operating results for each of the nine quarters in the period ended March 31,
1999. This information has been derived from unaudited interim financial
statements that, in the opinion of management, have been prepared on a basis
consistent with the financial statements contained elsewhere in this prospectus
and include all adjustments, consisting of only normal recurring adjustments,
necessary for fair statement of such information when read in conjunction with
Allaire's financial statements and notes thereto. The operating results for any
quarter are not necessarily indicative of results for any future period.
29
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31 MAR. 31, JUNE 30, SEPT. 30, DEC. 31 MAR. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue:
Software license
fees.......... $1,143 $ 1,304 $ 1,888 $ 2,781 $ 3,568 $ 4,017 $ 4,131 $ 5,471 $ 6,124
Services........ 68 76 116 274 464 582 1,141 1,138 1,712
-------- -------- --------- -------- -------- -------- --------- -------- --------
Total
revenue... 1,211 1,380 2,004 3,055 4,032 4,599 5,272 6,609 7,836
-------- -------- --------- -------- -------- -------- --------- -------- --------
Cost of Revenue:
Software license
fees.......... 157 186 197 421 420 400 442 653 454
Services........ 146 303 396 608 699 904 1,240 1,215 1,505
-------- -------- --------- -------- -------- -------- --------- -------- --------
Total cost
of
revenue... 303 489 593 1,029 1,119 1,304 1,682 1,868 1,959
-------- -------- --------- -------- -------- -------- --------- -------- --------
Gross profit...... 908 891 1,411 2,026 2,913 3,295 3,590 4,741 5,877
-------- -------- --------- -------- -------- -------- --------- -------- --------
Operating
Expenses:
Research and
development... 352 581 868 901 1,024 1,002 1,341 1,405 1,630
Sales and
marketing..... 1,006 1,184 2,026 3,056 3,115 3,813 4,604 4,566 5,138
General and
administrative... 377 499 990 1,008 869 879 948 1,297 1,052
Stock-based
compensation... 0 0 0 0 161 25 34 192 67
-------- -------- --------- -------- -------- -------- --------- -------- --------
Total
operating
expenses... 1,735 2,264 3,884 4,965 5,169 5,719 6,927 7,460 7,887
-------- -------- --------- -------- -------- -------- --------- -------- --------
Loss from
operations...... (827) (1,373) (2,473) (2,939) (2,256) (2,424) (3,337) (2,719) (2,010)
Interest income
(expense),
net............. (9) 40 94 62 45 20 (36) (63) 326
-------- -------- --------- -------- -------- -------- --------- -------- --------
Net loss.......... $ (836) $(1,333) $(2,379) $(2,877) $(2,211) $(2,404) $(3,373) $(2,781) $(1,684)
-------- -------- --------- -------- -------- -------- --------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- --------
AS A PERCENTAGE OF
TOTAL REVENUE:
Revenue:
Software license
fees.......... 94.4% 94.5% 94.2% 91.0% 88.5% 87.3% 78.4% 82.8% 78.2%
Services........ 5.6 5.5 5.8 9.0 11.5 12.7 21.6 17.2 21.8
-------- -------- --------- -------- -------- -------- --------- -------- --------
Total
revenue... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
-------- -------- --------- -------- -------- -------- --------- -------- --------
Cost of Revenue:
Software license
fees.......... 13.0 13.5 9.8 13.8 10.4 8.7 8.4 9.9 5.8
Services........ 12.0 21.9 19.8 19.9 17.3 19.7 23.5 18.4 19.2
-------- -------- --------- -------- -------- -------- --------- -------- --------
Total cost
of
revenue... 25.0 35.4 29.6 33.7 27.8 28.4 31.9 28.3 25.0
-------- -------- --------- -------- -------- -------- --------- -------- --------
Gross profit...... 75.0 64.6 70.4 66.3 72.2 71.6 68.1 71.7 75.0
-------- -------- --------- -------- -------- -------- --------- -------- --------
Operating
Expenses:
Research and
development... 29.1 42.1 43.3 29.5 25.4 21.8 25.4 21.3 20.8
Sales and
marketing..... 83.1 85.8 101.1 100.0 77.3 82.9 87.3 69.1 65.6
General and
administrative... 31.1 36.2 49.4 33.0 21.6 19.1 18.0 19.6 13.4
Stock-based
compensation... 0.0 0.0 0.0 0.0 4.0 0.5 0.6 2.9 0.9
-------- -------- --------- -------- -------- -------- --------- -------- --------
Total
operating
expenses... 143.3 164.1 193.8 162.5 128.2 124.4 131.4 112.9 100.7
-------- -------- --------- -------- -------- -------- --------- -------- --------
Loss from
operations...... (68.3) (99.5) (123.4) (96.2) (56.0) (52.7) (63.3) (41.1) (25.7)
Interest income
(expense),
net............. (0.7) 2.9 4.7 2.0 1.1 0.4 (0.7) (0.9) 4.2
-------- -------- --------- -------- -------- -------- --------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- --------
Net loss.......... (69.0)% (96.6)% (118.7)% (94.2)% (54.8)% (52.3)% (64.0)% (41.1)% (21.5)%
-------- -------- --------- -------- -------- -------- --------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- --------
</TABLE>
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<PAGE>
Allaire's total revenue has increased each consecutive quarter during the
nine fiscal quarters ending March 31, 1999, as a result of market acceptance of
Allaire's products and diversification of Allaire's sales channels, including
expansion of Allaire's direct sales force and relationships with domestic and
international distributors. Services revenue has generally increased along with
increases in Allaire's installed customer base. Cost of revenue from software
license fees has fluctuated as a percentage of revenue from software license
fees primarily due to growth in the indirect distribution channel, use of
licensed technology and economies of scale gained from increased license volume.
Cost of services revenue increased quarter to quarter in absolute dollars
primarily due to increases in personnel and related costs for customer support
and training.
Operating expenses increased in each quarter, reflecting increased spending
on developing, selling, marketing and supporting Allaire's products, as well as
building Allaire's market presence. Research and development costs have
increased as a result of higher personnel and consulting costs associated with
enhancing existing products and developing new products. Sales and marketing
expenses increased as a result of hiring additional sales and marketing
personnel and an increase in marketing program costs. General and administrative
expenses increased throughout 1997 primarily due to the hiring of Allaire's
executive and financial staff and support personnel, increased use of outside
services during the second half of 1997 and a legal settlement. The increase
during the fourth quarter of 1998 was related to costs associated with exiting a
facilities lease.
Allaire's operating results have varied on a quarterly basis during its
short operating history and are expected to fluctuate significantly in the
future. A variety of factors, many of which are outside of Allaire's control,
may affect Allaire's quarterly operating results. These factors include:
- the evolution of the market for Web development products;
- market acceptance of Allaire's products;
- Allaire's success and timing in developing and introducing new products
and enhancements to existing products;
- market acceptance of products developed by competitors;
- changes in pricing policies by Allaire or its competitors;
- an increase in the length of Allaire's sales cycle;
- changes in customer buying patterns;
- customer order deferrals in anticipation of new products or enhancements
by Allaire or competitors;
- market entry by new competitors;
- development and performance of Allaire's distribution channels;
- general economic conditions; and
- economic conditions specific to Internet-related industries.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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.
Prior to its initial public offering, Allaire had funded its operations
primarily through net cash proceeds from private placements of preferred stock
totaling $12.8 million. At March 31, 1999, Allaire had cash and cash equivalents
totaling $53.2 million, an increase of $51.4 million from December 31, 1998.
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 provided by operating activities for the quarter ended March 31, 1999 was
due to an increase in deferred revenue of $1.8 million, offset by a net loss of
$1.7 million. The significant increase in deferred revenue during the quarter
ended March 31, 1999 primarily related to deferral of revenue on ColdFusion
Enterprise Server shipments. Allaire was obligated to provide certain additional
functionality to its customers which was not delivered by March 31, 1999.
Allaire expects that such functionality will be delivered within the next two
fiscal quarters.
Cash used for investing activities for 1997, 1998 and the quarter ended
March 31, 1999 was $1.8 million, $2.5 million and $1.0 million, respectively.
Investing activities for the periods were primarily purchases of equipment,
consisting largely of computer servers, workstations and networking equipment
and leasehold improvements to support Allaire's additional personnel.
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. Cash provided by financing activities for the
quarter ended March 31, 1999 was $52.2 million, related to the net proceeds from
Allaire's initial public offering.
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
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<PAGE>
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 March 31, 1999, Allaire had $1.4 million
outstanding under the line, which was collateralized by previous purchases of
furniture and equipment.
As of March 31, 1999, Allaire's primary commitments consisted of obligations
related to operating leases, $1.4 million of notes payable under the equipment
loan line and $416,000 of capital lease obligations.
In April 1999, Allaire completed a merger with Bright Tiger by issuing
approximately 300,000 shares of Allaire common stock for all of the outstanding
equity securities of Bright Tiger. In connection with the merger, Allaire
assumed and paid off Bright Tiger debt obligations totaling approximately $2.6
million.
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.
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<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 operation, viability or
commercial acceptance of the Internet, which could have a material adverse
impact on Allaire's business, operating results and financial condition.
With respect to Allaire's primary internal software systems, Allaire either
has received written confirmations from software vendors that the software it
installed is Year 2000 compliant or is in the process of installing available
software upgrades to achieve Year 2000 compliance. Based on the foregoing,
Allaire currently has no reason to believe that its internal software systems
will not be Year 2000 compliant by September 30, 1999. 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 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 adopted
SOP 98-1, January 1, 1999, and Allaire does not expect its adoption 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
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<PAGE>
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 March 31, 1999 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.
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BUSINESS
ALLAIRE
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. In April 1999, Allaire acquired
Bright Tiger. Bright Tiger designs and markets Web site resource management
products to allow its customers to build and manage fast, reliable Web sites.
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.
On June 14, 1999 Allaire signed a definitive merger agreement to acquire
Live Software, Inc. Closing of the acquisition is subject to satisfaction of
customary closing conditions. Live Software develops, markets and supports
server-side Java development and deployment technology. Live Software's
principal product, JRun, is a leading server-side Java development and
deployment engine.
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.
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
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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, 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.
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.
THE ALLAIRE SOLUTION
Allaire is a leading provider of application development and server software
for a wide range of Web development, from building static Web pages to
developing high-volume, interactive Web applications. Allaire designed
ColdFusion Markup Language, or CFML, to use the same easy to learn tag and
attribute syntax used in HTML and XML. When used in conjunction with HTML and
XML, CFML allows developers to develop Web applications without requiring them
to change programming syntax. Using Allaire's ColdFusion and HomeSite products
and services, Web developers can:
- Rapidly create complex Web sites and sophisticated Web applications
through the use of CFML;
- Efficiently build high-volume, interactive Web applications, including
applications for electronic commerce, content management and
personalization;
- Readily integrate leading Internet and enterprise technologies;
- Securely deploy scalable, platform-independent applications over the
Internet, across extranets and within intranets; and
- Obtain high-quality education, training and support from Allaire and its
partners.
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ALLAIRE STRATEGY
Allaire's goal is to be the leading provider of Web development tools,
application servers and application frameworks for organizations seeking to
develop new online business operations. Key elements of Allaire's strategy to
attain this goal are:
MAXIMIZE MARKET SHARE. Allaire has established significant market presence
for its Web development and application server products by providing
high-quality products and services at competitive prices and by working to
ensure the continuing adoption of its products and the ongoing success of its
developer community. Allaire plans to continue to seed its HomeSite product
broadly throughout the market of Web developers through Allaire's "HomeSite
Everywhere" marketing program. This program consists of wide electronic
distribution of a non-expiring evaluation version of HomeSite and the active
pursuit of original equipment manufacturer partnerships. By providing ready
access to HomeSite, Allaire seeks to establish broad association of the Allaire
brand with high quality and highly productive Web development products. As Web
developers upgrade from static pages and Web sites to interactive Web sites and
applications, Allaire will continue to migrate them from HomeSite to ColdFusion,
which uses the same productive development environment and a similar tag-based
development approach as HomeSite. To help ensure rapid adoption of its products
and ongoing successful use by developers at all skill levels, Allaire plans to
continue to enhance its Allaire Alliance partner program and to continue to
provide rich online information resources, an online gallery of readily
available third party custom CFML tags, and education and training.
SUPPORT AN OPEN WEB APPLICATION ARCHITECTURE. Allaire specifically
architected its products to be open by supporting development for key Web client
and Web server platforms, technologies and protocols, as well as key enterprise
and client-server standards. Allaire intends to continue to support emerging Web
technologies and additional enterprise and client-server technologies, and to
continue to provide products with an open and extensible architecture. By
enabling its customers to choose among the platforms and technologies that best
meet their needs without compromising functionality or performance, Allaire
believes its products are well positioned as large companies and other
organizations upgrade legacy mainframe and client-server applications to Web
applications. In addition, by enabling customers to preserve investments in
legacy technologies, Allaire expects to be able to remove many of the potential
technological barriers to purchase as it moves from purchases by individual
developers to larger standards-based purchases by major corporate customers.
FOCUS ON MAJOR ACCOUNT SALES. Allaire believes that successful,
department-level installations of its products will provide the foundation for
more complex and business-critical projects to be deployed across an
organization. As major accounts increase their investment in application
development technologies, the purchasing decision more often includes input from
senior managers who base their decisions on business criteria and enterprise
standards as well as by developers principally using technical criteria. In
order to win larger sales within major accounts, Allaire intends to expand the
support and coverage of such accounts within its domestic sales force, and to
work with systems integrators and other high-profile Web development
organizations to more effectively present the business advantages of adopting
Allaire's Web development and application server technology. As part of its
HomeSite Everywhere marketing program, Allaire seeks to convert broad adoption
within organizations of the non-expiring evaluation version into standards-based
volume licenses and site licenses.
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EXPAND CHANNEL DISTRIBUTION. In order to better capitalize on opportunities
created by domestic and international markets, Allaire intends to expand its
channel distribution through distributors, direct and original equipment
manufacturer resellers and systems integrators. Allaire believes that selling
its products through these channel partners gives it an opportunity to gain a
greater share of emerging markets, enabling more rapid entry and a larger
effective presence in such markets, while containing its sales, marketing and
distribution costs. In each market, Allaire will work to optimize the balance of
direct presence and presence through channel partners.
EXPAND AVAILABILITY OF CONSULTING AND TRAINING. Allaire intends to enhance
and expand the delivery of consulting and training, both directly and through
training partners. Making such services widely available allows Allaire to
benefit from the increasing demand for trained Web developers. Such services
also are often required for sales to major accounts that intend to develop and
deploy complex, large-scale and business-critical Web applications. By offering
high-quality consulting and training services, Allaire expects to better ensure
and enhance its customers' productive and successful use of its products.
MAINTAIN TECHNOLOGICAL LEADERSHIP. Allaire intends to continue to devote
substantial resources to the development and acquisition of new and innovative
products for the development and deployment of Web applications. The products
developed or acquired by Allaire to date are among the earliest and most
recognized entrants into the emerging markets for Web application server
technology and Web development software. From its earliest days, Allaire
believes it has been able to leverage its understanding of the market
opportunity for Web development products, its innovation, and the active support
of its developer base into productive and successful application server
products. Allaire intends to continue to use these core strengths to introduce
additional innovative products for the development and deployment of open,
scalable and secure Web applications, including the development of application
frameworks to accelerate the creation of new Web-based business applications.
PRODUCTS
Allaire has two primary 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:
- 1998 Web Techniques Editors' Choice Award;
- 1998 Win 100 Award from Windows Magazine;
- PC Magazine's Editors' Choice Award;
- Internet Computing Magazine's "Net Best" Award;
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- Webdeveloper.com's Product Award;
- CNET's builder.com Editor's Choice Award;
- CNET's builder.com 1998 Product Award; and
- CNET's Internet Excellence Award.
- Jolt Productivity 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:
- 1999 PC Magazine's Editors' Choice Award
- 1998 Codie Award for software excellence from the Software Publishers
Association;
- "Best of the Show Award" at the 1998 Fall Internet World;
- CNET's builder.com 1998 Product Award; and
- Network World Blue Ribbon Award.
COLDFUSION STUDIO 4.0. 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. 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 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. In addition, the Enterprise edition runs on
Sun Solaris.
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<TABLE>
<CAPTION>
PRODUCT
(SUGGESTED LIST PRICE) DESCRIPTION TYPICAL APPLICATIONS TARGET USERS
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
HomeSite 4.0 (Electronic HTML page design and Web High-quality static Web site developers
Version $89; Packaged site development tool corporate Web sites Web development team
Version $99) Features an intuitive managers
graphical interface
ColdFusion Studio 4.0 An integrated development Business systems (HR, Web application developers
($395) environment with a number financial, customer Enterprise and
of visual tools for support) client-server programmers
creating Web applications Electronic commerce HTML and desktop database
Includes the award-winning (stores, business to developers
HomeSite HTML design tool business) Development team managers
Features include Dynamic content publishing
interactive debugging, (document management,
remote development dynamic news and
capabilities and one-step personalized 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 ($1,295) processors and allows an extranets Large systems integrators
unlimited number of Field office extranets New Web-based businesses
concurrent users Single server applications Internet service providers
Features include open state using a relational database
repository and shared
server security
Access to any ODBC and
OLE-DB data source
ColdFusion Server Supports up to eight High-volume, Large enterprises
Enterprise 4.0 ($3,495) processors and allows an business-critical commerce Large systems integrators
unlimited number of sites and applications New Web-based businesses
concurrent users Enterprise intranet Internet service providers
Includes all Professional applications
4.0 features, plus features Enterprise applications
required for large scale requiring native database
applications, including drivers or CORBA
clustering, load balancing
and automatic fail over and
CORBA support
Sybase, Oracle and
Microsoft SQL Server native
database drivers
</TABLE>
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.
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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.
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.
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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 Company'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 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.
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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,
1998 and the quarter ended March 31,1999, Allaire spent approximately $873,000,
$2.7 million, $4.8 million and $1.6 million, respectively, on research and
development. Allaire intends to continue to devote substantial resources toward
research and development. As of March 31, 1999, Allaire had 39 employees engaged
in research and development activities. Allaire must hire additional skilled
software engineers to further its research and development efforts. Allaire's
business, operating results and financial condition could be adversely affected
if it is not able to hire and retain the required number of engineers.
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, 1998 and the quarter
ended March 31, 1999, 13%, 28%, 45% and 54%, respectively, of Allaire's total
revenue was generated through the indirect distribution channel. As of March 31,
1999, Allaire had 70 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 March 31,
1999, Allaire had 19 distributors in North America, Europe and Asia Pacific,
including Ingram Micro and Mitsubishi. In addition, as of March 31, 1999,
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 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
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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
commerce, content management and personalization for Internet, intranet and
extranet use.
Revenue from customers outside North America, primarily Asia and Europe,
were approximately 17%, 20%, 13% and 16% of total revenue in 1996, 1997, 1998
and the quarter ended March 31, 1999, respectively. Sales by Allaire to Ingram
Micro accounted for approximately 29% and 31% of Allaire's total revenue for
1998 and the quarter ended March 31, 1999, respectively. 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 training 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.
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Allaire also provides training and consulting to assist its customers in the
use of its products. As of March 31, 1999, Allaire had 28 technical support
engineers and professional service 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:
- the quality and reliability of software;
- features for creating, editing and adapting content;
- ease of use and interactive user features;
- application server scalability, availability and performance;
- cost per user; and
- 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,
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larger, well-established and well-financed companies. There can be no assurance
that Allaire can establish or sustain a leadership position in this market
segment.
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. Moreover, the laws of other countries in which Allaire
markets its products may afford Allaire little or no effective protection of its
intellectual property. 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 them 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
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marks. Allaire has registered United States trademarks for "Cold Fusion" and a
related design and for "Bright Tiger", 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:
- visual editing technology from Microsoft;
- security technology from Netegrity; and
- 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 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 March 31, 1999, Allaire had 181 employees, 166 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.
FACILITIES
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 and development 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.
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.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
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..................... 40 President, Director 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
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<PAGE>
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 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
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<PAGE>
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.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee, which sets objectives
and policies for Allaire's compensation programs for executives and key
employees. Such objectives and policies include, but are not limited to,
attracting and retaining superior talent, rewarding individual performance and
achieving Allaire's financial goals. The Compensation Committee also administers
Allaire's 1997 Stock Incentive Plan, 1998 Stock Incentive Plan and 1998 Employee
Stock Purchase Plan and approves the compensation of all officers and key
employees of Allaire. The Compensation Committee currently consists of Mr. Flint
and Mr. Gannon.
The Board of Directors also has an Audit Committee, which reviews the scope
and results of the audit and other services provided by the independent
auditors. The Audit Committee currently consists of Mr. Flint and Mr. Gannon.
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.
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.
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<PAGE>
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>
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<PAGE>
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
--------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS EXERCISE POTENTIAL REALIZABLE
UNDERLYING GRANTED TO OR BASE VALUE AT ASSUMED
OPTIONS EMPLOYEES IN PRICE EXPIRATION ANNUAL RATES OF
GRANTED FISCAL YEAR PER SHARE DATE STOCK PRICE
----------- ----------------- ----------- ----------- APPRECIATION FOR
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>
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<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 Allaire's initial public offering price of $20.00 per share.
<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>
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
- he is terminated without cause within six months of the change in control;
- he is not offered a position with the successor comparable to his current
position with Allaire after the change in control; or
- 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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
(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.
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CERTAIN 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.
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
Allaire's 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
Allaire's initial public offering.
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. Pursuant to Allaire's Certificate of Incorporation, each share of
Series D Preferred Stock automatically converted into one share of common stock
upon the closing of Allaire's initial public 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.
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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
certain individuals. 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 have borne interest at a mutually agreed
upon rate between 5% and 20%. The line of credit commitment expired on the
closing of Allaire's initial public offering.
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
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<PAGE>
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. As of March 18,
1999, Allaire owned approximately a 16% equity interest in Yesler on a fully
diluted basis.
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 Consolidated 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.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Allaire's common stock as of May 31, 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:
- shares of common stock issuable by Allaire pursuant to options which may
be exercised within 60 days after May 31, 1999 and not subject to
repurchase by Allaire; and
- shares of common stock issuable by Allaire pursuant to warrants which may
be exercised within 60 days after May 31, 1998.
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
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outstanding includes: (a) the 11,213,858 shares of common stock as of May 31,
1999 and (b) the presently exercisable options and presently exercisable
warrants held by that person.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OF COMMON
NAME OF BENEFICIAL OWNER OWNED STOCK OUTSTANDING
- ------------------------------------------------------------ ----------------- ---------------------
<S> <C> <C>
Joseph J. Allaire........................................... 2,005,000 17.9%
Entities affiliated with Polaris Venture
Management Co., LLC (1)................................... 1,390,836 12.4%
1000 Winter Street, Suite 3350
Waltham, MA 02154
Jonathan A. Flint (2)....................................... 1,390,836 12.4%
1000 Winter Street, Suite 3350
Waltham, MA 02154
BancBoston Ventures Inc..................................... 1,010,500 9.0%
175 Federal Street
Boston, MA 02110
David J. Orfao.............................................. 348,000 3.1%
Amy E. Lewis................................................ 105,500 *
David A. Gerth.............................................. 105,500 *
Jack P. Lull................................................ 162,622 1.5%
John J. Gannon.............................................. 19,789 *
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 1.9%
One Broadway
Cambridge, MA 02142
All executive officers and directors as a group (11 4,458,760 38.9%
persons)..................................................
</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. Shares listed as
owned beneficially by Polaris Venture Management Co., LLC include shares
owned beneficially by Jonathan A. Flint.
(2) Includes shares owned beneficially by Polaris Venture Management Co., LLC
(see note 1).
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DESCRIPTION OF CAPITAL STOCK
Allaire's authorized capital stock consists of 35,000,000 shares of common
stock, with a par value of $.01 per share, and 5,000,000 shares of preferred
stock, with a par value of $.01 per share. Of the 5,000,000 shares of authorized
preferred stock, 1,616,494 shares are undesignated and available for issuance.
COMMON STOCK
As of May 31, 1999, there were 11,213,858 shares of common stock outstanding
and held of record by 177 stockholders.
Holders of common stock are entitled to one vote per share for each share
held of record on all matters submitted to a vote of stockholders. The holders
of common stock are entitled to receive such lawful dividends as may be declared
by the Board of Directors. However, such dividends are subject to preferences
that may be applicable to the holders of any outstanding shares of preferred
stock. In the event of a liquidation, dissolution or winding up of the affairs
of Allaire, whether voluntary or involuntary, the holders of common stock will
be entitled to receive pro rata all of the remaining assets of Allaire available
for distribution to its stockholders. Any such pro rata distribution would be
subject to the rights of the holders of any outstanding shares of preferred
stock. The common stock has no preemptive, redemption, conversion or
subscription rights. All outstanding shares of common stock are fully paid and
non-assessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by Delaware law, to provide for the issuance of preferred stock in one or more
series. The Board of Directors is also authorized, subject to the limitations
prescribed by Delaware law, to establish the number of shares to be included in
each series and to fix the voting powers, preferences, qualifications and
special or relative rights or privileges of each series. The Board of Directors
is authorized to issue preferred stock with voting, conversion and other rights
and preferences that could adversely affect the voting power or other rights of
the holders of common stock.
Allaire has no current plans to issue any preferred stock. However, the
issuance of preferred stock or of rights to purchase preferred stock could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of the
outstanding voting stock of Allaire.
WARRANTS
As of May 31, 1999, Allaire had outstanding two warrants to purchase an
aggregate of 35,398 shares of common stock at an exercise price of $2.26 per
share. The warrants are currently exercisable in whole or in part, at any time
or from time to time until five years from the effective date of January 22,
2004. The warrants contain certain protections against dilution resulting from
stock splits, stock dividends and similar events. The warrants may be exercised
for cash or pursuant to certain cashless exercise provisions.
As of May 31, 1999, Allaire also had outstanding four warrants to purchase
an aggregate of 14,899 shares of common stock. Two warrants are to purchase an
aggregate of 8,599 shares of common stock at an exercise price of $2.03 per
share, and are currently exercisable in
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whole or in part, at any time or from time to time, until December 31, 2001. The
other two warrants are to purchase an aggregate of 6,300 shares of common stock
at an exercise price of $4.00 per share. The other two warrants are currently
exercisable in whole or in part, at any time or from time to time, until March
7, 2002, and contain certain protections against dilution resulting from stock
splits, stock dividends and similar events.
REGISTRATION RIGHTS
Pursuant to a registration rights agreement among Allaire and the holders of
an aggregate of 3,848,941 shares of common stock, the holders of warrants
exercisable for an aggregate of 14,899 shares of common stock, and the holders
of warrants exercisable for an aggregate of 35,398 shares of common stock
(together the "Registration Rights Holders"), such holders are entitled to
certain rights with respect to the registration of such shares under the
Securities Act.
If Allaire proposes to register any of its securities under the Securities
Act, either for its own account or for the account of other security holders,
the Registration Rights Holders are entitled to notice of such registration. The
Registration Rights Holders are also entitled to include their shares of common
stock in such registration. However, in the event of a registration pursuant to
an underwritten public offering of common stock, the underwriters shall have the
right, subject to certain conditions, to limit the number of shares included in
such registration.
The holders of more than 50% of the then-outstanding shares of common stock
held by all of the Registration Rights Holders are entitled, at any time
beginning at July 22, 1999, to request that Allaire file a registration
statement under the Securities Act covering the sale of some or all of the
shares held by the requesting holder or holders. However, no such request may be
made within 120 days of the filing of a registration statement by Allaire in
which such requesting stockholders were permitted to include their shares. Upon
the receipt of such a request, Allaire is required to use commercially
reasonable efforts to effect such registration. Allaire is not required to
effect more than two such demand registrations.
Once Allaire has qualified to use Form S-3 to register securities under the
Securities Act, the Registration Rights Holders have the right to request that
Allaire file a registration statement on Form S-3 or any successor thereto for a
public offering of all or any portion of their shares, provided that the
reasonably anticipated aggregate price to the public of such offering would
exceed $1,000,000. Allaire shall not be required to effect a registration in
this manner more than once in any 12-month period.
In general, all fees, costs and expenses of such registrations (other than
insurance costs and fees and disbursements of counsel to the selling
stockholders) will be borne by Allaire. Allaire has agreed to indemnify the
Registration Rights Holders against, and provide contribution with respect to,
certain liabilities relating to any registration in which any shares of
Registration Rights Holders are sold under the Securities Act.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF ALLAIRE'S AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED BY-LAWS AND DELAWARE LAW
Allaire's Amended and Restated Certificate of Incorporation (the
"Certificate"), Allaire's Amended and Restated By-Laws (the "By-Laws") and
Delaware Law contain certain
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provisions that could be deemed to have anti-takeover effects. These provisions
could discourage, delay or prevent a change in control of Allaire or an
acquisition of Allaire at a price which many stockholders may find attractive.
The existence of these provisions could limit the price that investors might be
willing to pay in the future for shares of common stock.
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The By-Laws provide that, except as otherwise provided by law or the
Certificate, newly created directorships resulting from an increase in the
authorized number of directors or vacancies on the Board may be filled only by:
- the Board, provided that a quorum is then in office and present;
- by a majority of the directors then in office, if less than a quorum is
then in office; or
- by the sole remaining director.
These provisions prevent a stockholder from enlarging the Board and filling
the new directorships with such stockholder's own nominees without Board
approval.
These provisions of the By-Laws may have the effect of discouraging a third
party from initiating a proxy contest, making a tender offer or otherwise
attempting to gain control of Allaire, or of attempting to change the
composition or policies of the Board, even though such attempts might be
beneficial to Allaire or its stockholders.
The Certificate and the By-Laws provide that, unless otherwise prescribed by
law or the Certificate, only a majority of the Board, the Chairman of the Board
or the President is able to call a special meeting of stockholders. The
Certificate and the By-Laws also provide that, unless otherwise prescribed by
law or the Certificate, stockholder action may be taken only at a duly called
and convened annual or special meeting of stockholders and may not be taken by
written consent. These provisions, taken together, prevent stockholders from
forcing consideration by the stockholders of stockholder proposals over the
opposition of the Board, except at an annual meeting.
The By-Laws also establish an advance notice procedure for stockholders to
make nominations of candidates for election as director, or to bring other
business before an annual meeting of stockholders of Allaire (the "Notice
Procedure"). Under the Notice Procedure, notice of stockholder nominations or
proposals to be made at an annual or special meeting in lieu of an annual
meeting generally must be received by Allaire not less than 60 days nor more
than 90 days prior to the scheduled date of the meeting. However, if less than
70 days notice or prior public disclosure of the date of the meeting is given,
then notice must be received not later than the 10th day following the earlier
of the day such notice was mailed or the day such public disclosure was made.
Notice of stockholder nominations or proposals to be made at a special meeting
(other than a special meeting in lieu of an annual meeting), not later than the
10th day following the earlier of the day such notice was mailed or the day such
public disclosure was made. These notices must contain certain prescribed
information.
The Notice Procedure affords the Board an opportunity to consider the
qualifications of proposed director nominees or the merit of stockholder
proposals, and, to the extent deemed appropriate by the Board, to inform
stockholders about such matters. The Notice Procedure also provides a more
orderly procedure for conducting annual meetings of stockholders. The By-Laws do
not give the Board any power to approve or disapprove stockholder nominations
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<PAGE>
for the election of directors or proposals for action. However, the Notice
Procedure may prevent a contest for the election of directors or the
consideration of stockholder proposals. This could deter a third party from
conducting a solicitation of proxies to elect its own slate of directors or to
approve its own proposal if the proper advance notice procedures are not
followed, without regard to whether consideration of such nominees or proposals
might be harmful or beneficial to Allaire and its stockholders.
DELAWARE LAW
Allaire is subject to Section 203 of the Delaware General Corporation Law
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder.
Section 203 does not apply if:
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock which is not owned by the
interested stockholder.
The application of Section 203 may limit the ability of stockholders to
approve a transaction that they may deem to be in their best interests.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation to or with the interested stockholder;
- subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
- any transaction involving the corporation which has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
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<PAGE>
In general, Section 203 defines an "interested stockholder" as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person associated with, affiliated with or
controlling or controlled by such entity or person.
LIMITATION OF LIABILITY
The Certificate provides that no director of Allaire shall be personally
liable to Allaire or to its stockholders for monetary damages for breach of
fiduciary duty as a director, except that the limitation shall not eliminate or
limit liability to the extent that the elimination or limitation of such
liability is not permitted by the Delaware General Corporation Law as the same
exists or may hereafter be amended.
The Certificate further provides for the indemnification of Allaire's
directors and officers to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, including circumstances in which
indemnification is otherwise discretionary. A principal effect of these
provisions is to limit or eliminate the potential liability of Allaire's
directors for monetary damages arising from breaches of their duty of care,
subject to certain exceptions. These provisions may also shield directors from
liability under federal and state securities laws.
STOCK TRANSFER AGENT
The transfer agent and registrar for the common stock is Boston EquiServe
L.P.
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<PAGE>
SELLING STOCKHOLDERS
The Shares are being offered for sale from time to time during the period of
effectiveness of the Registration Statement for the accounts of the Selling
Stockholders set forth below. Each of the Selling Stockholders acquired the
Shares being offered under an Agreement and Plan of Merger (the "Merger
Agreement") dated April 2, 1999 among Allaire, Bengal Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of Allaire, and Bright Tiger
in connection with Allaire's acquisition of Bright Tiger.
Allaire has filed with the Commission a Registration Statement on Form S-1,
of which this prospectus forms a part, with respect to the resale of the Shares
from time to time on the Nasdaq Stock Market's National Market or in
privately-negotiated transactions. Allaire has agreed to use best efforts to
keep such Registration Statement effective until December 31, 1999, or, if
earlier, until the distribution contemplated in this prospectus has been
completed.
The table below sets forth, as of May 31, 1999, certain information
regarding the beneficial ownership of each Selling Stockholder. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission.
The percentages set forth in the table below represent the percentages
beneficially owned relative to the aggregate of 11,213,858 shares of Common
Stock outstanding as of May 31, 1999.
We do not know when or in what amounts a Selling Stockholder may offer
Shares for sale. The Selling Stockholders may not sell any or all of the Shares
offered by the Selling Stockholders. Because the Selling Stockholders may offer
all or some of the Shares pursuant to this offering, and because there are
currently no agreements, arrangements or understandings with respect to the sale
of any of the Shares that will be held by the Selling Stockholders after
completion of the offering, we can not estimate the number of the Shares that
will be held by the Selling Stockholders after completion of the offering.
However, for purposes of the table below, we have assumed that, after completion
of the offering, none of the Shares covered by this prospectus will be held by
the Selling Stockholders.
This Registration Statement shall also cover any additional shares of common
stock that become issuable in connection with the shares registered for sale
hereby by reason of any stock dividend, stock split, recapitalization or other
similar transaction effected without the receipt of consideration that results
in an increase in the number of the Allaire's outstanding shares of common
stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY
PRIOR TO OFFERING NUMBER OF OWNED AFTER OFFERING
-------------------------- SHARES BEING ----------------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------ ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
North Bridge Venture Partners, L.P........ 82,941 * 82,941 0 *
Oak Investment Partners VII, Limited
Partnership............................. 74,712 * 74,712 0 *
Accel V L.P............................... 67,537 * 67,537 0 *
Kathleen M. Wilde......................... 14,009 * 14,009 0 *
Accel Internet/Strategic Technology Fund
L.P..................................... 9,050 * 9,050 0 *
Larry V. Moore............................ 7,153 * 7,153 0 *
</TABLE>
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<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY
PRIOR TO OFFERING NUMBER OF OWNED AFTER OFFERING
-------------------------- SHARES BEING ----------------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------ ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Mary L. Walker............................ 7,005 * 7,005 0 *
William C. Adams, Jr...................... 7,005 * 7,005 0 *
Accel Investors '96 L.P................... 4,022 * 4,022 0 *
James Hourihan............................ 3,756 * 3,756 0 *
Paul Severino............................. 3,136 * 3,136 0 *
Oak VII Affiliates Fund, Limited
Partnership............................. 1,877 * 1,877 0 *
Ellmore C. Patterson Partners............. 1,844 * 1,844 0 *
Accel Keiretsu V L.P...................... 1,341 * 1,341 0 *
Michael McMenemy.......................... 627 * 627 0 *
Mariusz Sijka............................. 523 * 523 0 *
Alan Billing.............................. 485 * 392 93 *
Linda J. Holcombe......................... 478 * 105 373 *
Howard A. Schneider....................... 288 * 147 141 *
Paul Benoit............................... 243 * 68 175 *
MBBP Partners............................. 226 * 226 0 *
Sheryl Schultz............................ 212 * 212 0 *
Daniel P. Carey........................... 212 * 212 0 *
Joel M. Trippier.......................... 163 * 163 0 *
Joseph Kraetsch........................... 121 * 121 0 *
Michael Estes............................. 71 * 71 0 *
William E. Scarborough, Jr................ 68 * 68 0 *
John Arguoyan............................. 65 * 65 0 *
Robert P. Lucier.......................... 51 * 51 0 *
Darlene M. Guthro......................... 43 * 43 0 *
Donald T. Miller.......................... 43 * 43 0 *
Raymond Beauregard........................ 29 * 29 0 *
Douglas A. Levin.......................... 29 * 29 0 *
</TABLE>
- ------------------------
* Less than 1%.
The following Selling Stockholders currently have or had during the past
three years the following material relationships with Allaire or any of its
predecessors or affiliates: Kathleen M. Wilde was a director and officer of
Bright Tiger; Larry V. Moore was a director and officer of Bright Tiger; Mary L.
Walker, William C. Adams and Paul Severino were each directors of Bright Tiger;
James Hourihan, Howard A. Schneider and Douglas A. Levin were each officers of
Bright Tiger; Linda J. Holcombe was an officer of Bright Tiger.
Of the total shares of common stock listed as owned beneficially by the
Selling Stockholders in the table above, a total of 28,876 shares are held in an
escrow account to secure indemnification obligations to Allaire of the Selling
Stockholders. It is expected that these shares (less any shares that may be
distributed from the escrow account to Allaire in satisfaction of
indemnification claims) will be released from escrow and distributed to the
Selling Stockholders on the earlier to occur of the issuance of the independent
audit report
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covering Allaire's financial statements for the year ended December 31, 1999 or
April 12, 2000. The number of shares indicated as owned by each Selling
Stockholder includes those shares (representing approximately 10% of the number
of Shares beneficially owned by each Selling Stockholder) which such Selling
Stockholder is entitled to receive upon distribution of these shares from the
escrow account.
PLAN OF DISTRIBUTION
The Shares may be sold from time to time by the Selling Stockholders, or by
pledgees, donees, transferees or other successors in interest. Such sales may be
made on one or more exchanges, or in the over-the-counter market or otherwise,
at prices and at terms then prevailing or at prices related to the then current
market price, or in negotiated transactions. The Shares may be sold by one or
more of the following: (a) block trades in which the broker or dealer so engaged
will attempt to sell the Shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction; (b) purchases by a
broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this prospectus; (c) an exchange distribution in accordance
with the rules of such exchange; (d) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (e) privately
negotiated transactions. In effecting sales, brokers or dealers or agents
engaged by the Selling Stockholders may arrange for other brokers or dealers to
participate. Brokers or dealers will receive commissions or discounts from
Selling Stockholders in amounts to be negotiated immediately prior to the sale.
Such brokers or dealers and any other participating brokers or dealers may be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales, and any commission received by them and profit on
any resale of the Shares as principal, and any profits received by the Selling
Stockholders, might be deemed to be underwriting discounts and commissions under
the Securities Act. In addition, any securities covered by this prospectus which
qualify for sale pursuant to Rule 144 under the Securities Act may be sold under
Rule 144 rather than pursuant to the prospectus.
Upon Allaire being notified by a Selling Stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of the
Shares through a block trade, special offering, exchange or secondary
distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(c) under the
Securities Act, disclosing (i) the name of each Selling Stockholder and of the
participating broker-dealer(s), (ii) the number of shares involved, (iii) the
price at which such shares were sold, (iv) the commissions paid or discounts or
concessions allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus and (vi) other facts
material to the transaction.
Allaire has agreed to pay the expenses incurred in connection with preparing
and filing the Registration Statement and this prospectus (other than selling
commissions). Allaire has agreed to indemnify the Selling Stockholders against
certain liabilities, including liabilities under the Securities Act.
To the extent required, this prospectus may be amended and supplemented from
time to time to describe a specific plan of distribution. In connection with
distributions of the Shares or otherwise, the Selling Stockholders may enter
into hedging transactions with broker-dealers
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<PAGE>
or other financial institutions. In connection with such transactions,
broker-dealers or other financial institutions may engage in short sales of the
common stock in the course of hedging the positions they assume with Selling
Stockholders. The Selling Stockholders may also sell the common stock short and
redeliver the Shares to close out such short positions. The Selling Stockholders
may also enter into option or other transactions with broker-dealers or other
financial institutions which require the delivery to such broker-dealer or other
financial institution of Shares offered by this prospectus, which Shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction). The Selling
Stockholders may also pledge shares to a broker-dealer or other financial
institution, and, upon a default, such broker-dealer or other financial
institution, may effect sales of the pledged Shares pursuant to this prospectus
(as supplemented or amended to reflect such transaction).
In order to comply with the securities laws of certain states, if
applicable, the shares must be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Certain of the Selling Stockholders may distribute their Shares from time to
time to their limited and/or general partners, who may sell shares pursuant to
this prospectus. In addition, each Selling Stockholder may also transfer Shares
owned by him or her by gift and, upon the transfer, the donee would have the
same rights of sale as the Selling Stockholder under this prospectus.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for Allaire by Foley, Hoag & Eliot LLP, Boston, Massachusetts.
EXPERTS
The financial statements of Allaire Corporation as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998
included in this Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Bright Tiger Technologies, Inc. as of December
31, 1998 and 1997 and for the years then ended, and for the period from
inception (June 6 1996) through December 31, 1996 and for the period from
inception (June 6, 1996) through December 31, 1998 included in this Prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
Allaire has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 under the Securities Act with
respect to the common stock covered hereby. This prospectus does not contain all
of the information set forth in the
70
<PAGE>
registration statement. For further information with respect to Allaire and the
common stock, reference is made to the registration statement. Statements
contained in this prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and, in each instance,
reference is made to the copy of the contract or document filed as an exhibit to
the registration statement, and each such statement is qualified in all respects
by reference to such exhibit. Allaire's common stock is traded on the Nasdaq
Stock Market's National Market. Reports and other information concerning Allaire
may be inspected at the National Association of Securities Dealers, Inc., 1725 K
Street, N.W., Washington, D.C. 20006. Copies of the registration statement and
such reports, proxy statements and other information filed by Allaire may be
examined without charge at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Regional Offices of the Commission at Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, Thirteenth
Floor, New York, New York 10048. Copies of all or any portion of the
registration statement may be obtained from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington
D.C. 20549, or by calling the Commission at 1-800-SEC-0330, at prescribed rates.
The Commission also maintains a Web site at http:// www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants, such as Allaire, that make electronic filings with the Commission.
71
<PAGE>
ALLAIRE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Accountants.............................................. F-2
Consolidated Balance Sheet as of December 31, 1997, 1998 and March 31, 1999
(unaudited).................................................................. F-3
Consolidated Statement of Operations for the years ended December 31, 1996,
1997, 1998 and the three months ended March 31, 1998 and 1999 (unaudited).... F-4
Consolidated Statement of Redeemable Convertible Preferred Stock and
Stockholders' Deficit for the years ended December 31, 1996, 1997, 1998 and
the three months ended March 31, 1999 (unaudited)............................ F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1996,
1997, 1998 and the three months ended March 31, 1998 and 1999 (unaudited).... F-6
Notes to Consolidated Financial Statements.....................................
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS:
Supplemental Consolidated Balance Sheet as of December 31, 1997, 1998 and March
31, 1999 (unaudited)......................................................... F-42
Supplemental Consolidated Statement of Operations for the years ended December
31, 1996, 1997, 1998 and the three months ended March 31, 1998 and 1999
(unaudited).................................................................. F-43
Supplemental Consolidated Statement of Redeemable Convertible Preferred Stock
and Stockholders' Deficit for the years ended December 31, 1996, 1997, 1998
and the three months ended March 31, 1999 (unaudited)........................ F-44
Supplemental Consolidated Statement of Cash Flows for the Years Ended December
31, 1996, 1997, 1998 and the three months ended March 31, 1998 and 1999
(unaudited).................................................................. F-45
Notes to Supplemental Consolidated Financial Statements........................ F-7-F-26
Management's Discussion and Analysis of Financial Condition and Results of
Operations--March 31, 1999................................................... F-27-41
FINANCIAL STATEMENTS OF ACQUIRED BUSINESS:
Report of Independent Accounts................................................. F-64
Balance Sheet as of December 31, 1997, 1998 and March 31, 1999 (unaudited)..... F-65
Statement of Operations for the period from Inception (June 6, 1996) through
December 31, 1996, for the years ended December 31, 1997 and 1998 and the
three months ended March 31, 1998 (unaudited) and 1999 (unaudited)........... F-66
Statement of Changes in Redeemable Convertible Preferred Stock and
Stockholders' Deficit for the period from inception (June 6, 1996) through
December 31, 1996, for the years ended December 31, 1997 and 1998 and the
three months ended March 31, 1999 (unaudited)................................ F-67
Statement of Cash Flows for the period from Inception (June 6, 1996) through
December 31, 1996, for the years ended December 31, 1997 and 1998 and the
three months ended March 31, 1998 (unaudited) and 1999 (unaudited)........... F-68
Notes to Financial Statements F-69
</TABLE>
F-1
<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.
As described in Note 14, on April 12, 1999, Allaire Corporation merged with
Bright Tiger Technologies, Inc. in a transaction accounted for as a pooling of
interests. The accompanying supplementary consolidated financial statements give
retroactive effect to the merger of Allaire Corporation with Bright Tiger
Technologies, Inc. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the pooling of
interests method in financial statements that do not include the date of
consummation. These financial statements do not extend through the date of
consummation; however, they will become the historical consolidated financial
statements of Allaire Corporation and subsidiary after financial statements
covering the date of consummation of the business combination are issued.
In our opinion, based upon our audits, the supplementary consolidated financial
statements listed in the accompanying index present fairly, in all material
respects, the financial position of Allaire Corporation and its subsidiaries at
December 31, 1997 and 1998, and the results of their operations and their 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.
Our audits of the financial statements and the supplementary consolidated
financial statements also included an audit of the financial statement schedule
and the supplemental financial statement schedule. In our opinion, these
financial statement schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 3, 1999,
except as to the pooling of interests with
Bright Tiger Technologies, Inc. which is as of April 12, 1999
F-2
<PAGE>
ALLAIRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- --------- MARCH 31,
1999
-----------
(UNAUDITED)
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents........................................................... $ 5,521 $ 1,847 $ 53,246
Accounts receivable, net of allowance for doubtful accounts and sales returns of
$487, $479 and $440 at December 31, 1997 and 1998 and March 31, 1999,
respectively...................................................................... 1,413 3,142 2,982
Prepaid expenses and other current assets........................................... 236 1,060 648
--------- --------- -----------
Total current assets.............................................................. 7,170 6,049 56,876
Property and equipment, net......................................................... 2,209 3,484 4,092
Other assets, net................................................................... 318 420 405
--------- --------- -----------
Total assets.......................................................................... $ 9,697 $ 9,953 $ 61,373
--------- --------- -----------
--------- --------- -----------
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders' Deficit
Current liabilities:
Current portion of capital lease obligations........................................ $ 315 $ 340 $ 346
Current portion of notes payable.................................................... -- 418 435
Accounts payable.................................................................... 1,601 3,256 2,172
Accrued expenses.................................................................... 1,320 3,712 3,605
Accrued employee compensation and benefits.......................................... 1,130 2,189 2,403
Deferred revenue.................................................................... 1,312 4,647 6,487
--------- --------- -----------
Total current liabilities............................................................. 5,678 14,562 15,448
Capital lease obligations........................................................... 499 159 70
Notes payable....................................................................... -- 1,034 919
--------- --------- -----------
Total liabilities............................................................... 6,177 15,755 16,437
--------- --------- -----------
Redeemable convertible preferred stock:
Series B, $.01 par value;
Authorized: 514,306 shares at December 31, 1997 and December 31, 1998; no shares
at March 31, 1999
Issued and outstanding: 514,306 shares at December 31, 1997 and December 31, 1998;
no shares at March 31, 1999...................................................... 2,325 2,325 --
Series C, $.01 par value;
Authorized: 169,200 shares at December 31, 1997 and December 31, 1998; no shares
at March 31, 1999
Issued and outstanding: 169,200 shares at December 31, 1997 and December 31, 1998;
no shares at March 31, 1999...................................................... 1,000 1,000 --
Series D, $.01 par value;
Authorized: 2,500,000 shares at December 31, 1997 and December 31, 1998; no shares
at March 31, 1999
Issued and outstanding: 2,336,909 shares at December 31, 1997 and December 31,
1998; no shares at March 31, 1999................................................ 9,348 9,348 --
--------- --------- -----------
Total redeemable convertible preferred stock.......................................... 12,673 12,673 --
--------- --------- -----------
Stockholders' equity (deficit):
Preferred stock, $.01 par value;
Authorized: 5,000,000 shares at March 31, 1999.................................... -- -- --
Series A convertible preferred stock, $.01 par value;
Authorized: 200,000 shares at December 31, 1997 and December 31, 1998; no shares
at March 31, 1999
Issued and outstanding: 56,557 shares at December 31, 1997; 88,463 at December 31,
1998; no shares at March 31, 1999................................................ 255 751 --
Common stock, $.01 par value;
Authorized: 10,000,000 shares at December 31, 1997, 35,000,000 at December 31,
1998 and March 31, 1999
Issued and outstanding: 3,002,500 shares at December 31, 1997, 4,148,586 issued
and 4,145,169 outstanding at December 31, 1998; issued 10,875,877 and 10,861,523
outstanding at March 31, 1999.................................................... 30 41 109
Additional paid-in capital............................................................ 13 1,804 67,622
Deferred compensation................................................................. -- (850) (906)
Accumulated deficit................................................................... (9,435) (20,205) (21,889)
Stock subscriptions receivable........................................................ (16) (16) --
--------- --------- -----------
Total stockholders' equity (deficit).................................................. (9,153) (18,475) 44,936
--------- --------- -----------
Commitments and contingencies (Note 13)
Total liabilities, redeemable conertible preferred stock and stockholders'
equity (deficit)............................................................... $ 9,697 $ 9,953 $ 61,373
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ALLAIRE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED,
YEAR ENDED DECEMBER 31, MARCH 31
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software license fees........................ $ 2,358 $ 7,116 $ 17,187 $ 3,568 $ 6,124
Services..................................... -- 534 3,325 464 1,712
--------- --------- --------- --------- ---------
Total revenue.............................. 2,358 7,650 20,512 4,032 7,836
--------- --------- --------- --------- ---------
Cost of revenue:
Software license fees........................ 234 961 1,915 421 454
Services..................................... -- 1,453 4,058 699 1,505
--------- --------- --------- --------- ---------
Total cost of revenue.......................... 234 2,414 5,973 1,120 1,959
--------- --------- --------- --------- ---------
Gross profit................................... 2,124 5,236 14,539 2,912 5,877
--------- --------- --------- --------- ---------
Operating expenses:
Research and development..................... 873 2,702 4,772 1,024 1,630
Sales and marketing.......................... 1,576 7,272 16,099 3,115 5,138
General and administrative................... 1,387 2,874 3,992 868 1,052
Stock-based compensation..................... -- -- 412 161 67
--------- --------- --------- --------- ---------
Total operating expenses................... 3,836 12,848 25,252 5,168 7,887
--------- --------- --------- --------- ---------
Loss from operations........................... (1,712) (7,612) (10,736) (2,256) (2,010)
Interest income (expense), net................. 14 187 (34) 45 326
--------- --------- --------- --------- ---------
Net loss....................................... $ (1,698) $ (7,425) $ (10,770) $ (2,211) $ (1,684)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic and diluted net loss per share........... $ (0.97) $ (4.40) $ (3.67) $ (0.89) $ (0.19)
Shares used in computing basic and diluted net
loss per share............................... 1,743 1,687 2,938 2,477 8,819
Unaudited pro forma basic and diluted net loss
per share.................................... $ (1.51) $ (0.17)
Shares used in computing unaudited pro forma
basic and diluted net loss per share......... 7,139 9,757
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ALLAIRE CORPORATION
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- ---------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES PAR VALUE
--------- ----------- --------- ----------- --------- -------------
<S> <C> <C> <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
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.............................................. (920,000) (9)
Repurchase and cancellation of shares of common
stock.............................................. (80,000) (1)
Issuance of Series C redeemable convertible preferred
stock, net of issuance costs of $12................ 84,600 500
Exercise of employee stock options................... 2,500 --
Net loss.............................................
--------- ----------- --------- ----------- --------- -----
Balance, December 31, 1996........................... 593,449 2,800 43,557 177 3,002,500 30
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 3,002,500 30
Issuance of Series A convertible preferred stock, net
of issuance costs of $9............................ 31,906 496
Exercise of employee stock options................... 1,146,086 11
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 4,148,586 41
Conversion of redeemable convertible preferred stock
and convertible preferred stock to common stock
(unaudited)........................................ (3,020,415) (12,673) (88,463) (751) 3,848,941 39
Issuance of common stock in initial public offering,
net of issuance costs of $5,200 (unaudited)........ 2,875,000 29
Exercise of employee stock options (unaudited)....... 3,350
Repurchase of common stock held in treasury
(unaudited)........................................
Deferred compensation relating to grants of stock
options (unaudited)................................
Compensation relating to grants of stock options
(unaudited)........................................
Repayment of stock subscription receivable
(unaudited)........................................
Net loss (unaudited).................................
--------- ----------- --------- ----------- --------- -----
Balance, March 31, 1999 (unaudited).................. -- $ -- -- $ -- 10,875,877 $ 109
--------- ----------- --------- ----------- --------- -----
--------- ----------- --------- ----------- --------- -----
<CAPTION>
ADDITIONAL STOCK TOTAL
PAID-IN DEFERRED ACCUMULATED SUBSCRIPTIONS STOCKHOLDERS'
CAPITAL COMPENSATION DEFICIT RECEIVABLE DEFICIT
----------- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995........................... $ -- $ -- $ (203) $ -- $ (181)
Issuance of common stock in exchange for stock
subscriptions receivable........................... 27 (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.............................................. (14) 23 --
Repurchase and cancellation of shares of common
stock.............................................. (1) 2 --
Issuance of Series C redeemable convertible preferred
stock, net of issuance costs of $12................ (12) (12)
Exercise of employee stock options................... 1 1
Net loss............................................. (1,698) (1,698)
----------- ----- ------------ ------------- -------------
Balance, December 31, 1996........................... 13 -- (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........................... 13 -- (9,435) (16) (9,153)
Issuance of Series A convertible preferred stock, net
of issuance costs of $9............................ 496
Exercise of employee stock options................... 530 541
Repurchase of common stock held in treasury.......... (2) (2)
Deferred compensation relating to grants of stock
options............................................ 997 (997) --
Compensation relating to grants of stock options..... 265 147 412
Net loss............................................. (10,770) (10,770)
----------- ----- ------------ ------------- -------------
Balance, December 31, 1998........................... 1,804 (850) $ (20,205) $ (16) $ (18,475)
Conversion of redeemable convertible preferred stock
and convertible preferred stock to common stock
(unaudited)........................................ 13,385 12,673
Issuance of common stock in initial public offering,
net of issuance costs of $5,200 (unaudited)........ 52,312 52,341
Exercise of employee stock options (unaudited)....... 4 4
Repurchase of common stock held in treasury
(unaudited)........................................ (8) (8)
Deferred compensation relating to grants of stock
options (unaudited)................................ 125 (125) --
Compensation relating to grants of stock options
(unaudited)........................................ 69 69
Repayment of stock subscription receivable
(unaudited)........................................ 16 16
Net loss (unaudited)................................. (1,684) (1,684)
----------- ----- ------------ ------------- -------------
Balance, March 31, 1999 (unaudited).................. $ 67,622 $ (906) $ (21,889) $ -- $ 44,936
----------- ----- ------------ ------------- -------------
----------- ----- ------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ALLAIRE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
-------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $ (1,698) $ (7,425) $ (10,770) $ (2,211) $ (1,684)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization............................... 94 726 1,379 337 463
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............................................... -- -- 412 161 67
Changes in assets and liabilities:
Accounts receivable....................................... (577) (796) (1,729) (295) 160
Prepaid expenses and other current assets................. (76) (149) (824) (38) 412
Other assets.............................................. (254) (55) (305) (49) (31)
Accounts payable.......................................... 459 1,115 1,655 (553) (1,084)
Accrued expenses.......................................... 368 2,071 3,451 749 107
Deferred revenue.......................................... (103) 1,204 3,335 601 1,840
--------- --------- ---------- --------- ---------
Total adjustments......................................... 3 4,121 7,374 913 1,934
--------- --------- ---------- --------- ---------
Net cash used for operating activities.................... (1,695) (3,304) (3,396) (1,298) 250
--------- --------- ---------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment........................... (598) (1,502) (2,450) (486) (1,025)
Payment for acquisition of Bradbury Software L.L.C............ -- (252) -- -- --
--------- --------- ---------- --------- ---------
Net cash used for investing activities.................... (598) (1,754) (2,450) (486) (1,025)
--------- --------- ---------- --------- ---------
Cash flows from financing activities:
Proceeds from sale leaseback transaction...................... -- 421 -- -- --
Principal payments on capital lease obligations............... -- (165) (315) (77) (83)
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) -- (98)
Proceeds from sale of common stock............................ 1 541 529 52,347
----
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) -- (8)
Payment received on stock subscription receivable............. -- 4 -- 5 16
Net cash provided by financing activities................. 2,802 10,053 2,172 457 52,174
--------- --------- ---------- --------- ---------
Net increase (decrease) in cash and cash equivalents............ 509 4,995 (3,674) (1,327) 51,399
Cash and cash equivalents, beginning of period.................. 17 526 5,521 5,521 1,847
--------- --------- ---------- --------- ---------
Cash and cash equivalents, end of period........................ $ 526 $ 5,521 $ 1,847 $ 4,194 $ 53,246
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest........................................ $ 4 $ 46 $ 162 $ 15 $ 87
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 $ -- $ -- $ --
Conversion of redeemable convertible preferred stock to common
stock....................................................... $ -- $ -- $ -- $ -- $ 12,673
Conversion of Series A into common stock...................... $ -- $ -- $ -- $ -- $ 751
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED 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.
The consolidated financial statements include the accounts of Allaire and
its subsidiary. All significant intercompany transactions have been eliminated.
Certain 1996, 1997, and 1998 amounts have been reclassified to conform to the
1999 method of presentation.
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.
UNAUDITED INTERIM FINANCIAL DATA
The interim financial data as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 have been derived from unaudited financial
statements of Allaire. Management believes that Allaire's unaudited financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for such periods. Results for the three months ended March
31, 1998 and March 31, 1999 are not necessarily indicative of results to be
expected for the full fiscal year.
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
F-7
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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, 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.
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,
F-8
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
"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
F-9
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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,
F-10
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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
F-11
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION (CONTINUED)
$5,000 on these notes was converted into 64,190 shares of Series D preferred
stock in May 1997.
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.
F-12
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT (CONTINUED)
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.
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
F-13
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LINES OF CREDIT (CONTINUED)
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
F-14
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PREFERRED STOCK (CONTINUED)
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.
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.
F-15
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PREFERRED STOCK (CONTINUED)
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.
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
F-16
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMON STOCK (CONTINUED)
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.
F-17
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-18
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS (CONTINUED)
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.
F-19
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS (CONTINUED)
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.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
VESTED AND EXERCISABLE
------------------------------
WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE REMAINING CONTRACTUAL OF 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
F-20
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS (CONTINUED)
and deferred compensation relating to these options totaling $412,000 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.
F-21
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
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 1998 1997
----------- ------------ ------------
<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>
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.
F-22
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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,
F-23
<PAGE>
ALLAIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 EVENTS
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.
In April 1999, Allaire completed a merger with Bright Tiger Technologies,
Inc. ("Bright Tiger") by issuing approximately 300,000 shares of Allaire common
stock in exchange for all of the outstanding equity securities of Bright Tiger.
Bright Tiger provides software designed to enhance the performance, availability
and manageability of large-scale Internet sites and Web applications. Allaire
had previously licensed technology from Bright Tiger that was incorporated in
certain Allaire ColdFusion products. The transaction will be accounted for as a
pooling of interests. Allaire expects to incur a non-recurring charge of
approximately $2.2 million in the quarter ended June 30, 1999 primarily related
to professional fees, severance packages and related risks associated with the
acquisition.
F-24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of Allaire should be read in conjunction with Allaire's
suppemental consolidated financial statements and notes thereto appearing
elsewhere in this prospectus.
This Prospectus 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 "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
F-25
<PAGE>
("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, and 39% and 54% of total
revenue for the quarters ended March 31, 1998 and 1999, 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 and 13% and 16% of total revenue for the
quarters ended March 31, 1998 and 1999, respectively.
In April 1999, Allaire completed a merger with Bright Tiger by issuing
approximately 300,000 shares of Allaire common stock for all of the outstanding
equity securities of Bright Tiger. Bright Tiger provides software designed to
enhance the performance, availability and manageability of large-scale Internet
sites and Web applications. Allaire had previously licensed technology from
Bright Tiger that was incorporated in certain Allaire ColdFusion products.
Allaire expects to incur a non-recurring charge of approximately $2.2 million in
the quarter ended June 30,1999 primarily related to professional fees, severance
packages and related costs associated with the acquisition.
F-26
<PAGE>
On June 14, 1999 Allaire signed a definitive merger agreement to acquire
Live Software, Inc. ("Live Software") for approximately 550,000 shares of
Allaire common stock. The transaction is expected to be accounted for as a
pooling of interests. Closing of the acquisition, which is expected to occur by
July 15, 1999, is subject to satisfaction of customary closing conditions. Live
Software develops, markets and supports server-side Java development and
deployment technology. Live Software's principal product, JRUN, is a leading
server-side Java development and deployment engine.
Allaire has experienced substantial net losses in each fiscal period since
its inception and, as of March 31, 1999, had an accumulated deficit of 33.9
million. Such net losses and accumulated deficit resulted primarily from 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 large orders, in
which case 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.
F-27
<PAGE>
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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
Revenue:
Software license fees........................ 100.0% 86.3% 83.9% 88.4% 78.4%
Services..................................... 0.0 13.7 16.1 11.6 21.6
--------- --------- --------- --------- ---------
Total revenue.......................... 100.00 100.00 100.00 100.00 100.00
Cost of revenue:
Cost of software license fees................ 9.9 12.7 9.3 10.4 5.7
Cost of services............................. 0.0 18.9 19.4 17.2 18.8
--------- --------- --------- --------- ---------
Total cost of revenue.................. 9.9 31.6 28.7 27.6 24.5
--------- --------- --------- --------- ---------
Gross profit................................. 90.1 68.4 71.3 72.4 77.5
--------- --------- --------- --------- ---------
-- -- -- --
Operating expenses:
Research and development..................... 47.0 63.7 37.1 44.0 29.2
Sales and marketing.......................... 68.7 115.0 91.5 101.8 71.8
General and administrative................... 60.9 44.4 22.8 26.1 15.7
Stock-based Compensation..................... 0.0 0.0 2.0 4.0 0.9
--------- --------- --------- --------- ---------
Total operating expenses............... 176.6 223.1 153.4 175.9 117.6
--------- --------- --------- --------- ---------
Loss from operations......................... (86.5) (154.7) (82.1) (103.5) (40.1)
--------- --------- --------- --------- ---------
Interest income, net......................... 0.6 4.1 0.1 2.3 3.7
--------- --------- --------- --------- ---------
Net loss..................................... (85.9)% (150.6)% (82.0)% (101.2)% (36.4)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
QUARTERS ENDED MARCH 31, 1998 AND 1999
REVENUE
Total revenue increased 97% from $4.1 million for the quarter ended March
31, 1998 to $8.0 million for the quarter ended March 31, 1999.
SOFTWARE LICENSE FEES. Revenue from software license fees increased 75%
from $3.6 million for the quarter ended March 31, 1998 to $6.3 million for the
quarter ended March 31, 1999. This increase was primarily due to an increase in
the number of licenses sold to use Allaire's ColdFusion software products and
from an increase in product price associated with the release of new versions of
Allaire's products during the fourth quarter of 1998.
SERVICES. Revenue from services increased 268% from $470,000 for the
quarter ended
March 31, 1998 to $1.7 million in the quarter ended March 31, 1999. The increase
was primarily attributable to growth in training revenue resulting from an
increase in Allaire's installed customer base.
F-28
<PAGE>
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 8% from $421,000 for the quarter ended March 31,
1998 to $456,000 for the quarter ended March 31, 1999. The increase in absolute
dollars was due to higher unit sales volume. The improvement in software license
fees gross margins from 88% for the quarter ended March 31,1998 to 93% for the
quarter ended March 31, 1999 was primarily attributable to economies of scale
achieved with Allaire's higher sales volume.
COST OF SERVICES. Cost of services consists primarily of personnel costs.
Cost of services increased 115% from $699,000 for the quarter ended March 31,
1998 to $1.5 million for the quarter ended March 31, 1999. 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
(49)% for the quarter ended March 31,1998 to 13% for the quarter ended March 31,
1999 was primarily attributable to the substantial growth in training revenue.
Continued improvement in services gross margins is dependent upon the 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 29% from $1.8 million for the quarter ended March
31, 1998 to $2.3 million for the quarter ended March 31, 1999. The increase
primarily resulted from salaries associated with newly hired development
personnel. Allaire anticipates that research and development expenses will
increase primarily due to increased product development consulting costs.
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 37% from $4.1 million for the quarter
ended March 31, 1998 to $5.6 million for the quarter ended March 31, 1999. The
increase was primarily attributable to costs associated with additional direct
sales, pre-sales support and marketing personnel, and an increase in marketing
programs, including promotions and advertising. Allaire anticipates that sales
and marketing expenses will continue to increase in absolute dollars as it
continues to expand its
F-29
<PAGE>
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 17% to from $1.1 million for the
quarter ended March 31, 1998 $1.2 million for the quarter ended March 31, 1999.
The increase was primarily attributable to salaries associated with newly hired
personnel and related costs required to manage Allaire's growth and facilities
expansion. 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.
STOCK-BASED COMPENSATION. The amount that the estimated fair market value
of Allaire's common stock exceeds the exercise price of stock options on the
date of grant is recorded as deferred compensation and amortized to stock-based
compensation expense as the options vest. Allaire recognized $161,000 for the
quarter ended March 31, 1998 compared to $67,000 of stock based compensation for
the quarter ended March 31, 1999. The decrease was primarily attributable to the
grant of a fully vested option with an exercise price substantially below fair
market value during the quarter ended March 31, 1998.
INTEREST INCOME (EXPENSE), NET. Interest income, net of interest expense,
increased from $92,000 for the quarter ended March 31, 1998 to $286,000 for the
quarter ended March 31, 1999. The increase was due to interest income earned
from the investment of the net cash proceeds from Allaire's initial public
offering in January 1999.
PROVISION FOR INCOME TAXES. Allaire incurred significant operating losses
for all periods from inception through March 31, 1999. 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, 1997 AND 1998
REVENUE
Total revenue increased 172% from $7.7 million for 1997 to $20.9 million for
1998.
SOFTWARE LICENSE FEES. Revenue from software license fees increased 145%
from $7.1 million for 1997 to $17.5 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 526% from $538,000 for 1997 to
$3.4 million for 1998. The increase was primarily attributable to growth in
training revenue resulting from an increase in Allaire's installed customer
base.
F-30
<PAGE>
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 $973,000 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.
COST OF SERVICES. Cost of services consists primarily of personnel costs.
Cost of services increased 179% 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 (170)% for 1997 to (21)% for 1998 was primarily
attributable to the substantial growth in services revenue.
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 58% from $4.9 million for 1997 to $7.7 million
for 1998. The increase primarily resulted from salaries associated with newly
hired development personnel and product development consulting costs.
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 117% from $8.8 million for 1997 to $19.1
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.
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 40% from $3.4 million for 1997 to
$4.7 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.
STOCK-BASED COMPENSATION. The amount that the estimated fair market value
of Allaire's common stock exceeds the exercise price of stock options on the
date of grant is recorded as deferred compensation and amortized to stock-based
compensation expense as the options vest. Allaire recognized zero and $412,000
of stock based compensation for 1997 and 1998, respectively.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net decreased
from net interest income of $314,000 for 1997 to $13,000 for 1998. The decrease
was primarily due to
F-31
<PAGE>
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 225% 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 316%
from $234,000 for 1996 to $973,000 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 340%
from $1.1 million for 1996 to $4.9 million for 1997. The increase primarily
resulted from salaries associated with newly hired development personnel and
product development consulting costs.
SALES AND MARKETING. Sales and marketing expenses increased 445% from $1.6
million for 1996 to $8.8 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
F-32
<PAGE>
increase in marketing programs, including trade shows, seminars and product
launch and brand awareness activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
137% from $1.4 million for 1996 to $3.4 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 $314,000 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.
F-33
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth a summary of Allaire's unaudited quarterly
operating results for each of the nine quarters in the period ended March 31,
1999. This information has been derived from unaudited interim financial
statements that, in the opinion of management, have been prepared on a basis
consistent with the financial statements contained elsewhere in this prospectus
and include all adjustments, consisting of only normal recurring adjustments,
necessary for fair statement of such information when read in conjunction with
Allaire's financial statements and notes thereto. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31 MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1997 1997 1998 1998 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software license fees......... $ 1,143 $ 1,304 $ 1,888 $ 2,795 $ 3,595 $ 4,185 $ 4,192
Services...................... 68 76 116 278 470 580 1,158
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue............... 1,211 1,380 2,004 3,073 4,065 4,765 5,350
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cost of revenue:
Software license fees......... 157 186 197 433 421 402 447
Services...................... 146 303 396 608 699 904 1,240
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenue....... 303 489 593 1,041 1,120 1,306 1,687
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit.................... 908 891 1,411 2,032 2,945 3,459 3,663
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development...... 631 1,055 1,547 1,650 1,775 1,778 2,088
Sales and marketing........... 1,074 1,390 2,486 3,868 4,104 4,436 5,355
General and administrative.... 435 621 1,116 1,231 1,054 1,088 1,125
Stock-based compensation...... 0 0 0 0 161 25 34
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.... 2,140 3,066 5,149 6,749 7,094 7,327 8,602
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from operations............ $ (1,232) $ (2,175) $ (3,738) $ (4,717) $ (4,149) $ (3,868) $ (4,939)
Interest income (expense),
net........................... 19 76 115 104 92 45 (36)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss........................ $ (1,213) $ (2,099) $ (3,623) $ (4,613) $ (4,057) $ (3,823) $ (4,975)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
AS A PERCENTAGE OF TOTAL
REVENUE:
Revenue:
Software license fees......... 94.4% 94.5% 94.2% 91.0% 88.4% 87.8% 78.4%
Services...................... 5.6 5.5 5.8 9.0 11.6 12.2 21.6
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue............... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cost of revenue:
Software license fees......... 13.0 13.4 9.8 14.1 10.4 8.4 8.3
Services...................... 12.0 22.0 19.8 19.8 17.2 19.0 23.2
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenue....... 25.0 35.4 29.6 33.9 27.6 27.4 31.5
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit.................... 75.0 64.6 70.4 66.1 72.4 72.6 68.5
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development...... 52.1 76.4 77.2 53.7 43.7 37.3 39.1
Sales and marketing........... 88.7 100.7 124.1 125.9 101.0 93.1 100.1
General and administrative.... 35.9 45.0 55.7 40.0 25.8 22.8 21.0
Stock-based compensation...... 0.0 0.0 0.0 0.0 4.0 0.5 0.6
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.... 176.7 222.1 257.0 219.6 174.5 153.7 160.8
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from operations............ (101.7) (157.5) (186.6) (153.5) (102.1) (81.1) (92.3)
Interest income (expense),
net........................... 1.6 5.5 5.7 3.4 2.3 0.9 (0.7)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss........................ (100.1)% (152.0 )% (180.9 )% (150.1 )% (99.8 )% (80.2 )% (93.0)%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
<S> <C> <C>
DEC. 31 MAR. 31,
1998 1999
----------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software license fees......... $ 5,525 $ 6,276
Services...................... 1,159 1,728
----------- -----------
Total revenue............... 6,684 8,004
----------- -----------
Cost of revenue:
Software license fees......... 667 456
Services...................... 1,215 1,505
----------- -----------
Total cost of revenue....... 1,882 1,961
----------- -----------
Gross profit.................... 4,802 6,043
----------- -----------
Operating expenses:
Research and development...... 2,093 2,290
Sales and marketing........... 5,205 5,625
General and administrative.... 1,481 1,230
Stock-based compensation...... 192 67
----------- -----------
Total operating expenses.... 8,971 9,212
----------- -----------
Loss from operations............ $ (4,169) $ (3,169)
Interest income (expense),
net........................... (88) 286
----------- -----------
Net loss........................ $ (4,257) $ (2,883)
----------- -----------
----------- -----------
AS A PERCENTAGE OF TOTAL
REVENUE:
Revenue:
Software license fees......... 82.7% 78.4%
Services...................... 17.3 21.6
----------- -----------
Total revenue............... 100.0 100.0
----------- -----------
Cost of revenue:
Software license fees......... 10.0 5.7
Services...................... 18.2 18.8
----------- -----------
Total cost of revenue....... 28.2 24.5
----------- -----------
Gross profit.................... 71.8 75.5
----------- -----------
Operating expenses:
Research and development...... 31.3 28.6
Sales and marketing........... 77.8 70.3
General and administrative.... 22.2 15.4
Stock-based compensation...... 2.9 0.8
----------- -----------
Total operating expenses.... 134.2 115.1
----------- -----------
Loss from operations............ (62.4) (39.6)
Interest income (expense),
net........................... (1.3) 3.6
----------- -----------
Net loss........................ (63.7 )% (36.0 )%
----------- -----------
----------- -----------
</TABLE>
Allaire's total revenue has increased each consecutive quarter during the
nine fiscal quarters ending March 31, 1999, as a result of market acceptance of
Allaire's products and diversification of Allaire's sales channels, including
expansion of Allaire's direct sales force and relationships with domestic and
international distributors. Services revenue has generally
F-34
<PAGE>
increased along with increases in Allaire's installed customer base. Cost of
revenue from software license fees has fluctuated as a percentage of revenue
from software license fees primarily due to growth in the indirect distribution
channel, use of licensed technology and economies of scale gained from increased
license volume. Cost of services revenue increased quarter to quarter in
absolute dollars primarily due to increases in personnel and related costs for
customer support and training.
Operating expenses increased in each quarter, reflecting increased spending
on developing, selling, marketing and supporting Allaire's products, as well as
building Allaire's market presence. Research and development costs have
increased as a result of higher personnel and consulting costs associated with
enhancing existing products and developing new products. Sales and marketing
expenses increased as a result of hiring additional sales and marketing
personnel and an increase in marketing program costs. General and administrative
expenses increased throughout 1997 primarily due to the hiring of Allaire's
executive and financial staff and support personnel, increased use of outside
services during the second half of 1997 and a legal settlement. The increase
during the fourth quarter of 1998 was related to costs associated with exiting a
facilities lease.
Allaire's operating results have varied on a quarterly basis during its
short operating history and are expected to fluctuate significantly in the
future. A variety of factors, many of which are outside of Allaire's control,
may affect Allaire's quarterly operating results. These factors include:
- the evolution of the market for Web development products;
- market acceptance of Allaire's products;
- Allaire's success and timing in developing and introducing new products
and enhancements to existing products;
- market acceptance of products developed by competitors;
- changes in pricing policies by Allaire or its competitors;
- an increase in the length of Allaire's sales cycle;
- changes in customer buying patterns;
- customer order deferrals in anticipation of new products or enhancements
by Allaire or competitors;
- market entry by new competitors;
- development and performance of Allaire's distribution channels;
- general economic conditions; and
- economic conditions specific to Internet-related industries.
LIQUIDITY AND CAPITAL RESOURCES
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.
Prior to its initial public offering, Allaire had funded its operations
primarily through net cash proceeds from private
F-35
<PAGE>
placements of preferred stock totaling $23.2 million. At March 31, 1999, Allaire
had cash and cash equivalents totaling $53.9 million, an increase of $50.8
million from December 31, 1998.
Cash used for operating activities for 1997 was $7.0 million, primarily due
to a net loss of $11.5 million, partially offset by increases in accounts
payable, accrued expenses and deferred revenue. Cash used for operating
activities for 1998 was $9.5 million, primarily due to a net loss of $17.1
million, partially offset by accrued expenses and deferred revenue. Cash used
for operating activities for the quarter ended March 31, 1999 was due to a net
loss of $2.9 million, partially offset by a 1.9 million increase in deferred
revenue. The significant increase in deferred revenue during the quarter ended
March 31, 1999 primarily related to deferral of revenue on ColdFusion Enterprise
Server shipments. Allaire was obligated to provide certain additional
functionality to its customers which was not delivered by March 31, 1999.
Allaire expects that such functionality will be delivered within the next two
fiscal quarters.
Cash used for investing activities for 1997 was $7.5 million, primarily due
to increase in short term investments and property and equipment purchases. Cash
provided by investing activities for 1998 was $1.6 million, primarily due to the
decrease in short term investments, partially offset by property and equipment
purchases. Cash used for investing activities for the quarter ended March 31,
1999 was $529,000, primarily due to property and equipment purchases, partially
offset by a decrease in short term investments. Property and equipment purchases
for the periods were primarily purchases of computer servers, workstations and
networking equipment and leasehold improvements to support Allaire's additional
personnel.
Cash provided by financing activities for 1997 was $21.0 million, primarily
due to preferred stock and common stock issuances. Cash provided by financing
activities for 1998 was $3.9 million, primarily due to the issuance of notes
payable, promissory notes, proceeds from the exercise of common stock options
and the issuance of preferred stock. Cash provided by financing activities for
the quarter ended March 31, 1999 was $52.1 million, related to the net proceeds
from Allaire's initial public offering.
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.
F-36
<PAGE>
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 March 31, 1999, Allaire had $1.4 million
outstanding under the line, which was collateralized by previous purchases of
furniture and equipment.
As of March 31, 1999, Allaire's primary commitments consisted of obligations
related to operating leases, $2.4 million of notes payable under equipment
lines, $1.5 million of promissory notes and $416,000 of capital lease
obligations.
In April 1999, Allaire completed a merger with Bright Tiger by issuing
approximately 300,000 shares of Allaire common stock for all of the outstanding
equity securities of Bright Tiger. In connection with the merger, Allaire
assumed and paid off Bright Tiger debt obligations totaling approximately $2.6
million.
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.
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,
F-37
<PAGE>
operating results and financial condition. Year 2000 complications may disrupt
the operation, viability or commercial acceptance of the Internet, which could
have a material adverse impact on Allaire's business, operating results and
financial condition.
With respect to Allaire's primary internal software systems Allaire either
has received written confirmations from software vendors that the software it
installed is Year 2000 compliant or is in the process of installing available
software upgrades to achieve Year 2000 compliance. Based on the foregoing,
Allaire currently has no reason to believe that its internal software systems
will not be Year 2000 compliant by September 30, 1999. 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 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 adopted
SOP 98-1, January 1, 1999, and Allaire does not expect its adoption 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.
F-38
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 1999 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.
F-39
<PAGE>
ALLAIRE CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................................................................... $ 7,187 $ 3,161
Short-term investments.............................................................................. 4,717 495
Accounts receivable, net of allowance for doubtful accounts and sales returns of $487, $479 and $440
at December 31, 1997 and 1998 and March 31, 1999, respectively.................................... 1,431 3,173
Prepaid expenses and other current assets........................................................... 236 1,092
--------- ---------
Total current assets.............................................................................. 13,571 7,921
Property and equipment, net......................................................................... 3,107 4,185
Other assets, net................................................................................... 332 365
--------- ---------
Total assets.......................................................................................... $ 17,010 $ 12,471
--------- ---------
--------- ---------
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit)
Current liabilities
Current portion of capital lease obligations........................................................ $ 315 $ 340
Promissory notes.................................................................................... -- 1,500
Current portion of notes payable.................................................................... 123 1,564
Accounts payable.................................................................................... 1,813 3,293
Accrued expenses.................................................................................... 1,428 3,825
Accrued employee compensation and benefits.......................................................... 1,204 2,213
Deferred revenue.................................................................................... 1,312 4,676
--------- ---------
Total current liabilities............................................................................. 6,195 17,411
Capital lease obligations........................................................................... 1,251 159
Notes payable....................................................................................... -- 1,034
--------- ---------
Total liabilities................................................................................. 7,446 18,604
--------- ---------
Redeemable convertible preferred stock:
Series B, $.01 par value;
Authorized: 514,306 shares at December 31, 1997 and December 31, 1998, no shares authorized at
March 31, 1999
Issued and outstanding: 514,306 shares at December 31, 1997 and December 31, 1998, no shares
issued and outstanding at March 31, 1999......................................................... 2,325 2,325
Series C, $.01 par value;
Authorized: 169,200 shares at December 31, 1997 and December 31, 1998, no shares authorized at
March 31, 1999
Issued and outstanding: 169,200 shares at December 31, 1997 and December 31, 1998, no shares
issued and outstanding at March 31, 1999......................................................... 1,000 1,000
Series D, $.01 par value;
Authorized: 2,500,000 shares at December 31, 1997 and December 31, 1998, no shares authorized at
March 31, 1999
Issued and outstanding: 2,336,909 shares at December 31, 1997 and December 31, 1998, no shares
issued and outstanding at March 31, 1999......................................................... 9,348 9,348
--------- ---------
Total redeemable convertible preferred stock.......................................................... 12,673 12,673
--------- ---------
Stockholders' equity (deficit):
Preferred stock, $.01 par value; Authorized: 5,000,000 shares at March 31, 1999 -- --
Series A convertible preferred stock, $.01 par value;
Authorized: 200,000 shares at December 31, 1997 and December 31, 1998, no shares authorized at
March 31, 1999
Issued and outstanding: 56,557 shares at December 31, 1997; 88,463 at December 31, 1998, no shares
issued and outstanding at March 31, 1999......................................................... 255 751
Common stock, $.01 par value;
Authorized: 10,000,000 shares at December 31, 1997, 35,000,000 at December 31, 1998 and March 31,
1999
Issued and outstanding: 3,300,505 issued and outstanding shares at December 31, 1997, 4,436,669
issued and 4,433,252 outstanding at December 31, 1998; 11,164,445 issued and 11,160,987
outstanding at March 31, 1999.................................................................... 33 44
Additional paid-in capital............................................................................ 10,516 12,273
Accumulated deficit................................................................................... (13,897) (31,008)
Deferred compensation................................................................................. -- (850)
Stock subscriptions receivable........................................................................ (16) (16)
--------- ---------
Total stockholders' equity (deficit)................................................................ (3,109) (18,806)
Commitments and contingencies (Note 13)
--------- ---------
Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit).......... $ 17,010 $ 12,471
--------- ---------
--------- ---------
<CAPTION>
MARCH 31
1999
-----------
<S> <C>
(UNAUDITED)
Assets
Current assets:
Cash and cash equivalents........................................................................... $ 53,908
Short-term investments.............................................................................. --
Accounts receivable, net of allowance for doubtful accounts and sales returns of $487, $479 and $440
at December 31, 1997 and 1998 and March 31, 1999, respectively.................................... 3,145
Prepaid expenses and other current assets........................................................... 687
-----------
Total current assets.............................................................................. 57,740
Property and equipment, net......................................................................... 4,688
Other assets, net................................................................................... 310
-----------
Total assets.......................................................................................... $ 62,738
-----------
-----------
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit)
Current liabilities
Current portion of capital lease obligations........................................................ $ 346
Promissory notes.................................................................................... 1,500
Current portion of notes payable.................................................................... 1,508
Accounts payable.................................................................................... 2.249
Accrued expenses.................................................................................... 3,721
Accrued employee compensation and benefits.......................................................... 2,482
Deferred revenue.................................................................................... 6,534
-----------
Total current liabilities............................................................................. 18,340
Capital lease obligations........................................................................... 70
Notes payable....................................................................................... 919
-----------
Total liabilities................................................................................. 19,329
-----------
Redeemable convertible preferred stock:
Series B, $.01 par value;
Authorized: 514,306 shares at December 31, 1997 and December 31, 1998, no shares authorized at
March 31, 1999
Issued and outstanding: 514,306 shares at December 31, 1997 and December 31, 1998, no shares
issued and outstanding at March 31, 1999......................................................... --
Series C, $.01 par value;
Authorized: 169,200 shares at December 31, 1997 and December 31, 1998, no shares authorized at
March 31, 1999
Issued and outstanding: 169,200 shares at December 31, 1997 and December 31, 1998, no shares
issued and outstanding at March 31, 1999......................................................... --
Series D, $.01 par value;
Authorized: 2,500,000 shares at December 31, 1997 and December 31, 1998, no shares authorized at
March 31, 1999
Issued and outstanding: 2,336,909 shares at December 31, 1997 and December 31, 1998, no shares
issued and outstanding at March 31, 1999......................................................... --
-----------
Total redeemable convertible preferred stock.......................................................... --
-----------
Stockholders' equity (deficit):
Preferred stock, $.01 par value; Authorized: 5,000,000 shares at March 31, 1999 --
Series A convertible preferred stock, $.01 par value;
Authorized: 200,000 shares at December 31, 1997 and December 31, 1998, no shares authorized at
March 31, 1999
Issued and outstanding: 56,557 shares at December 31, 1997; 88,463 at December 31, 1998, no shares
issued and outstanding at March 31, 1999......................................................... --
Common stock, $.01 par value;
Authorized: 10,000,000 shares at December 31, 1997, 35,000,000 at December 31, 1998 and March 31,
1999
Issued and outstanding: 3,300,505 issued and outstanding shares at December 31, 1997, 4,436,669
issued and 4,433,252 outstanding at December 31, 1998; 11,164,445 issued and 11,160,987
outstanding at March 31, 1999.................................................................... 112
Additional paid-in capital............................................................................ 78,095
Accumulated deficit................................................................................... (33,892)
Deferred compensation................................................................................. (906)
Stock subscriptions receivable........................................................................ --
-----------
Total stockholders' equity (deficit)................................................................ 43,409
Commitments and contingencies (Note 13)
-----------
Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit).......... $ 62,738
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
ALLAIRE CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED, MARCH
YEAR ENDED DECEMBER 31, 31
--------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- ---------- ---------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software license fees................................. $ 2,358 $ 7,130 $ 17,497 $ 3,595 $ 6,276
Services.............................................. -- 538 3,367 470 1,728
--------- ---------- ---------- --------- ---------
Total revenue................................. 2,358 7,668 20,864 4,065 8,004
--------- ---------- ---------- --------- ---------
Cost of revenue:
Software license fees................................. 234 973 1,937 421 456
Services.............................................. -- 1,453 4,058 699 1,505
--------- ---------- ---------- --------- ---------
Total cost of revenue......................... 234 2,426 5,995 1,120 1,961
--------- ---------- ---------- --------- ---------
Gross profit.............................................. 2,124 5,242 14,869 2,945 6,043
--------- ---------- ---------- --------- ---------
Operating expenses:
Research and development.............................. 1,109 4,883 7,734 1,775 2,290
Sales and marketing................................... 1,618 8,818 19,100 4,104 5,625
General and administrative............................ 1,437 3,403 4,748 1,054 1,230
Stock-based compensation.............................. 412 161 67
--- ---
---------- --------- ---------
--------- ----------
Total operating expenses...................... 4,164 17,104 31,994 7,094 9,212
--------- ---------- ---------- --------- ---------
Loss from operations...................................... (2,040) (11,862) (17,125) (4,149) (3,169)
Interest income, net...................................... 13 314 13 92 286
--------- ---------- ---------- --------- ---------
Net loss.................................................. $ (2,027) $ (11,548) $ (17,112) $ (4,057) $ (2,883)
--------- ---------- ---------- --------- ---------
--------- ---------- ---------- --------- ---------
Basic and diluted net loss per share...................... $ (1.15) $ (6.31) $ (5.34) $ (1.48) $ (0.32)
Shares used in computing basic and
diluted net loss per share................................ 1,756 1,830 3,207 2,742 9,083
Unaudited pro forma basic and diluted net loss per
share................................................... $ (2.31) $ (0.29)
Shares used in computing unaudited pro forma basic and
diluted net loss per share.............................. 7,408 10,021
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
ALLAIRE CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND
STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE CONVERTIBLE PREFERRED COMMON
PREFERRED STOCK STOCK STOCK
-------------------- ---------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995........................................ -- $ -- -- $ -- 2,200,000
Issuance of common stock in exchange for stock subscriptions
receivable...................................................... 1,800,000
Stock issued by pooled company.................................... 43,070
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.......................... (920,000)
Repurchase and cancellation of shares of common stock............. (80,000)
Issuance of Series C redeemable convertible preferred stock, net
of issuance costs of $12........................................ 84,600 500
Exercise of employee stock options................................ 2,500
Net loss..........................................................
--------- --------- --------- ----- ---------
Balance, December 31, 1996........................................ 593,449 2,800 43,557 177 3,045,570
Stock issued by pooled company, net............................... 254,935
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 3,300,505
Stock repurchased by pooled company, net.......................... (9,922)
Issuance of Series A convertible preferred stock, net of issuance
costs of $9..................................................... 31,906 496
Exercise of employee stock options................................ 1,146,086
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 4,436,669
Stock issued by pooled company (unaudited)........................ 485
Conversion of redeemable convertible preferred stock and
convertible preferred stock to common stock (unaudited)......... (3,020,415) (12,673) (88,463) (751) 3,848,941
Issuance of common stock in initial public offering, net of
issuance costs of $5,200 (unaudited)............................ 2,875,000
Exercise of employee stock options (unaudited).................... 3,350
Repurchase of common stock held in treasury (unaudited)...........
Deferred compensation relating to grants of stock options
(unaudited).....................................................
Compensation relating to grants of stock options (unaudited)......
Repayment of stock subscription receivable (unaudited)............
Net loss (unaudited)..............................................
--------- --------- --------- ----- ---------
Balance, March 31, 1999 (unaudited)............................... -- $ -- -- $ -- 11,164,445
--------- --------- --------- ----- ---------
--------- --------- --------- ----- ---------
<CAPTION>
ADDITIONAL
PAID-IN DEFERRED ACCUMULATED
PAR VALUE CAPITAL COMPENSATION DEFICIT
----- ----------- --------------- ------------
<S> <C> <C>
Balance, December 31, 1995........................................ $ 22 $ -- $ -- $ (203)
Issuance of common stock in exchange for stock subscriptions
receivable...................................................... 18 27
Stock issued by pooled company.................................... -- 360 (10)
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........................................ (55)
Forgiveness of stock subscriptions receivable in exchange for
cancellation of shares of common stock.......................... (9) (14)
Repurchase and cancellation of shares of common stock............. (1) (1)
Issuance of Series C redeemable convertible preferred stock, net
of issuance costs of $12........................................ (12)
Exercise of employee stock options................................ -- 1
Net loss.......................................................... (2,027)
--- ----------- ----- ------------
Balance, December 31, 1996........................................ 30 373 -- (2,307)
Stock issued by pooled company, net............................... 3 10,143
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........................................ (42)
Issuance of Series D redeemable convertible preferred stock upon
conversion of notes payable and accrued interest................
Repayment of stock subscription receivable........................
Net loss.......................................................... (11,548)
--- ----------- ----- ------------
Balance, December 31, 1997........................................ 33 10,516 -- (13,897)
Stock repurchased by pooled company, net.......................... -- (33)
Issuance of Series A convertible preferred stock, net of issuance
costs of $9.....................................................
Exercise of employee stock options................................ 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.................. 265 147
Net loss.......................................................... (17,112)
--- ----------- ----- ------------
Balance, December 31, 1998........................................ 44 12,274 (850) $ (31,009)
Stock issued by pooled company (unaudited)........................ 3
Conversion of redeemable convertible preferred stock and
convertible preferred stock to common stock (unaudited)......... 39 13,385
Issuance of common stock in initial public offering, net of
issuance costs of $5,200 (unaudited)............................ 29 52,312
Exercise of employee stock options (unaudited).................... 4
Repurchase of common stock held in treasury (unaudited)........... (8)
Deferred compensation relating to grants of stock options
(unaudited)..................................................... 125 (125)
Compensation relating to grants of stock options (unaudited)...... 69
Repayment of stock subscription receivable (unaudited)............
Net loss (unaudited).............................................. (2,883)
--- ----------- ----- ------------
Balance, March 31, 1999 (unaudited)............................... $ 112 $ 78,095 $ (906) $ 33,892
--- ----------- ----- ------------
--- ----------- ----- ------------
<CAPTION>
STOCK TOTAL
SUBSCRIPTIONS STOCKHOLDERS'
RECEIVABLE DEFICIT
--------------- -------------
Balance, December 31, 1995........................................ $ -- $ (181)
Issuance of common stock in exchange for stock subscriptions
receivable...................................................... (45) --
Stock issued by pooled company.................................... 350
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)
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)
Exercise of employee stock options................................ 1
Net loss.......................................................... (2,027)
----- -------------
Balance, December 31, 1996........................................ (20) (1,747)
Stock issued by pooled company, net............................... 10,146
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........................................
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.......................................................... (11,548)
----- -------------
Balance, December 31, 1997........................................ (16) (3,109)
Stock repurchased by pooled company, net.......................... (33)
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.................. 412
Net loss.......................................................... (17,112)
----- -------------
Balance, December 31, 1998........................................ $ (16) $ (18,806)
Stock issued by pooled company (unaudited)........................ 3
Conversion of redeemable convertible preferred stock and
convertible preferred stock to common stock (unaudited)......... 12,673
Issuance of common stock in initial public offering, net of
issuance costs of $5,200 (unaudited)............................ 52,341
Exercise of employee stock options (unaudited).................... 4
Repurchase of common stock held in treasury (unaudited)........... (8)
Deferred compensation relating to grants of stock options
(unaudited)..................................................... --
Compensation relating to grants of stock options (unaudited)...... 69
Repayment of stock subscription receivable (unaudited)............ 16 16
Net loss (unaudited).............................................. (2,883)
----- -------------
Balance, March 31, 1999 (unaudited)............................... $ -- $ 43,409
----- -------------
----- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
ALLAIRE CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (2,027) $ (11,548) $ (17,112) $ (4,057) $ (2,883)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization................................. 102 874 1,786 432 568
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................................................. -- -- 412 161 67
Changes in assets and liabilities:
Accounts receivable......................................... (577) (813) (1,743) (317) 29
Prepaid expenses and other current assets................... (76) (149) (856) (44) 405
Other assets................................................ (254) (68) (237) (51) 9
Accounts payable............................................ 475 1,310 1,481 (276) (1,045)
Accrued expenses............................................ 387 2,234 3,406 737 164
Deferred revenue............................................ (103) 1,204 3,364 601 1,858
--------- --------- --------- --------- ---------
Total adjustments........................................... 46 4,597 7,613 1,243 2,055
--------- --------- --------- --------- ---------
Net cash used for operating activities...................... (1,981) (6,951) (9,499) (2,814) (828)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments............................. -- (8,817) (6,282) (293) --
Sale of short-term investment................................... -- 4,100 10,504 832 496
Purchases of property and equipment............................. (660) (2,494) (2,659) (665) (1,025)
Payment for acquisition of Bradbury Software L.L.C.............. -- (252) -- -- --
--------- --------- --------- --------- ---------
Net cash (used for) provided by investing activities........ (660) (7,463) 1,563 (126) (529)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from sale leaseback transaction........................ -- 421 -- -- --
Proceeds from issuance of promissory notes...................... 67 -- 1,500 -- --
Principal payments on capital lease obligations................. -- (165) (315) (77) (83)
Proceeds from issuance of convertible notes payable............. 175 252 -- -- --
Proceeds from issuance of notes payable......................... 88 808 1,891 -- --
Principal payments on notes payable............................. (195) (33) (168) -- (171)
Proceeds from sale of common stock.............................. 351 10,145 508 529 52,350
Proceeds from sale of redeemable convertible preferred stock,
net of issuance costs......................................... 2,733 9,547 -- -- --
Proceeds from sale of convertible preferred stock, net of
issuance costs................................................ -- -- 496 -- --
Payments to acquire treasury stock.............................. -- -- (2) -- (8)
Payment received on stock subscription receivable............... -- 4 -- 5 16
--------- --------- --------- --------- ---------
Net cash provided by financing activities................... 3,219 21,006 3,910 457 52,104
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............. 578 6,592 (4,026) (2,483) 50,747
Cash and cash equivalents, beginning of period.................... 17 595 7,187 7,187 3,161
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period.......................... $ 595 $ 7,187 $ 3,161 $ 4,704 $ 53,908
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest.......................................... $ 5 $ 75 $ 258 $ 35 $ 111
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 $ -- $ -- $ --
Conversion of redeemable convertible preferred stock to common
stock......................................................... $ -- $ -- $ -- $ -- $ 12,673
Conversion of Series A into common stock........................ $ -- $ -- $ -- $ -- $ 751
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED 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.
The consolidated financial statements include the accounts of Allaire and
its subsidiaries. All significant intercompany transactions have been
eliminated. Certain 1996, 1997 and 1998 amounts have been reclassified to
conform to the 1999 method of presentation.
As described in Note 3, during April 1999, Allaire completed the acquisition
of Bright Tiger Technologies, Inc. (Bright Tiger). The acquisition was accounted
for as a pooling-of-interest. Accordingly, the accompanying financial statements
and notes have been restated for all periods presented.
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.
UNAUDITED INTERIM FINANCIAL DATA
The interim financial data as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 have been derived from unaudited financial
statements of Allaire. Management believes that Allaire's unaudited financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for such periods. Results for the three months ended March
31, 1998 and March 31, 1999 are not necessarily indicative of results to be
expected for the full fiscal year.
F-44
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
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. Short-term
investments at December 31, 1997 and 1998 consisted of U.S. Treasury bills.
Allaire's cash equivalents and short-term investments are classified as
available-for-sale and recorded at amortized cost, which approximates fair
value. Gross unrealized and realized gains or loss on sales of securities as of
December 31, 1997 and 1998 and for the years ended December 31, 1996, 1997 and
1998 were not significant.
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. 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 that 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 that 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. Revenue from long-term
consulting and service contracts are recognized over the term of the contract
using the percentage of completion method of accounting, based upon the
proportion of costs incurred bear to total estimated costs at completion.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of Allaire's financial instruments, which include cash
equivalents, short-term investments, accounts receivable, 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
F-45
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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. Allaire
has capitalized no software development costs 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."
F-46
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING EXPENSE
Allaire recognizes advertising expense as incurred. Advertising expense was
$152,000, $784,000 and $976,000 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.
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, 1998 and the three months ended March 31, 1999, 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
F-47
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
evaluating segment performance. SFAS No. 131 is effective for Allaire's fiscal
year ending December 31, 1998 and relates to disclosure only.
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, 2000. Allaire does not
expect SFAS No. 133 to have a material affect on its financial position or
results of operations.
In March 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. ACQUISITIONS
ACQUISITION OF BRADBURY SOFTWARE L.L.C.
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.
F-48
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
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.
ACQUISITION OF BRIGHT TIGER
On April 12, 1999, Allaire completed its acquisition of Bright Tiger
Technologies, Inc. ("Bright Tiger"), a Massachusetts company that develops and
markets Web site resource management software. In connection with the
transaction, Allaire issued 288,583 shares of its common stock for all of the
issued and outstanding shares of Bright Tiger. The merger was accounted for on a
pooling-of-interests basis. Accordingly, Allaire's consolidated financial
statements have been restated to include the accounts and operations of Bright
Tiger for all periods presented.
Revenues and net income of the combined entities for the three-month period
prior to the merger are presented in the following table. Prior to the merger
during the quarter ended March 31, 1999, the companies had intercompany sales of
$40,000. The intercompany sales have been eliminated and certain amounts in
Bright Tiger's financial statements were reclassified to conform to Allaire's
presentations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
PRO FORMA RESULTS (UNAUDITED)
- --------------------------------------------------------------------------------------------- -------------------
<S> <C>
Net Revenues:
Allaire.................................................................................... $ 7,836,000
Bright Tiger............................................................................... 168,000
-------------------
Combined..................................................................................... $ 8,004,000
Net Loss:
Allaire.................................................................................... $ (1,684,000)
Bright Tiger............................................................................... (1,199,000)
-------------------
Combined................................................................................... $ (2,883,000)
</TABLE>
The following table represents a reconciliation of net revenues and net loss
previously reported by the combining companies to those presented in the
accompanying consolidated
F-49
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
financial statements. Prior to the merger, during 1998, the companies had
intercompany sales of $140,000. The intercompany sales have been eliminated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
<S> <C> <C>
1997 1998
-------------- --------------
Net Revenues:
Allaire......................................................................... $ 7,650,000 $ 20,512,000
Bright Tiger.................................................................... 18,000 352,000
-------------- --------------
Combined........................................................................ $ 7,668,000 $ 20,864,000
Net Loss:
Allaire......................................................................... $ (7,425,000) $ (10,770,000)
Bright Tiger.................................................................... (4,123,000) (6,342,000)
-------------- --------------
Combined........................................................................ $ (11,548,000) $ (17,112,000)
</TABLE>
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................................................................ $ 768,000 $ 1,180,000
Furniture and fixtures under capital lease............................................ 127,000 78,000
Equipment............................................................................. 1,445,000 3,261,000
Equipment under capital lease......................................................... 852,000 843,000
Software.............................................................................. 354,000 593,000
Leasehold improvements................................................................ 163,000 401,000
------------ ------------
3,709,000 6,356,000
Less: Accumulated depreciation and amortization....................................... (602,000) (2,171,000)
------------ ------------
$ 3,107,000 $ 4,185,000
------------ ------------
------------ ------------
</TABLE>
F-50
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation and amortization expense for the years ended December 31, 1996,
1997 and 1998 was $88,000, $582,000 and $1,581,000, 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 AND PROMISSORY NOTES
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.
EQUIPMENT CREDIT LINE
In December 1996, Bright Tiger entered into, and in July 1997 amended and
restated, an equipment loan line agreement with a bank, under which Bright Tiger
may borrow up to $875,000 for purchases of equipment, subject to certain
limitations. In June 1998, Bright Tiger entered into a second agreement with the
bank for an additional equipment loan line of
F-51
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LINES OF CREDIT AND PROMISSORY NOTES (CONTINUED)
$500,000, subject to the same limitations. All borrowings under these lines of
credit are collateralized by substantially all of Bright Tiger's assets and bear
interest at the bank's prime rate plus 3/4% (8.50% at December 31, 1998). The
terms of the lines of credit include certain covenants requiring the maintenance
of specified financial ratios and restrictions on Bright Tiger's ability to sell
or transfer fixed assets and to declare or pay dividends to its stockholders. As
of December 31, 1998, Bright Tiger was not in compliance with the covenants
relating to the maintenance of certain financial ratios. Accordingly, the
outstanding balance under the lines of credit was immediately callable by the
bank and has been classified as a current liability in its entirety. At December
31, 1998, $1,145,900 was outstanding under the aforementioned lines of credit.
The credit line was paid in full in April 1999.
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.
F-52
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LINES OF CREDIT AND PROMISSORY NOTES (CONTINUED)
PROMISSORY NOTES
In November 1998, Bright Tiger issued promissory notes to existing investors
of Bright Tiger in exchange for $1,500,000 in cash proceeds. These notes bear
interest at 8% per year, and the principal and accrued interest of the notes are
payable upon demand by their holders. These notes contain conversion rights
whereby the holders of the notes may apply the unpaid principal and interest
under the notes to the purchase of equity securities of Bright Tiger. The
promissory notes were paid in full in April 1999.
PREFERRED STOCK WARRANTS
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.
F-53
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PREFERRED STOCK (CONTINUED)
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.
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
F-54
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PREFERRED STOCK (CONTINUED)
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. 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.
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.
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.
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
F-55
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMON STOCK (CONTINUED)
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.
F-56
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMON STOCK (CONTINUED)
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
Certain 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.
1996 STOCK INCENTIVE PLAN
The 1996 Plan provides for the granting of incentive and non-qualified stock
options to management, other key employees, consultants and directors of Bright
Tiger. The total number of shares of common stock that may be issued pursuant to
awards granted under the 1996 Plan is 36,538. The exercise price under each
stock option shall be specified by the Board of Directors at the time of grant.
However, incentive stock options may not be granted at less than fair market
value of Allaire's common stock at the date of grant or for a term in excess of
ten years. For holders of more than 10% of Allaire's total combined voting power
of all classes of stock, incentive stock options may not be granted at less than
110% of the fair market value of Allaire's common stock at the date of grant and
for a term not to exceed five years. At December 31, 1998, there were 14,924
shares available for future grant under the 1996 plan.
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.
F-57
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS (CONTINUED)
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,
---------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- -------------- --------------
Net loss:
As reported..................................................... $ (2,026,000) $ (11,548,000) $ (17,112,000)
Pro forma....................................................... (2,034,000) (11,609,000) (17,251,000)
Basic and diluted net loss per share:
As reported..................................................... $ (1.15) $ (6.31) $ (5.34)
Pro forma....................................................... $ (1.16) $ (6.34) $ (5.38)
</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.
F-58
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS (CONTINUED)
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)................................... 1,135,952 .44
Exercised....................................................................... (2,500) .50
Canceled........................................................................ (7,500) .50
----------- -----
Outstanding--December 31, 1996.................................................... 1,125,952 .44
Granted (weighted average fair value of $.17)................................... 1,488,409 .57
Exercised....................................................................... (5,380) 1.42
Canceled........................................................................ (221,599) .51
----------- -----
Outstanding--December 31, 1997.................................................... 2,387,382 .52
Granted (weighted average fair value of $2.95).................................. 572,316 6.95
Exercised....................................................................... (1,147,384) .47
Canceled........................................................................ (124,563) 2.01
----------- -----
Outstanding--December 31, 1998.................................................... 1,687,751 $ 2.60
----------- -----
----------- -----
</TABLE>
As of December 31, 1998, 14,924, 184,867, and 1,681,400 shares were
available for grant under the 1996 Stock Plan, the 1997 Stock Plan and the 1998
Stock Plan, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
VESTED AND EXERCISABLE
- ---------------------------------- WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE REMAINING CONTRACTUAL OF 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
F-59
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS (CONTINUED)
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,
---------------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ------------ -------------
Deferred tax assets:
Net operating loss carryforwards...................................... $ 710,600 $ 5,412,000 $ 11,771,000
Reserves not currently deductible..................................... 98,900 216,000 249,000
Tax credit carryforwards.............................................. 17,000 238,000 689,000
Other................................................................. 29,000 78,000 402,000
---------- ------------ -------------
Total deferred tax assets....................................... 855,500 5,944,00 13,111,000
Deferred tax asset valuation allowance.................................. (855,500) 5,944,00 (13,111,000)
---------- ------------ -------------
$ -- $ -- $ --
---------- ------------ -------------
---------- ------------ -------------
</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.
F-60
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
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,
-----------------------------------------
<S> <C> <C> <C>
1996 1997 1998
----------- ------------- -------------
Income tax benefit at U.S. federal statutory tax rate.................. (709,000) $ (4,042,000) $ (5,965,000)
State taxes, net of federal tax impact................................. (125,000) (711,000) (1,054,000)
Permanent differences.................................................. 2,000 18,000 38,000
Tax credit carryforwards............................................... (18,000) (91,000) (195,000)
Other.................................................................. (5,000) (263,000) 9,000
Change in valuation allowance.......................................... 855,000 5,089,000 7,167,000
----------- ------------- -------------
Provision for income taxes............................................. $ -- $ -- $ --
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
At December 31, 1998, Allaire had federal and state net operating losses of
approximately $28.8 million and $27.9 million, respectively, and federal and
state tax credit carryforwards of approximately $409,000 and $336,000,
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,
-----------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------ ------------ -------------
North America......................................................... $ 1,953,000 $ 6,171,000 $ 18,267,000
Europe................................................................ 197,000 822,000 1,756,000
Other international................................................... 208,000 675,000 901,000
------------ ------------ -------------
$ 2,358,000 $ 7,668,000 $ 20,864,000
------------ ------------ -------------
------------ ------------ -------------
</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.
F-61
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $178,000, $511,000 and
$1,398,000, 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.................................................................................. 2,617,000 366,000
2000.................................................................................. 2,433,000 163,000
2001.................................................................................. 2,381,000 --
2002.................................................................................. 2,379,000 --
2003.................................................................................. 1,166,000 --
------------- ----------
Total minimum lease payments.......................................................... $ 10,976,000 529,000
-------------
-------------
Less--amount representing interest.................................................... 30,000
----------
Present value of capital lease obligations............................................ $ 499,000
----------
----------
</TABLE>
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
F-62
<PAGE>
ALLAIRE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
15. 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.
F-63
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Bright Tiger Technologies, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in redeemable convertible preferred stock and
stockholders' deficit and of cash flows present fairly, in all material
respects, the financial position of Bright Tiger Technologies, Inc. (a
development stage enterprise) (the 'Company') at December 31, 1998 and 1997, and
the results of its operations and its cash flows for the years then ended, and
for the period from inception (June 6, 1996) through December 31, 1996 and for
the period from inception (June 6, 1996) through 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
April 15, 1999
F-64
<PAGE>
BRIGHT TIGER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
------------ ------------ MARCH 31,
1999
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 1,666,100 $ 1,313,800 $ 662,100
Short term investments............................................... 4,717,400 495,700 --
Accounts receivable, net............................................. 17,700 101,400 202,900
Prepaid expenses..................................................... -- 31,500 38,500
------------ ------------ ------------
Total current assets............................................... 6,401,200 1,942,400 903,500
------------ ------------ ------------
------------ ------------ ------------
Fixed assets, net.................................................... 898,100 701,200 595,800
Other assets......................................................... 13,400 15,000 15,000
------------ ------------ ------------
Total assets....................................................... $ 7,312,700 $ 2,658,600 $ 1,514,300
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Promissory notes..................................................... $ $ 1,500,000 1,500,000
Current portion of long-term debt.................................... 123,200 1,145,900 1,073,000
Accounts payable..................................................... 211,600 107,600 117,000
Accrued employee compensation and benefits........................... 80,800 35,400 79,000
Accrued marketing expenses........................................... 47,000 17,000 18,000
Other accrued expenses............................................... 54,300 84,500 96,600
Deferred revenues.................................................... 28,900 47,200
------------ ------------ ------------
Total current liabilities.......................................... 516,900 2,919,300 2,930,800
Long-term debt......................................................... 751,800 -- --
------------ ------------ ------------
Total liabilities.................................................. 1,268,700 2,919,300 2,930,800
Redeemable convertible preferred stock:
Series C, $.01 par value; 1,333,334 shares authorized, issued and
outstanding at December 31, 1997 and 1998 and March 31, 1999
(unaudited) (liquidating preference of $6,000,000)................. 6,000,000 6,000,000 6,000,000
Series B, $.01 par value; 1,634,500 shares authorized, issued and
outstanding at December 31, 1997 and 1998 and March 31, 1999
(unaudited) (liquidating preference of $4,086,200)................. 4,086,200 4,086,200 4,086,200
Series A, $.01 par value; 350,000 shares authorized, issued and
outstanding at December 31, 1997 and 1998 and March 31, 1999
(unaudited) (liquidating preference of $350,000)................... 350,000 350,000 350,000
------------ ------------ ------------
Total redeemable convertible preferred stock....................... 10,436,200 10,436,200 10,436,200
------------ ------------ ------------
Stockholders' deficit:
Common stock, $.01 par value; 10,000,000 shares authorized, 1,782,123
shares issued and 1,748,823 shares outstanding at December 31,
1997; 1,828,073 shares issued and 1,397,448 shares outstanding at
December 31, 1998; 1,845,240 shares issued and 1,414,615 shares
outstanding at March 31, 1999 (unaudited).......................... 17,800 18,300 18,500
Additional paid-in capital........................................... 51,800 57,300 60,100
Deficit accumulated during the development stage..................... (4,461,600) (10,733,600) (11,892,400)
------------ ------------ ------------
(4,392,000) (10,658,000) (11,813,800)
Treasury stock at cost: 33,300, 430,625 and 430,625 shares at December
31, 1997 and 1998 and March 31, 1999 (unaudited), respectively....... (200) (38,900) (38,900)
------------ ------------ ------------
Total stockholders' deficit............................................ (4,392,200) (10,696,900) (11,852,700)
------------ ------------ ------------
Total redeemable convertible preferred stock and stockholders'
deficit.............................................................. 6,044,000 (260,700) (1,416,500)
Commitments (Note 8)................................................... -- -- --
------------ ------------ ------------
Total liabilities, redeemable convertible preferred stock and
stockholders' deficit............................................ $ 7,312,700 $ 2,658,600 $ 1,514,300
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
BRIGHT TIGER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION THREE MONTHS
(JUNE 6, (JUNE 6, ENDED MARCH
1996) 1996) 31,
THROUGH YEAR ENDED DECEMBER 31, THROUGH ------------
DECEMBER 31, -------------------------- DECEMBER 31, 1998
1996 1997 1998 1998 (UNAUDITED)
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ -- $ 17,700 $ 492,700 $ 510,400 $ 32,900
------------ ------------ ------------ ------------- ------------
Costs and expenses:
Cost of Revenues............................. -- 11,800 22,300 34,100 --
Research and development..................... 235,700 2,180,800 3,032,700 5,449,200 750,800
Sales and marketing.......................... 42,700 1,546,000 3,000,900 4,589,600 988,900
General and administrative................... 49,700 529,100 755,700 1,334,500 186,200
------------ ------------ ------------ ------------- ------------
328,100 4,267,700 6,811,600 11,407,400 1,925,900
------------ ------------ ------------ ------------- ------------
Loss from operations..................... (328,100) (4,250,000) (6,318,900) (10,897,000) (1,893,000)
------------ ------------ ------------ ------------- ------------
Other income (expense):
Interest income.............................. -- 156,100 161,800 317,900 67,000
Interest expense............................. (700) (29,000) (114,900) (144,600) (20,500)
------------ ------------ ------------ ------------- ------------
(700) 127,100 46,900 173,300 46,500
------------ ------------ ------------ ------------- ------------
Net loss................................. $ (328,800) $ (4,122,900) $ (6,272,000) $ (10,723,700) $ (1,846,500)
------------ ------------ ------------ ------------- ------------
------------ ------------ ------------ ------------- ------------
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 6,
1996)
THROUGH
1999 MARCH 31,
(UNAUDITED) 1999
------------- -------------
<S> <C> <C>
Revenues....................................... $ 207,800 $ 718,200
------------- -------------
Costs and expenses:
Cost of Revenues............................. 2,400 36,500
Research and development..................... 659,200 6,108,400
Sales and marketing.......................... 487,000 5,076,600
General and administrative................... 177,600 1,512,100
------------- -------------
1,326,200 12,733,600
------------- -------------
Loss from operations..................... (1,118,400) (12,015,400)
------------- -------------
Other income (expense):
Interest income.............................. 13,000 330,900
Interest expense............................. (53,400) (198,000)
------------- -------------
(40,400) 132,900
------------- -------------
Net loss................................. $ (1,158,800) $ (11,882,500)
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
BRIGHT TIGER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
DEFICIT
FOR THE PERIOD FROM INCEPTION (JUNE 6, 1996) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
REDEEMABLE DEFICIT
CONVERTIBLE ACCUMULATED TREASURY
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE STOCK
------------------------ ----------------------- PAID-IN DEVELOPMENT ---------
SHARES AMOUNT SHARES PAR VALUE CAPITAL STAGE SHARES
---------- ------------ ---------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of restricted common stock to
founders.............................. -- $ -- 1,000,137 $ 10,000 $ -- $ (9,900) --
Issuance of Series A redeemable
convertible preferred stock........... 350,000 350,000
Net loss................................ (328,800)
---------- ------------ ---------- ----------- ----------- ------------- ---------
Balance at December 31, 1996............ 350,000 350,000 1,000,137 10,000 -- (338,700) --
Issuance of restricted common stock..... 781,986 7,800 51,800
Issuance of Series B redeemable
convertible preferred stock........... 1,634,500 4,086,200
Issuance of Series C redeemable
convertible preferred stock........... 1,333,334 6,000,000
Repurchase of common stock (33,300)
Net loss................................ (4,122,900)
---------- ------------ ---------- ----------- ----------- ------------- ---------
Balance at December 31, 1997............ 3,317,834 10,436,200 1,782,123 17,800 51,800 (4,461,600) (33,300)
Issuance of common stock................ 45,950 500 5,500
Repurchase of common stock.............. (397,325)
Net loss................................ (6,272,000)
---------- ------------ ---------- ----------- ----------- ------------- ---------
Balance at December 31, 1998............ 3,317,834 10,436,200 1,828,073 18,300 57,300 (10,733,600) (430,625)
Issuance of common stock (unaudited).... 17,167 200 2,800
Net loss (unaudited).................... (1,158,800)
---------- ------------ ---------- ----------- ----------- ------------- ---------
Balance at March 31, 1999 (unaudited)... 3,317,834 $ 10,436,200 1,845,240 $ 18,500 $ 60,100 $ (11,892,400) (430,625)
---------- ------------ ---------- ----------- ----------- ------------- ---------
---------- ------------ ---------- ----------- ----------- ------------- ---------
<CAPTION>
AMOUNT TOTAL
--------- --------------
<S> <C> <C>
Issuance of restricted common stock to
founders.............................. $ -- $ 100
Issuance of Series A redeemable
convertible preferred stock...........
Net loss................................ (328,800)
--------- --------------
Balance at December 31, 1996............ -- (328,700)
Issuance of restricted common stock..... 59,600
Issuance of Series B redeemable
convertible preferred stock...........
Issuance of Series C redeemable
convertible preferred stock...........
Repurchase of common stock (200) (200)
Net loss................................ (4,122,900)
--------- --------------
Balance at December 31, 1997............ (200) (4,392,200)
Issuance of common stock................ 6,000
Repurchase of common stock.............. (38,700) (38,700)
Net loss................................ (6,272,000)
--------- --------------
Balance at December 31, 1998............ (38,900) (10,696,900)
Issuance of common stock (unaudited).... 3,000
Net loss (unaudited).................... (1,158,800)
--------- --------------
Balance at March 31, 1999 (unaudited)... $ (38,900) $ 11,852,700
--------- --------------
--------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
BRIGHT TIGER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION PERIOD FROM THREE MONTHS
(JUNE 6, INCEPTION ENDED
1996) (JUNE 6, 1996) MARCH 31,
THROUGH YEAR ENDED DECEMBER 31, THROUGH -------------
DECEMBER 31, ------------------------------ DECEMBER 31, 1998
1996 1997 1998 1998 (UNAUDITED)
------------ -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net loss.................................. $ (328,800) $ (4,122,900) $ (6,272,000) $ (10,723,700) $ (1,846,500)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................ 7,800 148,200 405,500 561,500 94,800
Increase (decrease) resulting from
operating assets and liabilities:
Accounts receivable................... -- (17,700) (83,700) (101,400) (21,600)
Prepaid expenses...................... -- -- (31,500) (31,500) (6,300)
Other assets.......................... (400) (13,000) (1,600) (15,000) (2,300)
Accounts payable...................... 16,600 195,000 (104,000) 107,600 277,600
Accrued employee compensation and
benefits............................ 19,000 61,800 (45,400) 35,400 4,600
Accrued marketing expenses............ -- 47,000 (30,000) 17,000 30,300
Other accrued expenses................ -- 54,300 30,200 84,500 (47,000)
Deferred revenue...................... -- -- 28,900 28,900 --
------------ -------------- -------------- -------------- -------------
Net cash used in operating
activities........................ (285,800) (3,647,300) (6,103,600) (10,036,700) (1,516,400)
------------ -------------- -------------- -------------- -------------
------------ -------------- -------------- -------------- -------------
Cash flow from investing activities:
Purchase of short term investments........ -- (8,817,400) (6,282,600) (15,100,000) (292,500)
Sale of short term investments............ -- 4,100,000 10,504,300 14,604,300 831,600
Purchases of fixed assets................. (61,700) (992,400) (208,600) (1,262,700) (178,800)
------------ -------------- -------------- -------------- -------------
Net cash provided by (used in)
investing activities.............. (61,700) (5,709,800) 4,013,100 (1,758,400) 360,300
------------ -------------- -------------- -------------- -------------
------------ -------------- -------------- -------------- -------------
Cash flows from financing activities:
Proceeds from issuance of promissory
notes................................... -- -- 1,500,000 1,500,000 --
Proceeds from issuance of long-term
debt.................................... 66,500 808,500 270,900 1,145,900 --
Proceeds from issuance of redeemable
convertible preferred stock............. 350,000 10,086,200 -- 10,436,200 --
Proceeds from issuance of common stock.... 100 59,600 6,000 65,700 --
Repurchase of common stock................ -- (200) (38,700) (38,900) --
Repayment of long-term debt............... -- -- -- -- --
------------ -------------- -------------- -------------- -------------
Net cash provided by (used in)
financing activities.............. 416,600 10,954,100 1,738,200 13,108,900 --
------------ -------------- -------------- -------------- -------------
Net increase (decrease) in cash and cash
equivalents............................... 69,100 1,597,000 (352,300) 1,313,800 (1,156,100)
Cash and cash equivalents, beginning of
period.................................... -- 69,100 1,666,100 -- 1,666,100
------------ -------------- -------------- -------------- -------------
Cash and cash equivalents, end of period.... $ 69,100 $ 1,666,100 $ 1,313,800 $ 1,313,800 $ 510,000
------------ -------------- -------------- -------------- -------------
------------ -------------- -------------- -------------- -------------
Supplement disclosure of cash flow
information:
Cash paid for interest.................... $ 700 $ 29,000 $ 95,800 $ 125,500 $ 20,459
------------ -------------- -------------- -------------- -------------
------------ -------------- -------------- -------------- -------------
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 6, 1996)
THROUGH
1999 MARCH 31,
(UNAUDITED) 1999
------------- --------------
<S> <C> <C>
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net loss.................................. $ (1,158,800) $ (11,882,500)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................ 105,400 666,900
Increase (decrease) resulting from
operating assets and liabilities:
Accounts receivable................... (101,500) (202,900)
Prepaid expenses...................... (7,000) (38,500)
Other assets.......................... -- (15,000)
Accounts payable...................... 9,400 117,000
Accrued employee compensation and
benefits............................ 43,600 79,000
Accrued marketing expenses............ 1,000 18,000
Other accrued expenses................ 12,100 96,600
Deferred revenue...................... 18,300 47,200
------------- --------------
Net cash used in operating
activities........................ (1,077,500) (11,114,200)
------------- --------------
------------- --------------
Cash flow from investing activities:
Purchase of short term investments........ -- (15,100,000)
Sale of short term investments............ 495,700 15,100,000
Purchases of fixed assets................. -- (1,262,700)
------------- --------------
Net cash provided by (used in)
investing activities.............. 495,700 (1,262,700)
------------- --------------
------------- --------------
Cash flows from financing activities:
Proceeds from issuance of promissory
notes................................... -- 1,500,000
Proceeds from issuance of long-term
debt.................................... -- 1,145,900
Proceeds from issuance of redeemable
convertible preferred stock............. -- 10,436,200
Proceeds from issuance of common stock.... 3,000 68,700
Repurchase of common stock................ -- (38,900)
Repayment of long-term debt............... (72,900) (72,900)
------------- --------------
Net cash provided by (used in)
financing activities.............. (69,900) 13,039,000
------------- --------------
Net increase (decrease) in cash and cash
equivalents............................... (651,700) 662,100
Cash and cash equivalents, beginning of
period.................................... 1,313,800 --
------------- --------------
Cash and cash equivalents, end of period.... $ 662,100 $ 662,100
------------- --------------
------------- --------------
Supplement disclosure of cash flow
information:
Cash paid for interest.................... $ 23,845 $ 149,345
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
BRIGHT TIGER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Bright Tiger Technologies, Inc. (the "Company") develops and markets Web
site resource management software designed to help organizations build and
manage fast, reliable Web sites.
Although the Company has commenced planned principal operations, revenues
are not yet significant. Accordingly, the Company is considered to be in the
development stage and the accompanying financial statements represent those of a
development stage enterprise, as defined in Statement of Financial Accounting
Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage
Enterprises."
On April 12, 1999, the Company was acquired by Allaire Corporation
("Allaire"). This transaction was accounted for as a pooling of interests and
was effected through the exchange of shares of Allaire's common stock for all of
the issued and outstanding shares of the Company. Prior to the transaction, all
of the issued and outstanding shares of the Company's Series A preferred stock
converted to common stock of the Company. Pursuant to the transaction, each
outstanding share of the Company's capital stock was converted into the right to
receive shares of Allaire's common stock as follows:
<TABLE>
<S> <C>
Common stock....................................................... 0.02824
Series B preferred stock........................................... 0.06271
Series C preferred stock........................................... 0.09847
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the financial
statements are as follows:
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. The Company invests excess cash
primarily in a money market fund at a major financial institution and U.S.
Treasury bills which are subject to minimal credit and market risk.
The Company's cash equivalents at December 31, 1997 consisted of
approximately $47,500 in money market funds and $1,595,600 in U.S. Treasury
bills. Short-term investments at December 31, 1997 consisted of U.S. Treasury
bills. The Company's cash equivalents at December 31, 1998 consisted of
approximately $296,600 in money market funds and $1,493,000 in U.S. Treasury
bills. All securities are classified as available-for-sale and are recorded at
cost which approximates fair value. Any unrealized gains or losses are recorded
as a separate component of stockholders' equity. Gross unrealized and realized
gains and losses on sales of securities as of December 31, 1996, 1997 and 1998
and for the period from
F-69
<PAGE>
BRIGHT TIGER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
inception (June 6, 1996) to December 31, 1996 and for the years ended December
31, 1997 and 1998 were not significant.
FIXED ASSETS
Fixed assets are recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the assets. Repair and maintenance
costs are expensed as incurred.
REVENUE RECOGNITION
Revenue for software licenses is recognized when an agreement has been
executed, delivery has occurred, no significant vendor obligations remain and
collection of the related receivable is probable. Revenue from maintenance and
post-contract support contracts are recognized ratably over the contractual
periods for which services are performed. Revenue from consulting and service
contracts are recognized over the term of the contract using the percentage of
completion method of accounting, based upon the proportion that costs incurred
bear to total estimated costs at completion.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Costs incurred in the research and development of the Company'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 SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed") and capitalized thereafter when material to the Company's financial
position or results of operations. During the period from inception (June 6,
1996) through December 31, 1998, no software development costs have been
capitalized.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to its employees using the
intrinsic value based method as prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations and has adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", through disclosure only (Note 6).
ADVERTISING EXPENSE
The Company recognizes advertising expense as incurred. Advertising expense
was $0, $141,400 and $213,200 for the period from inception (June 6, 1996)
through December 31, 1996 and for the years ended December 31, 1997 and 1998,
respectively.
F-70
<PAGE>
BRIGHT TIGER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes, as
set forth in SFAS No. 109, "Accounting for Income Taxes." Under this method,
deferred tax liabilities and assets are recognized for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities.
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 amount of expenses during the reporting period.
Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL DATA
The interim financial data as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 and for the period from inception (June 6, 1996)
through March 31, 1999 are unaudited; however, in the opinion of management, the
interim financial data include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for these interim periods. The interim financial data are not
necessarily indicative of the results of operations for a full fiscal year.
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
USEFUL LIFE DECEMBER 31,
IN --------------------------
YEARS 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Computer equipment and software........................................ 3 $ 1,018,900 $ 845,300
Furniture and fixtures................................................. 3 228,800 193,400
Leasehold improvements................................................. 3 15,000 15,400
------------ ------------
1,262,700 1,054,100
Less -- accumulated depreciation 561,500 156,000
------------ ------------
$ 701,200 $ 898,100
------------ ------------
------------ ------------
</TABLE>
4. LONG-TERM DEBT AND LINE OF CREDIT
In December 1996, the Company entered into, and in July 1997 amended and
restated, a loan agreement with a bank for a line of credit under which the
Company may borrow up to $875,000 for purchases of equipment, subject to certain
limitations. In June 1998, the
F-71
<PAGE>
BRIGHT TIGER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND LINE OF CREDIT (CONTINUED)
Company entered into a second agreement with the bank for an additional line of
credit of $500,000 for purchases of equipment, subject to the same limitations.
All borrowings under these lines of credit are collateralized by substantially
all of the Company's assets and bear interest at the bank's prime rate plus 3/4%
(8.50% at December 31, 1998). The terms of the lines of credit include certain
covenants requiring the maintenance of specified financial ratios and
restrictions on the Company's ability to sell or transfer fixed assets and to
declare or pay dividends to its stockholders. As of December 31, 1998, the
Company was not in compliance with the covenants relating to maintenance of
certain financial ratios. Accordingly, the outstanding balance under the lines
of credit was immediately callable by the bank and has been classified as a
current liability in its entirety. At December 31, 1998, $1,145,900 was
outstanding under the aforementioned lines of credit.
In November 1998, the Company issued promissory notes to existing investors
of the Company in exchange for $1,500,000 in cash proceeds. These notes bear
interest at 8% per year, and the principal and accrued interest of the notes are
payable upon demand by their holders. These notes contain conversion rights
whereby the holders of the notes may apply the unpaid principal and interest
under the notes to the purchase of equity securities of the Company.
The line of credit and promissory notes were paid in full in April 1999.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Preferred Stock has the following characteristics:
CONVERSION
Each share of the Series A Preferred Stock and Series B Preferred Stock are
convertible at any time at the option of the holder into one and one-half shares
of common stock, subject to certain anti-dilution adjustments. Each share of the
Series C Preferred Stock is convertible at any time at the option of the holder
into one share of common stock, subject to certain anti-dilution adjustments.
The Preferred Stock automatically converts into common stock upon the closing of
an underwritten public offering of the Company's common stock involving net
proceeds to the Company of at least $10 million and a price of not less than
$3.67, $6.67 and $13.50 per share, subject to certain anti-dilution adjustments,
for the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock, respectively.
The Company has reserved 525,000, 2,451,750 and 1,333,334 shares of its
common stock for issuance upon the conversion of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock, respectively.
F-72
<PAGE>
BRIGHT TIGER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
DIVIDENDS
Holders of the Preferred Stock are only entitled to receive dividends when,
as and if declared by the Board of Directors, subject to certain limitations.
Through December 31, 1998, no dividends have been declared or paid by the
Company.
REDEMPTION
At the request of the holders of a majority of the then outstanding shares
of Preferred Stock, in November 2002, 2003 and 2004, the Company shall redeem up
to 33 1/3%, 50% and 100%, respectively, of the then outstanding shares of
Preferred Stock at a per share price of $1.00, $2.50 and $4.50 for the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock,
respectively, plus any and all declared but unpaid dividends, subject to certain
anti-dilution adjustments. The redemption value of the Preferred Stock issued
and outstanding at December 31, 1998 is equal to its issuance price.
LIQUIDATION, DISSOLUTION OR WINDING-UP OF THE COMPANY
In the event of any liquidation, dissolution or winding-up of the affairs of
the Company, the holders of the then outstanding Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock will be entitled to
receive, in preference to the holders of the common stock, a per share payment
of $1.00, $2.50 and $4.50, respectively, plus any declared but unpaid dividends.
If the remaining assets of the Company are insufficient to pay the Preferred
Stockholders the full amount to which they are entitled, any distribution of the
remaining assets will be in proportion to the respective amounts which would
otherwise be payable if all amounts payable were paid in full. Any assets
remaining following the distribution to the holders of the Preferred Stock will
be distributed ratably among the common stockholders and the holders of the
Series B and Series C Preferred Stock, subject to certain limitations on the
aggregate amount payable of $7.50 and $13.50 per share, respectively, as
adjusted for certain anti-dilution adjustments.
VOTING RIGHTS
Each holder of the Preferred Stock is entitled to the number of votes equal
to the number of shares of common stock into which such holder's shares are
convertible at the record date for such vote.
COMMON STOCK SPLITS
In connection with the issuance of the Series A Preferred Stock in August
1996, the Board of Directors authorized a 666.76-for-1 common stock split. In
April 1997, the Board of Directors authorized a 3-for-2 common stock split
effected in the form of a 50% stock
F-73
<PAGE>
BRIGHT TIGER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
dividend. All common share and per share amounts have been retroactively
adjusted to reflect both of these stock splits.
STOCK RESTRICTION AGREEMENTS
At December 31, 1998, 502,940 of the Company's outstanding shares of common
stock were subject to stock restriction agreements. Under each of these
agreements, the Company has the option to repurchase any or all unvested shares
of common stock in the event of a restricted stockholder's voluntary resignation
or termination of employment by the Company at a repurchase price between
$0.0001 and $0.10 per share. The number of shares that may be repurchased by the
Company is reduced over a five-year period.
TREASURY STOCK
During 1997 and 1998, in connection with the resignation of founding
stockholders and executives of the Company that were party to stock restriction
agreements, the Company repurchased 33,300 and 397,325 shares of unvested common
stock for $200 and $38,700, respectively.
6. 1996 STOCK OPTION PLAN
During 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan"). The 1996 Plan provides for the granting of incentive and non-qualified
stock options to management, other key employees, consultants and directors of
the Company. The total number of shares of common stock that may be issued
pursuant to awards granted under the 1996 Plan is 1,293,840. The exercise price
under each stock option shall be specified by the Board of Directors at the time
of grant. However, incentive stock options may not be granted at less than fair
market value of the Company's common stock at the date of grant or for a term in
excess of ten years. For holders of more than 10% of the Company's total
combined voting power of all classes of stock, incentive stock options may not
be granted at less than 110% of the fair market value of the Company's common
stock at the date of grant and for a term not to exceed five years. At December
31, 1998, there were 528,463 shares available for future grant under the 1996
Plan.
F-74
<PAGE>
BRIGHT TIGER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. 1996 STOCK OPTION PLAN (CONTINUED)
The following table summarizes stock option activity under the 1996 Plan:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
PERIOD FROM INCEPTION ------------------------------------------------
(JUNE 6, 1996) THROUGH
DECEMBER 31,
1996 1997 1998
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............. -- -- 210,750 0.03 470,325 0.11
Granted.................................... 210,750 0.03 462,075 0.11 491,000 0.45
Cancelled.................................. -- -- (12,000) 0.10 (386,448) 0.28
Exercised.................................. -- -- (190,500) 0.04 (45,950) 0.13
Outstanding at end of year................... 210,750 0.03 470,325 0.11 528,927 0.30
---------- ---------- ----------
Options exercisable.......................... -- 13,906 136,473
---------- ---------- ----------
Weighted average fair value of option
grants..................................... .01 .01 .09
---------- ---------- ----------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE NUMBER OF AVERAGE
NUMBER OF CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE (YEARS) PRICE EXERCISABLE PRICE
- ------------------------------------------------------ ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.03................................................. 10,175 7.9 $ 0.03 2,157 0.03
$0.10................................................. 197,200 8.4 $ 0.10 72,514 0.10
$0.45................................................. 321,552 9.5 $ 0.45 61,802 0.45
----------- -----------
$0.03-$0.45........................................... 528,927 9.1 $ 0.30 136,473 $ 0.26
----------- -----------
</TABLE>
There was no compensation expense recorded in the Company's statement of
operations for the period from inception (June 6, 1996) through December 31,
1996 and for the years ended December 31, 1997 and 1998. Had compensation cost
for awards of stock options been
F-75
<PAGE>
BRIGHT TIGER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. 1996 STOCK OPTION PLAN (CONTINUED)
determined based on the fair value of these options at their date of grant,
consistent with the method prescribed by SFAS No. 123, the Company's net loss
would have been as follows:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 6,
1996)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
Net loss:
As reported.................................. $ (328,800) $ (4,122,900) $ (6,272,000)
Pro forma.................................... $ (328,900) $ (4,123,700) $ (6,278,000)
</TABLE>
Because additional option grants are expected to be made in future years and
options vest over several years, the above pro forma effects may not be
indicative of pro forma effects 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 period from inception (June 6, 1996) through
December 31, 1996 and for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 6,
1996) YEAR ENDED DECEMBER
THROUGH 31,
DECEMBER 31, --------------------
1996 1997 1998
------------- --------- ---------
<S> <C> <C> <C>
Expected option term (years)............................... 5 5 5
Risk-free interest rate.................................... 6.40% 6.30% 4.56%
Dividend yield............................................. 0.00% 0.00% 0.00%
</TABLE>
F-76
<PAGE>
BRIGHT TIGER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................................ $ 1,970,000 $ 4,416,000
Research and development tax credit carryforwards............................... 143,000 335,000
Bad debt write-offs............................................................. -- 1,000
Accrued expenses................................................................ 22,000 22,000
-------------- --------------
Gross deferred tax assets....................................................... 2,135,000 4,774,000
Deferred tax liability
Depreciation.................................................................... (29,000) (42,000)
-------------- --------------
Net deferred tax assets........................................................... 2,106,000 4,732,000
Deferred tax asset valuation allowance............................................ (2,106,000) (4,732,000)
-------------- --------------
$ -- $ --
-------------- --------------
-------------- --------------
</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, the Company has provided a valuation allowance for the full amount of
its deferred tax assets.
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $10,683,000 and $10,913,000 for federal and state income tax
reporting purposes, respectively. At December 31, 1998, the Company had research
and development credit carryforwards of $231,000 and $160,000 available to
offset future federal and state taxes, respectively. If not used, these
carryforwards will expire in 2011 through 2012.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may limit the amount of net operating loss
and tax credit carryforwards which could be utilized annually to offset future
taxable income and tax liabilities.
8. COMMITMENTS
The Company leases its office space under a noncancellable operating lease
which expires on March 31, 2000. Rent expense for the period from inception
(June 6, 1996) through December 31, 1996 and for the years ended December 31,
1997 and 1998 was approximately $15,000, $138,800 and $168,000, respectively.
F-77
<PAGE>
BRIGHT TIGER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS (CONTINUED)
Future minimum payments due under the aforementioned lease as of December
31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1999.............................................................................. $ 162,800
2000.............................................................................. 40,100
----------
$ 202,900
----------
----------
</TABLE>
F-78
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
issuance and distribution of the securities being registered. All amounts shown
are estimates except the Securities and Exchange Commission registration fee,
the National Association of Securities Dealers, Inc. filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<CAPTION>
PAYABLE
BY THE
COMPANY
----------
<S> <C>
Securities and Exchange Commission registration fee....................................... $ 3,831
Nasdaq National Market listing fee........................................................ 6,089
Printing and engraving expenses........................................................... 5,000
Transfer agent fees....................................................................... 5,000
Accounting fees and expenses.............................................................. 20,000
Legal fees and expenses................................................................... 50,000
Blue Sky fees and expenses (including related legal fees)................................. 500
Miscellaneous............................................................................. 9,580
----------
Total..................................................................................... $ 100,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law affords a Delaware
corporation the power to indemnify its present and former directors and officers
under certain conditions. Article Sixth of the Certificate provides that Allaire
shall indemnify each person who at any time is, or shall have been, a director
or officer of Allaire and was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
or she is or was a director or officer of Allaire, or is or was serving at the
request of Allaire as a director, officer, trustee of, or in a similar capacity
with, another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement incurred in connection with any such action, suit or
proceeding, to the maximum extent permitted by the Delaware General Corporation
Law, as the same exists or may hereafter be amended. No amendment to or repeal
of the provisions of Article Sixth of the Certificate shall deprive a director
or officer of the benefit thereof with respect to any act or failure occurring
prior to such amendment or repeal.
Section 102(b)(7) of the Delaware General Corporation Law gives a Delaware
corporation the power to adopt a charter provision eliminating or limiting the
personal liability of directors to the corporation or its stockholders for
breach of fiduciary duty as directors, provided that such provision may not
eliminate or limit the liability of directors for (i) any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) any acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) any payment of a dividend or approval of a stock
purchase that is illegal
II-1
<PAGE>
under Section 174 of the Delaware General Corporation Law or (iv) any
transaction from which the director derived an improper personal benefit.
Article Seventh of the Certificate provides that to the maximum extent permitted
by the Delaware General Corporation Law, no director of Allaire shall be
personally liable to Allaire or to any of its stockholders for monetary damages
arising out of such director's breach of fiduciary duty as a director of
Allaire. No amendment to or repeal of the provisions of Article Seventh shall
apply to or have any effect on the liability or the alleged liability of any
director of Allaire with respect to any act or failure to act of such director
occurring prior to such amendment or repeal. A principal effect of such Article
Seventh is to limit or eliminate the potential liability of Allaire's directors
for monetary damages arising from breaches of their duty of care, unless the
breach involves one of the four exceptions described in (i) through (iv) above.
Section 145 of the Delaware General Corporation Law also affords a Delaware
corporation the power to obtain insurance on behalf of its directors and
officers against liabilities incurred by them in those capacities. Allaire has
procured a directors' and officers' liability and company reimbursement
liability insurance policy that (a) insures directors and officers of Allaire
against losses (above a deductible amount) arising from certain claims made
against them by reason of certain acts done or attempted by such directors or
officers and (b) insures Allaire against losses (above a deductible amount)
arising from any such claims, but only if Allaire is required or permitted to
indemnify such directors or officers for such losses under statutory or common
law or under provisions of its Amended and Restated Certificate of Incorporation
or its By-Laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information is furnished with regard to all securities sold by
Allaire within the past three years which were not registered under the
Securities Act.
(a) ISSUANCES OF COMMON STOCK BY ALLAIRE MINNESOTA.
From February 1996 through January 1997, Allaire Corp., a Minnesota
corporation ("Allaire Minnesota"), issued and sold an aggregate of 2,000,000
shares of its Common Stock for consideration valued at $51,690.
(b) ISSUANCES OF PREFERRED STOCK BY ALLAIRE MINNESOTA.
From June 1996 through March 1997, Allaire Minnesota issued and sold an
aggregate of 56,557 shares of its Series A Convertible Preferred Stock, for
aggregate consideration of $255,165. From June 1996 through March 1997, Allaire
Minnesota also issued and sold an aggregate of 514,306 shares of its Series B
Convertible Preferred Stock, for aggregate consideration of $2,324,664. In
December 1996, Allaire Minnesota issued and sold an aggregate of 84,600 shares
of its Series C Preferred Stock, for aggregate consideration of $499,986.
(c) GRANTS AND EXERCISES OF ALLAIRE MINNESOTA'S STOCK OPTIONS.
From June 1996 through April 1997, Allaire Minnesota issued options to
purchase an aggregate of 1,086,800 shares of its Common Stock, and sold 1,250
shares of its Common Stock pursuant to the exercise of such options for
aggregate consideration of $1,250.
II-2
<PAGE>
On April 25, 1997 Allaire Minnesota was reincorporated as a Delaware
corporation through the merger of Allaire Minnesota into Allaire. Pursuant to
the reincorporation merger, each share of Common Stock of Allaire Minnesota was
automatically changed and converted into two shares of Common Stock of Allaire.
Each share of Series A, B and C Convertible Preferred Stock of Allaire Minnesota
was automatically changed and converted into one share of the corresponding
series of Allaire's Convertible Preferred Stock. Each share of Allaire's Series
A, B and C Convertible Preferred Stock issued pursuant to the reincorporation
merger automatically changed and converted into two shares of Allaire's Common
Stock upon the closing of Allaire's initial public offering in January 1999.
Also pursuant to the reincorporation merger, each option to purchase one share
of Common Stock of Allaire Minnesota was automatically converted and changed
into an option to purchase two shares of Allaire's Common Stock.
(d) ISSUANCES OF COMMON STOCK BY ALLAIRE.
From January 1998 through April 22, 1999, Allaire issued and sold 1,438,019
shares of its Common Stock for aggregate consideration of $546,245.
(e) ISSUANCES OF PREFERRED STOCK BY ALLAIRE
On December 7, 1998, Allaire issued and sold 31,250 shares of Series A
Convertible Preferred Stock for aggregate consideration of $500,000. Each of
these 31,250 shares of Series A Convertible Stock automatically changed and
converted into one share of Allaire's Common Stock upon the closing of Allaire's
initial public offering.
In February 1998, Allaire issued and sold 656 shares of Series A Convertible
Preferred Stock, for aggregate consideration of $5,250. Each of these 656 shares
of Series A Convertible Preferred Stock automatically changed and converted into
one share of Allaire's Common Stock upon the closing of Allaire's initial public
offering. In May and June 1997, Allaire issued and sold 2,336,909 shares of
Series D Convertible Preferred Stock, for aggregate consideration of $9,347,636.
Each share of Series D Convertible Preferred Stock automatically changed and
converted into one share of the Company Common Stock upon the closing of
Allaire's initial public offering.
(f) GRANTS OF ALLAIRE'S STOCK OPTIONS.
From April 1997 through April 22, 1999, Allaire granted options to purchase
an aggregate of 1,911,610 shares of its Common Stock, exercisable at a weighted
average exercise price of $15.17 per share.
The issuances described in this Item 15 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 the
foregoing transactions 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.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
++2.1 Agreement and Plan of Merger, dated as of April 2, 1999, by and among Allaire,
Bengal Acquisition Corp. and Bright Tiger Technologies, Inc.
+3.1 Amended and Restated Certificate of Incorporation of Allaire
+3.2 Amended and Restated By-Laws of Allaire
+4.1 Specimen certificate for the Common Stock of Allaire
5.1 Opinion of Foley, Hoag & Eliot LLP
+10.1 1997 Stock Incentive Plan as amended
+10.2 1998 Stock Incentive Plan
+10.3 1998 Employee Stock Purchase Plan
+10.4 Option Agreement for David J. Orfao
+10.5 Form of Option Agreement for other executive officers
+10.6 Office Lease Agreement between Allaire and One Alewife Center Realty Trust, dated
November 5, 1997
+10.7 Lease Agreement between Allaire and CambridgePark Two, L.P., dated May 21, 1998
+10.8 Loan and Security Agreement between Allaire and Silicon Valley Bank, dated March
26, 1998
+10.9 Negative Pledge Agreement between Allaire and Silicon Valley Bank, dated March
26, 1998
+10.10 Loan Modification Agreement between Allaire and Silicon Valley Bank, dated August
6, 1998
+10.11 Loan Modification Agreement between Allaire and Silicon Valley Bank, dated
December 9, 1998
+10.12 Senior Loan and Security Agreement between Allaire and Phoenix Leasing
Incorporated, dated May 1, 1998
+10.13 Warrant Agreement between Allaire and Comdisco, Inc., dated August 21, 1998
+10.14 Warrant Agreement between Allaire and Gregory Stento, dated August 21, 1998
+10.15 Warrant Agreement between Allaire and Polaris Venture Partners, L.P., dated March
7, 1997
+10.16 Warrant Agreement between Allaire and Polaris Venture Partners Founders' Fund,
L.P., dated March 7, 1997
+10.17 Amended and Restated Registration Rights Agreement, dated May 15, 1997
+10.18 Waiver and Amendment No. 1 to Amended and Restated Registration Rights Agreement,
dated December 7, 1998
+10.19 Letter of Offer of Employment from Allaire to David J. Orfao, dated December 23,
1996
+10.20 Contribution and Restricted Stock Purchase Agreement between Allaire and Yesler
Software, Inc., dated July 14, 1998
+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
11.1 Statement re computation of unaudited net loss per share and pro forma net loss
per share
11.2 Statement re computation of supplemental unaudited net loss per share and pro
forma net loss per share
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
21.1 Subsidiaries of Allaire Corporation
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Foley, Hoag & Eliot LLP (included in Exhibit 5.1)
24.1 Power of Attorney (contained on page II-7 of this Registration Statement)
</TABLE>
- ------------------------
+ Incorporated by reference from Allaire's Registration Statement on Form S-1
(File No. 333-68639).
++ Incorporated by reference from Allaire's Current Report on Form 8-K filed
with the Securities and Exchange Commission on April 27, 1999.
(b) FINANCIAL STATEMENT SCHEDULES
II--VALUATION AND QUALIFYING ACCOUNTS
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more
II-5
<PAGE>
than 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Massachusetts, on
the 15th day of June, 1999.
ALLAIRE CORPORATION
BY: /s/ David J. Orfao
-----------------------------------------
David J. Orfao
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
We the undersigned officers and directors of Allaire Corporation hereby
severally constitute and appoint David J. Orfao, David A. Gerth and Joseph C.
Baker and each of them singly, our true and lawful attorneys-in-fact with full
power to them, to sign for us and in our names in the capacities indicated
below, any and all pre- or post-effective amendments to this Registration
Statement, any subsequent registration statement for the same offering which may
be filed under Rule 462(b) under the Securities Act ("a Rule 462(b) Registration
Statement") and any and all pre- or post-effective amendments thereto, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, and generally to do all
such things in our names and on our behalf in our capacities as officers and
directors to enable Allaire Corporation to comply with the provisions of the
Securities Act of 1933 and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys-in-fact, or any of them, to said Registration Statement
and any and all amendments thereto or to any subsequent Registration Statements
for the same offering which may be filed under said Rule 462(b).
In accordance with the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------
/s/ Joseph J. Allaire Chairman of the Board
- ------------------------------ June 15, 1999
Joseph J. Allaire
President, Chief
/s/ David J. Orfao Executive Officer and
- ------------------------------ Director (principal June 15, 1999
David J. Orfao executive officer)
Vice President, Finance
and Operations,
/s/ David A. Gerth Treasurer and Chief
- ------------------------------ Financial Officer June 15, 1999
David A. Gerth (principal financial
and accounting officer)
II-7
<PAGE>
SIGNATURE TITLE DATE
- ------------------------------ -------------------
/s/ Jonathan A. Flint Director
- ------------------------------ June 15, 1999
Jonathan A. Flint
/s/ John J. Gannon Director
- ------------------------------ June 15, 1999
John J. Gannon
/s/ Thomas A. Herring Director
- ------------------------------ June 15, 1999
Thomas A. Herring
/s/ Mitchell Kapor Director
- ------------------------------ June 15, 1999
Mitchell Kapor
II-8
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
ALLOWANCE FOR DOUBTFUL ACCOUNTS ------------------------------- MARCH 31,
AND SALES RETURNS 1996 1997 1998 1999
- -------------------------------------------------------------------- --------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period...................................... $ 10 $ 220 $ 487 $ 479
Additions:
Charged to expense................................................ 165 164 53 --
Charged against other accounts.................................... 45 165 38 --
Deductions:
Write-offs and returns............................................ -- (62) (99) (39)
--------- --------- --------- -----
Balance at end of period............................................ $ 220 $ 487 $ 479 $ 440
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------
<C> <S>
++2.1 Agreement and Plan of Merger, dated as of April 2, 1999, by and among Allaire, Bengal
Acquisition Corp. and Bright Tiger Technologies, Inc.
+3.1 Amended and Restated Certificate of Incorporation of Allaire
+3.2 Amended and Restated By-Laws of Allaire
+4.1 Specimen certificate for the Common Stock of Allaire
5.1 Opinion of Foley, Hoag & Eliot LLP
+10.1 1997 Stock Incentive Plan as amended
+10.2 1998 Stock Incentive Plan
+10.3 1998 Employee Stock Purchase Plan
+10.4 Option Agreement for David J. Orfao
+10.5 Form of Option Agreement for other executive officers
+10.6 Office Lease Agreement between Allaire and One Alewife Center Realty Trust, dated November
5, 1997
+10.7 Lease Agreement between Allaire and CambridgePark Two, L.P., dated May 21, 1998
+10.8 Loan and Security Agreement between Allaire and Silicon Valley Bank, dated March 26, 1998
+10.9 Negative Pledge Agreement between Allaire and Silicon Valley Bank, dated March 26, 1998
+10.10 Loan Modification Agreement between Allaire and Silicon Valley Bank, dated August 6, 1998
+10.11 Loan Modification Agreement between Allaire and Silicon Valley Bank, dated December 9,
1998
+10.12 Senior Loan and Security Agreement between Allaire and Phoenix Leasing Incorporated, dated
May 1, 1998
+10.13 Warrant Agreement between Allaire and Comdisco, Inc., dated August 21, 1998
+10.14 Warrant Agreement between Allaire and Gregory Stento, dated August 21, 1998
+10.15 Warrant Agreement between Allaire and Polaris Venture Partners, L.P., dated March 7, 1997
+10.16 Warrant Agreement between Allaire and Polaris Venture Partners Founders' Fund, L.P., dated
March 7, 1997
+10.17 Amended and Restated Registration Rights Agreement, dated May 15, 1997
+10.18 Waiver and Amendment No. 1 to Amended and Restated Registration Rights Agreement, dated
December 7, 1998
+10.19 Letter of Offer of Employment from Allaire to David J. Orfao, dated December 23, 1996
+10.20 Contribution and Restricted Stock Purchase Agreement between Allaire and Yesler Software,
Inc., dated July 14, 1998
+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
11.1 Statement re computation of unaudited net loss per share and pro forma net loss per share
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------
<C> <S>
11.2 Statement re computation of supplemental unaudited net loss per share and pro forma net
loss per share
21.1 Subsidiaries of Allaire Corporation
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Foley, Hoag & Eliot LLP (included in Exhibit 5.1)
24.1 Power of Attorney (contained on page II-7 of this Registration Statement)
</TABLE>
- ------------------------
+ Incorporated by reference from Allaire's Registration Statement on Form S-1
(File No. 333-68639).
++ Incorporated by reference from Allaire's Current Report on Form 8-K filed
with the Securities and Exchange Commission on April 27, 1999.
II-11
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF FOLEY, HOAG & ELIOT LLP]
June 15, 1999
Allaire Corporation
One Alewife Center
Cambridge, Massachusetts 02140
Ladies and Gentlemen:
We are familiar with the Registration Statement on Form S-1 (the
"Registration Statement") filed by Allaire Corporation, a Delaware corporation
(the "Company"), with the Securities and Exchange Commission under the
Securities Act of 1933, as amended. The Registration Statement relates to the
proposed offering by certain stockholders of the Company of 288,583 shares (the
"Shares") of the Company's Common Stock, $0.01 par value per share, all of which
Shares are now issued and outstanding.
We are familiar with the Company's Certificate of Incorporation and all
amendments thereto and restatements thereof, its By-Laws and all amendments
thereto and restatements thereof, the records of meetings and consents of its
Board of Directors and of its stockholders provided to us by the Company, and
the stock records provided to us by the Company. In addition, we have examined
and relied on the originals or copies certified or otherwise identified to our
satisfaction of all such corporate records of the Company and such other
instruments and other certificates of public officials, officers and
representatives of the Company and such other persons, and we have made such
investigations of law, as we have deemed appropriate as a basis for the opinions
expressed below.
Based on the foregoing, it is our opinion that:
1. the Company has taken all necessary corporate action required to
authorize the issuance and sale of the Shares; and
2. the Shares have been validly and legally issued and are fully paid
and non-assessable.
<PAGE>
Allaire Corporation
June 15, 1999
Page 2
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Legal
Matters" in the prospectus forming part of the Registration Statement.
Very truly yours,
Foley, Hoag & Eliot LLP
By: /s/ William R. Kolb
--------------------------------------
A Partner
<PAGE>
ALLAIRE CORPORATION
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF UNAUDITED NET LOSS PER SHARE
AND PRO FORMA NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended THREE MONTHS ENDED
December 31 March 31,
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Basic and diluted net loss per share:
Net loss................................... $(1,698) $(7,425) $(10,770) $(2,211) $(1,684)
------- ------- -------- ------- -------
------- ------- -------- ------- -------
Basic and diluted weighted average
common shares outstanding............... 1,743 1,687 2,938 2,477 8,819
------- ------- -------- ------- -------
------- ------- -------- ------- -------
Basic and diluted net loss per share....... $ (0.97) $ (4.40) $ (3.67) $ (0.89) $ (0.19)
------- ------- -------- ------- -------
------- ------- -------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31 THREE MONTHS ENDED MARCH 31,
1997 1998 1998 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Pro forma basic and diluted net loss per share:
Net loss.......................................... (7,425) (10,770) $(2,211) $(1,684)
-------- -------- ------- -------
-------- -------- ------- -------
Pro forma basic and diluted weighted average
shares outstanding
Shares attributable to common stock (1)......... 2,515 3,321 2,987 8,859
Shares attributable to the assumed conversion of
convertible preferred stock upon closing of the
initial public offering........................ 2,863 3,818 3,817 898
-------- -------- ------- -------
Pro forma basic and diluted weighted average
shares outstanding................................ 5,378 7,139 6,804 9,757
-------- -------- ------- -------
-------- -------- ------- -------
Pro forma basic and diluted loss per share........ $ (1.38) $ (1.51) $ (0.32) $ (0.17)
-------- -------- ------- -------
-------- -------- ------- -------
</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.
<PAGE>
ALLAIRE CORPORATION
EXHIBIT 11.2
STATEMENT RE: COMPUTATION OF SUPPLEMENTAL UNAUDITED NET LOSS PER SHARE
AND PRO FORMA NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended THREE MONTHS ENDED
December 31 March 31,
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Basic and diluted net loss per share:
Net loss...................................... $(2,026) $(11,548) $(17,112) $(4,057) $(2,883)
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Basic and diluted weighted average
common shares outstanding.................. 1,756 1,830 3,207 2,742 9,093
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Basic and diluted net loss per share.......... $ (1.15) $ (6.31) $ (5.34) $ (1.48) $ (0.32)
------- -------- -------- ------- -------
------- -------- -------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31 THREE MONTHS ENDED MARCH 31,
1997 1998 1998 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Pro forma basic and diluted net loss per share:
Net loss.......................................... $(11,548) $(13,112) $(4,057) $(2,883)
-------- -------- ------- -------
-------- -------- ------- -------
Pro forma basic and diluted weighted average
shares outstanding
Shares attributable to common stock (1)......... 1,870 3,240 2,782 9,133
Shares attributable to the assumed conversion of
convertible preferred stock upon closing of the
initial public offering......................... 2,863 3,818 3,817 898
-------- -------- ------- -------
Pro forma basic and diluted weighted average
shares outstanding................................ 4,733 7,065 6,599 10,031
-------- -------- ------- -------
-------- -------- ------- -------
Pro forma basic and diluted loss per share......... $ (2.44) $ (2.42) $ (0.61) $ (0.29)
-------- -------- ------- -------
-------- -------- ------- -------
</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.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF ALLAIRE CORPORATION
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Organization
- ------------------ ----------------------------
<S> <C>
Bright Tiger Technologies, Inc. Delaware
Allaire S.A. Belgium
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated February 3, 1999, except as to the pooling of interests
with Bright Tiger Technologies, Inc. which is as of April 12, 1999, relating
to the financial statements and financial statement schedules of Allaire
Corporation, which appear in such Registration Statement.
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated April 15, 1999, relating to the financial statements of
Bright Tiger Technologies, Inc., which appear in such Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 15, 1999