FILED PURSUANT TO RULE 424(B)(4)
FILE NO. 333-68639
2,500,000 Shares
[ALLAIRE LOGO]
Common Stock
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All of the shares of common stock being sold are being offered by Allaire.
Prior to this offering, there has been no public market for the common stock.
The common stock has been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "ALLR."
Allaire has granted the underwriters an option to purchase a maximum of
375,000 additional shares of common stock to cover over-allotments of shares.
Investing in the common stock involves certain risks. See "Risk Factors"
beginning on page 5.
Underwriting
Price to Discounts and Proceeds to
Public Commissions Allaire
---------- --------------- ------------
Per Share ......... $20.00 $1.40 $18.60
Total ............. $50,000,000 $3,500,000 $46,500,000
Delivery of the shares of common stock will be made on or about January 27,
1999, against payment in immediately available funds.
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.
Credit Suisse First Boston
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
NationsBanc Montgomery Securities LLC
Prospectus dated January 22, 1999.
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TABLE OF CONTENTS
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Page
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PROSPECTUS SUMMARY .................................................... 3
RISK FACTORS .......................................................... 5
USE OF PROCEEDS ....................................................... 17
DIVIDEND POLICY ....................................................... 17
CAPITALIZATION ........................................................ 18
DILUTION .............................................................. 19
SELECTED FINANCIAL DATA ............................................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ................................................ 21
BUSINESS .............................................................. 34
MANAGEMENT ............................................................ 52
CERTAIN TRANSACTIONS .................................................. 61
PRINCIPAL STOCKHOLDERS ................................................ 64
DESCRIPTION OF CAPITAL STOCK .......................................... 66
SHARES ELIGIBLE FOR FUTURE SALE ....................................... 71
UNDERWRITING .......................................................... 73
NOTICE TO CANADIAN RESIDENTS .......................................... 76
LEGAL MATTERS ......................................................... 77
EXPERTS ............................................................... 77
ADDITIONAL INFORMATION ................................................ 77
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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Until February 16, 1999 (25 days after the commencement of this offering),
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the obligation of dealers to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
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"Cold Fusion" is a federally registered trademark of Allaire. Allaire has
applied for federal registration of the trademark "HomeSite." "Allaire" and the
Allaire logo are trademarks of Allaire. Other trademarks or service marks
appearing in this prospectus are the property of their respective holders.
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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. Unless otherwise specified, all information in
this prospectus assumes no exercise of the underwriters' over-allotment option
and reflects the mandatory conversion into common stock of all outstanding
shares of preferred stock upon the closing of this offering.
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. More than 30,000 ColdFusion application server licenses and more
than 100,000 licenses for our HomeSite Web design tool have been sold to date.
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.
Our customers include:
o autobytel.com
o Boeing
o Booz, Allen & Hamilton
o Credit Suisse First Boston
o Hewlett-Packard
o Intel
o Internal Revenue Service
o JC Penney
o Lockheed Martin
o Lucent Technologies
o MCI Worldcom
o Microsoft
o SBC Communications
o United Parcel Service
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.
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The Offering
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Common Stock offered ............................ 2,500,000 shares
Common Stock to be outstanding after the offering 10,458,260 shares
Use of proceeds ................................. For general corporate purposes, including
working capital.
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
Inception Year Ended Nine Months Ended
(May 5, 1995) December 31, September 30,
through ----------------------- ------------------------
December 31, 1995 1996 1997 1997 1998
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(unaudited)
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Statement of Operations Data:
Total revenue ......................................... $ -- $ 2,358 $ 7,650 $ 4,595 $ 13,903
Total cost of revenue ................................. -- 234 2,414 1,385 4,117
Gross profit .......................................... -- 2,124 5,236 3,210 9,786
Total operating expenses .............................. 188 3,836 12,848 7,883 17,803
Loss from operations .................................. (188) (1,712) (7,612) (4,673) (8,017)
Net loss .............................................. (188) (1,698) (7,425) (4,548) (7,988)
Basic and diluted net loss per share .................. $ (0.09) $ (0.97) $ (4.40) $ (2.87) $ (2.84)
Shares used in computing basic and diluted net loss
per share ............................................ 2,200 1,743 1,687 1,584 2,813
Unaudited pro forma basic and diluted net loss per
share ................................................ $ (1.38) $ (1.13)
Shares used in computing unaudited pro
forma basic and diluted net loss per share ........... 5,378 7,054
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The pro forma as adjusted balance sheet data as of September 30, 1998
gives effect to the conversion of all outstanding preferred stock into common
stock upon the closing of the offering and has been adjusted to give effect to
the sale of 2,500,000 shares of common stock offered hereby at the initial
public offering price of $20.00 per share, after deducting estimated
underwriting discounts and commissions and offering expenses.
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December 31, September 30, 1998
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Pro Forma
1996 1997 Actual As Adjusted
----------- ----------- ----------- ------------
(unaudited)
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Balance Sheet Data:
Cash and cash equivalents ............................ $ 526 $ 5,521 $ 1,879 $47,379
Working capital (deficit) ............................ 224 1,492 (5,941) 39,559
Total assets ......................................... 2,038 9,697 8,330 53,830
Total long-term debt, net of current portion ......... -- 499 1,220 1,220
Total redeemable convertible preferred stock ......... 2,800 12,673 12,673 --
Total stockholders' equity (deficit) ................. (1,768) (9,153) (16,381) 41,792
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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.
We have a limited operating history on which to evaluate our prospects
We commenced operations in May 1995 and we recorded our first revenue upon
delivery of ColdFusion 1.5 to customers 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 the future
Since we began operations, we have incurred substantial net 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. For the nine months ended September 30, 1998, we had a net loss
of $8.0 million. As a result of accumulated operating losses, at September 30,
1998, we had an accumulated deficit of $17.4 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 fluctuate
Our quarterly revenue and operating results are difficult to 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:
o the market for Web development products is in an early stage of development
and it is therefore difficult to accurately predict customer demand; and
o the sales cycle for 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 for our products is uncertain
If the market for Web development products does not grow at 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 on the growth and commercial acceptance of the
Internet
Our future success will depend substantially upon the widespread adoption of
the Internet as a primary medium for commerce and business applications. If the
Internet does not become a viable and substantial commercial medium, 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 while simultaneously supporting Microsoft
technologies
We currently compete with Microsoft in the market for Web development products
while simultaneously maintaining a working relationship with Microsoft.
Microsoft has a longer operating history, a larger installed base of customers
and substantially greater financial, distribution, marketing and technical
resources than Allaire. As a result, 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 competition from other technology companies
The Web development products market is intensely competitive. Many of our
current and potential competitors 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
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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.
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 ability to expand our sales force and distribution
channels
To increase our revenue, we must increase the size of our sales force and the
number of our indirect channel partners, including original equipment
manufacturers, value-added resellers and systems integrators. A failure to do
so could have a material adverse effect on 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 ongoing sales through a limited number of distributors
We derive a substantial portion of our revenue from a limited number of
distributors. For the nine months ended September 30, 1998, revenue from our
indirect distribution channel accounted for approximately 41% of our total
revenue, and one distributor, Ingram Micro, accounted for approximately 22% 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 delayed sales as our sales cycle lengthens
A longer sales cycle reduces our ability to forecast revenue levels. Any delay
or loss in sales of our products could 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 on continued market acceptance of our products
If our products do not continue to satisfy the Web developer community or
otherwise fail to sustain sufficient market 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.
Our efforts to develop brand awareness may be unsuccessful
We believe that developing and maintaining awareness of the "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
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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.
Our performance depends on the success of ColdFusion and HomeSite
We derive almost all of our revenue from licenses of our ColdFusion and
HomeSite software products and related services. Any competitive pressures or
other factors that adversely affect market acceptance of ColdFusion or HomeSite
software would have a material adverse effect on our business, operating
results and financial condition.
Our future success will depend on our ability to enhance existing products and
develop new products
To be competitive, we must develop and introduce product enhancements and new
products which increase our customers' ability to build and deploy Web
applications. In the past, 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 for technology in our products
We license technology that is incorporated into our products from third
parties. The loss of access to such technology 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
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assurance that technology from others will continue to be available to us on
commercially reasonable terms, if at all.
We may have difficulty managing our growth
We have been experiencing a period of rapid growth that has been placing a
significant strain on all of our resources. Our revenue more than doubled in
the quarter ended September 30, 1998 from the same period the year earlier.
From October 1, 1997 to September 30, 1998, the number of our employees
increased from 85 to 153. 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 Allaire and David Orfao
Our future success depends to a significant degree on the 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.
We must hire and retain skilled personnel in a tight labor market
Qualified personnel are in great demand throughout the software industry. Our
success depends in large part upon 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.
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Our success depends on our ability to protect our proprietary technology
Our success depends to a significant degree upon the protection of our software
and other 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.
Other companies may claim that we infringe their proprietary technology
Although we attempt to avoid infringing known proprietary rights of third
parties, we are subject to the risk of 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
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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 adversely affected if our products contain errors
Software products as complex as ours may contain undetected errors or "bugs,"
which result in product failures. The occurrence of errors could result in loss
of or delay in revenue, loss of market share, failure to achieve market
acceptance, diversion of development resources, injury to 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 product liability claims relating to our customers'
critical business operations
Many of the Web applications developed and deployed with our products are
critical to the operations of our customers' businesses. Any failure in a
customer's Web application 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.
We may be subject to risks associated with future acquisitions
In the future, we may pursue acquisitions to obtain complementary products,
services and technologies. At present, we have no agreements or other
arrangements with respect to any acquisition. 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. If we
pursue 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, including
proceeds of the offering. 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.
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We may be affected by unexpected Year 2000 problems
Many existing computer systems and software products do not properly recognize
dates after December 31, 1999. This "Year 2000" problem could result in
miscalculations, data corruption, system failures or disruptions of operations.
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.
Our existing stockholders will exercise significant control over Allaire
After the offering, our officers, directors and existing stockholders will
together control approximately 76% of the outstanding common stock. As a
result, 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.
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Certain provisions of our charter and of Delaware law make a takeover of
Allaire more difficult
Our corporate documents and Delaware law contain provisions that might enable
our management to resist a takeover of Allaire. These provisions might
discourage, delay or prevent a change in the control of Allaire or a change in
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 security holders could depress the market price of the
common stock
Immediately after the offering, the public market for the common stock will
include only the 2,500,000 shares that we are selling in the offering. At that
time, there will be an additional 7,958,260 shares of common stock outstanding.
The persons that hold these shares will be able to sell some of them in the
public market following the offering. If these stockholders sell a large number
of shares, the market price of the common stock could decline significantly.
Moreover, the perception in the public market that these stockholders might
sell shares of common stock could depress the market price of the common stock.
Of the 7,958,260 additional shares held by our existing stockholders, 7,860,524
shares are subject to "lock-up" agreements with the representatives of the
underwriters. When the 180-day "lock-up" period expires (or earlier with the
consent of Credit Suisse First Boston), our existing stockholders and
optionholders will be able to sell approximately an additional 7,525,000 shares
in the public market.
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.
After the offering, we intend to register approximately 4,986,000 shares of
common stock that we have issued or may issue under our stock plans. Once we
register these shares, they can be sold in the public market upon issuance,
subject to the "lock-up" agreements described above.
15
<PAGE>
We will have broad discretion in using the proceeds from the offering
We have not identified specific uses for the proceeds from the offering, and we
will have broad discretion in how we use them. You will not have the
opportunity to evaluate the economic, financial or other information on which
we base our decisions on how to use the proceeds.
Investors will be subject to market risks typically associated with initial
public offerings
Prior to the offering, there has been no public market for the common stock.
After the offering, an active trading market might not develop or continue. If
you purchase shares of common stock in the offering, you will pay a price that
was not established in a competitive market. Rather, you will pay a price that
we negotiated with the representatives of the underwriters. The price of the
common stock that will prevail in the market after the offering may be higher
or lower than the price you pay.
The stock market in general has recently experienced extreme price and volume
fluctuations. In addition, 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.
Investors will experience immediate and substantial dilution in the book value
of their investment
If you purchase shares of the common stock in the offering, you will experience
immediate and substantial dilution, in that the price you pay will be
substantially greater than the net tangible book value per share of the shares
you acquire. This dilution is due in large part to the fact that earlier
investors in Allaire paid substantially less than the public offering price
when they purchased their shares of common stock. You will experience
additional dilution upon the exercise of outstanding stock options or warrants
to purchase common stock.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to Allaire from the issuance and sale of the 2,500,000
shares of common stock offered hereby are approximately $45.5 million
(approximately $52.5 million if the underwriters' over-allotment option is
exercised in full), at the initial public offering price of $20.00 per share,
after deducting estimated underwriting discounts and commissions and offering
expenses. Allaire intends to use the proceeds for general corporate purposes,
including working capital, product development and expansion of its
international operations and sales and marketing capabilities. A portion of the
proceeds may also be used to acquire or invest in complementary businesses or
products or to obtain the right to use complementary technologies. Allaire has
no specific understandings, commitments or agreements with respect to any such
acquisition or investment. Pending such uses, the proceeds of the offering will
be invested in short-term, interest-bearing, investment-grade securities,
certificates of deposit or direct or guaranteed obligations of the United
States.
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. Under the terms of
Allaire's line of credit, there are certain restrictions on Allaire's ability
to declare and pay dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 6 of Notes to Financial Statements.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Allaire as of
September 30, 1998:
o on an actual basis;
o on a pro forma basis giving effect to the conversion of all outstanding
shares of preferred stock into common stock upon the closing of the
offering and the amendment of Allaire's Certificate of Incorporation to
increase the number of authorized shares of common stock to 35,000,000;
and
o on a pro forma as adjusted basis to reflect the sale by Allaire of
2,500,000 shares of common stock offered hereby at the initial
public offering price of $20.00 per share, after deducting estimated
underwriting discounts and commissions and offering expenses.
This information should be read in conjunction with Allaire's financial
statements and notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------ ------------- ------------
(In thousands, except share and per
share data)
(unaudited) (unaudited)
<S> <C> <C> <C>
Capital lease obligations, net of current portion ........................ $ 247 $ 247 $ 247
Notes payable, net of current portion .................................... 973 973 973
--------- --------- ---------
Total long term debt ..................................................... 1,220 1,220 1,220
--------- --------- ---------
Redeemable convertible preferred stock, $.01 par value:
Series B--514,306 shares authorized, issued and outstanding actual;
none issued and outstanding pro forma and pro forma as adjusted ....... 2,325 -- --
Series C--169,200 shares authorized, issued and outstanding actual;
none issued and outstanding pro forma and pro forma as adjusted ....... 1,000 -- --
Series D--2,500,000 shares authorized, 2,336,909 shares issued
and outstanding actual; none issued and outstanding pro forma and
pro forma as adjusted ................................................. 9,348 -- --
--------- --------- ---------
Total redeemable convertible preferred stock ............................. 12,673 -- --
--------- --------- ---------
Stockholders' equity (deficit):
Series A convertible preferred stock, $.01 par value; 200,000 shares
authorized, 57,213 shares issued and outstanding actual; none
issued and outstanding pro forma and pro forma as adjusted ............ 260 -- --
Common stock, $.01 par value; 10,000,000 shares authorized actual
and 35,000,000 shares authorized pro forma and pro forma as
adjusted; 4,143,986 shares issued and 4,140,569 outstanding actual;
7,961,677 shares issued and 7,958,260 outstanding pro forma;
10,461,677 shares issued and 10,458,260 outstanding pro forma
as adjusted ........................................................... 41 79 104
Additional paid-in capital .............................................. 1,140 14,035 59,510
Accumulated deficit ..................................................... (17,423) (17,423) (17,423)
Deferred compensation ................................................... (383) (383) (383)
Stock subscriptions receivable .......................................... (16) (16) (16)
--------- --------- ---------
Total stockholders' equity (deficit) ..................................... (16,381) (3,708) 41,792
--------- --------- ---------
Total capitalization ..................................................... $ (2,488) $ (2,488) $ 43,012
========= ========= =========
</TABLE>
18
<PAGE>
DILUTION
The pro forma net tangible book value of Allaire at September 30, 1998 was
$(3,856,000), or $(0.48) per share of common stock. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding after
giving effect to the conversion of all shares of preferred stock. After giving
effect to the sale of 2,500,000 shares of common stock offered hereby by Allaire
at the initial public offering price of $20.00 per share and after deducting
estimated underwriting discounts and commissions and offering expenses,
Allaire's pro forma net tangible book value as of September 30, 1998 would have
been approximately $41,644,000, or $3.98 per share. This represents an immediate
increase in pro forma net tangible book value of $4.46 per share to existing
stockholders and an immediate dilution of $16.02 per share to new investors
purchasing shares of common stock in the offering. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share .................................. $ 20.00
Pro forma net tangible book value per share at September 30, 1998 ....... $ (0.48)
Increase attributable to the offering ................................... 4.46
--------
Pro forma net tangible book value per share after the offering ........... 3.98
--------
Net tangible book value dilution per share to new investors in the
offering ................................................................ $ 16.02
========
</TABLE>
The following table summarizes, as of September 30, 1998, on the pro forma
basis described above, the total number of shares and consideration paid to
Allaire and the average price per share paid by the existing stockholders and by
new investors purchasing shares of common stock in the offering at the initial
public offering price of $20.00 per share (before deducting the estimated
underwriting discounts and commissions and offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------------ --------------------------
Average Price
Number Percent Amount Percent Per Share
------------ --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 7,958,260 76.1% $14,114,000 22.0% $ 1.77
New investors ................. 2,500,000 23.9% 50,000,000 78.0% 20.00
--------- ----- ----------- -----
Totals ...................... 10,458,260 100.0% $64,114,000 100.0%
========== ===== =========== =====
</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 period from Allaire's inception (May 5, 1995) through December 31, 1995,
for the years ended December 31, 1996 and 1997 and for the nine months ended
September 30, 1998, and the balance sheet data as of December 31, 1996 and 1997
and as of September 30, 1998, are derived from, and are qualified by reference
to, audited financial statements included elsewhere in this prospectus. 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 nine months ended September 30, 1997 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
Inception
(May 5, 1995) Year Ended
through December 31,
December 31, -----------------------
1995 1996 1997
-------------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C>
Statement of Operations Data:
Revenue:
Software license fees ............................................. $ -- $ 2,358 $ 7,116
Services .......................................................... -- -- 534
------- -------- --------
Total revenue ................................................... -- 2,358 7,650
------- -------- --------
Cost of revenue:
Software license fees ............................................. -- 234 961
Services .......................................................... -- -- 1,453
------- -------- --------
Total cost of revenue ........................................... -- 234 2,414
------- -------- --------
Gross profit ....................................................... -- 2,124 5,236
------- -------- --------
Operating expenses:
Research and development .......................................... 65 873 2,702
Sales and marketing ............................................... 49 1,576 7,272
General and administrative ........................................ 74 1,387 2,874
------- -------- --------
Total operating expenses ..................................... 188 3,836 12,848
------- -------- --------
Loss from operations ............................................... (188) (1,712) (7,612)
Interest income, net ............................................... -- 14 187
------- -------- --------
Net loss ........................................................... $ (188) $ (1,698) $ (7,425)
======= ======== ========
Basic and diluted net loss per share ............................... $ (0.09) $ (0.97) $ (4.40)
Shares used in computing basic and diluted net loss per share ...... 2,200 1,743 1,687
Unaudited pro forma basic and diluted net loss per share ........... $ (1.38)
Shares used in computing unaudited pro forma basic and diluted
net loss per share ................................................ 5,378
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1997 1998
------------ ------------
(In thousands, except per
share data)
(unaudited)
<S> <C> <C>
Statement of Operations Data:
Revenue:
Software license fees ............................................. $ 4,335 $ 11,716
Services .......................................................... 260 2,187
-------- --------
Total revenue ................................................... 4,595 13,903
-------- --------
Cost of revenue:
Software license fees ............................................. 540 1,262
Services .......................................................... 845 2,855
-------- --------
Total cost of revenue ........................................... 1,385 4,117
-------- --------
Gross profit ....................................................... 3,210 9,786
-------- --------
Operating expenses:
Research and development .......................................... 1,801 3,371
Sales and marketing ............................................... 4,216 11,561
General and administrative ........................................ 1,866 2,871
-------- --------
Total operating expenses ..................................... 7,883 17,803
-------- --------
Loss from operations ............................................... (4,673) (8,017)
Interest income, net ............................................... 125 29
-------- --------
Net loss ........................................................... $ (4,548) $ (7,988)
======== ========
Basic and diluted net loss per share ............................... $ (2.87) $ (2.84)
Shares used in computing basic and diluted net loss per share ...... 1,584 2,813
Unaudited pro forma basic and diluted net loss per share ........... $ (1.13)
Shares used in computing unaudited pro forma basic and diluted
net loss per share ................................................ 7,054
</TABLE>
The pro forma as adjusted balance sheet data as of September 30, 1998 gives
effect to the conversion of all outstanding preferred stock into common stock
upon the closing of the offering and has been adjusted to give effect to the
sale of 2,500,000 shares of common stock offered hereby at the initial public
offering price of $20.00 per share, after deducting estimated underwriting
discounts and commissions and offering expenses.
<TABLE>
<CAPTION>
September 30, 1998
--------------------------
December 31,
-------------------------------------
Pro Forma
1995 1996 1997 Actual As Adjusted
--------- ----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ............................ $ 17 $ 526 $ 5,521 $ 1,879 $47,379
Working capital (deficit) ............................ (231) 224 1,492 (5,941) 39,559
Total assets ......................................... 119 2,038 9,697 8,330 53,830
Total long-term debt, net of current portion ......... -- -- 499 1,220 1,220
Total redeemable convertible preferred stock ......... -- 2,800 12,673 12,673 --
Total stockholders' equity (deficit) ................. (181) (1,768) (9,153) (16,381) 41,792
</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 financial statements and notes thereto appearing
elsewhere in this prospectus.
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 versions 4.0 of its ColdFusion and HomeSite software
products.
Allaire's revenue is derived principally from license fees for software
products and, to a lesser extent, fees for a range of services complementing
these products, primarily training and technical support. Software license fees
include sales of licenses for the then-current version of Allaire's products,
product upgrades and subscriptions. Subscriptions entitle the customer to all
new releases for a specific product during the subscription period, generally
12 months.
Revenue from sales of licenses to use Allaire's software products and
product upgrades is recognized upon delivery to customers, provided no
significant post-delivery obligations or uncertainties remain and collection of
the related receivable is probable. Revenue under arrangements where multiple
products or services are sold together under one contract is allocated to each
element based on their relative fair values, with these fair values being
determined using the price charged when that element is sold separately. For
agreements with specified upgrade rights, the revenue related to such upgrade
rights is deferred until the specified upgrade is delivered. Allaire provides
most of its distributors with rights of return. An allowance for estimated
future returns is recorded at the time revenue is recognized based on Allaire's
historical experience. Revenue from subscription sales is recognized ratably
over the term of the subscription period. Services revenue is recognized as
services are rendered or ratably over the term of the service agreement.
In October 1997, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SoP") 97-2, Software Revenue Recognition, which
provides guidance on the timing and amount of revenue recognition when
licensing, selling, leasing or otherwise marketing computer software and
related services. Allaire adopted SoP 97-2 for all transactions entered into
after December 31, 1997. Subsequently, in March 1998, the Financial Accounting
Standards Board ("FASB") approved SoP 98-4, Deferral of the Effective Date of a
Provision of SoP 97-2, Software Revenue Recognition. SoP 98-4 provides for the
one-year deferral of certain provisions of SoP 97-2 pertaining to its
requirements for what constitutes vendor specific objective evidence of the
fair value of multiple elements included in an arrangement. In November 1998,
the FASB cleared for issuance SoP 98-9,
21
<PAGE>
Modification of SoP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions, which will retain the limitations of SoP 97-2 on what constitutes
vendor specific objective evidence of fair value. SoP 98-9 will be 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.
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 41% of total revenue for 1996, 1997 and the nine months ended September 30,
1998, respectively. Allaire anticipates that revenue derived from the indirect
distribution channel will continue to represent a significant percentage of
total revenue.
Allaire primarily derives its international revenue through its indirect
distribution channel. International revenue accounted for 17%, 20% and 14% of
total revenue for 1996, 1997 and the nine months ended September 30, 1998,
respectively.
Allaire has only a limited operating history on which to base an
evaluation of its business and prospects. Allaire's prospects must be
considered in light of the risks and uncertainties encountered by companies in
an early stage of development in new and rapidly evolving markets. To address
these risks, Allaire must, among other things:
o develop new products and technologies more rapidly than its competitors;
o attract, integrate, motivate and retain qualified personnel;
o successfully implement its distribution strategy;
o continue to build its financial and operational infrastructure; and
o develop and maintain awareness of its brands.
There can be no assurance that Allaire will succeed in addressing any or all of
these risks, and the failure to do so would have a material adverse effect on
Allaire's business, operating results and financial condition.
Allaire has experienced substantial net losses in each fiscal period since
its inception and, as of September 30, 1998, had an accumulated deficit of
$17.4 million. Such net losses and accumulated deficit resulted from Allaire's
lack of substantial revenue and the significant costs incurred in the
development of Allaire's products and in the preliminary establishment of
22
<PAGE>
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.
Although Allaire has experienced revenue growth in recent periods, there
can be no assurance that such growth rates are sustainable, and therefore such
growth rates should not be considered indicative of future operating results.
There can also be no assurance that Allaire will be able to continue to
increase its revenue or attain profitability or, if increases in revenue and
profitability are achieved, that they can be sustained. 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.
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. Allaire generated no revenue and incurred operating expenses
totaling $188,000 during the period from inception (May 5, 1995) through
December 31, 1995. Consequently, operating results for that period have been
omitted from the table below.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
-------------------------- ----------------------------
1996 1997 1997 1998
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Software license fees ................. 100.0% 93.0% 94.3% 84.3%
Services .............................. 0.0 7.0 5.7 15.7
----- ----- ------ -----
Total revenue .................... 100.0 100.0 100.0 100.0
----- ----- ------ -----
Cost of revenue:
Cost of software license fees ......... 9.9 12.6 11.8 9.1
Cost of services ...................... 0.0 19.0 18.4 20.5
----- ----- ------ -----
Total cost of revenue ............ 9.9 31.6 30.2 29.6
----- ----- ------ -----
Gross profit ........................... 90.1 68.4 69.8 70.4
----- ----- ------ -----
Operating expenses:
Research and development .............. 37.1 35.3 39.2 24.2
Sales and marketing ................... 66.8 95.1 91.7 83.2
General and administrative ............ 58.8 37.5 40.6 20.7
----- ----- ------ -----
Total operating expenses ......... 162.7 167.9 171.5 128.1
----- ----- ------ -----
Loss from operations ................... (72.6) (99.5) (101.7) (57.7)
Interest income, net ................... 0.6 2.4 2.7 0.2
----- ----- ------ -----
Net loss ............................... (72.0)% (97.1)% ( 99.0)% (57.5)%
===== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1997 and 1998
Revenue
Total revenue increased 203% from $4.6 million for the nine months ended
September 30, 1997 to $13.9 million for the nine months ended September 30,
1998.
Software License Fees. Revenue from software license fees increased 170%
from $4.3 million for the nine months ended September 30, 1997 to $11.7 million
for the nine months ended September 30, 1998. This increase was primarily due
to an increase in the
23
<PAGE>
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.
Services. Revenue from services increased 741% from $260,000 for the nine
months ended September 30, 1997 to $2.2 million for the nine months ended
September 30, 1998. The increase was primarily attributable to growth in
training revenue resulting from an increase in Allaire's installed customer
base.
Cost of Revenue
Cost of Software License Fees. Cost of software license fees includes
costs of product media duplication, manuals, packaging materials, licensed
technology and fees paid to third-party vendors and agents for order
fulfillment. Cost of software license fees increased 134% from $540,000 for the
nine months ended September 30, 1997 to $1.3 million for the nine months ended
September 30, 1998. The increase in absolute dollars was due to higher unit
sales volume. The improvement in software license fees gross margins from 88%
for the nine months ended September 30, 1997 to 89% for the nine months ended
September 30, 1998 was primarily attributable to economies of scale achieved
with Allaire's higher sales volume. In the future, Allaire expects that
additional economies of scale may be offset by increased licensed technology
costs related to new versions of ColdFusion.
Cost of Services. Cost of services consists primarily of personnel costs.
Cost of services increased 238% from $845,000 for the nine months ended
September 30, 1997 to $2.9 million for the nine months ended September 30,
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 (225)% for the nine months ended September 30, 1997
to (31)% for the nine months ended September 30, 1998 was primarily
attributable to the substantial growth in training revenue. The continued
improvement in services gross margins is contingent 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 87% from $1.8 million for the nine months ended
September 30, 1997 to $3.4 million for the nine months ended September 30,
24
<PAGE>
1998. The increase primarily resulted from salaries associated with newly hired
development personnel and consulting costs related to product localization.
Allaire anticipates that research and development expenses will continue to
increase in absolute dollars.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, commissions, and costs associated with marketing programs
such as trade shows, seminars, advertising and new product launch activities.
Sales and marketing expenses increased 174% from $4.2 million for the nine
months ended September 30, 1997 to $11.6 million for the nine months ended
September 30, 1998. The increase was primarily attributable to costs associated
with additional direct sales, pre-sales support and marketing personnel, and,
to a lesser extent, an increase in marketing programs, including trade shows,
seminars and product launch activities. Allaire anticipates that sales and
marketing expenses will continue to increase in absolute dollars as it
continues to expand its marketing programs and sales force to support its brand
awareness, product launches, international expansion and increased focus on
major account sales.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and other personnel related costs for executive
and financial personnel, as well as legal, accounting and insurance costs.
General and administrative expenses increased 54% from $1.9 million for the
nine months ended September 30, 1997 to $2.9 million for the nine months ended
September 30, 1998. Substantially all of the increase was due 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.
Interest Income, Net. Interest income, net of interest expense, decreased
77% from $125,000 for the nine months ended September 30, 1997 to $29,000 for
the nine months ended September 30, 1998. The decrease was primarily due to an
increase in interest expense attributable to Allaire's capital lease and notes
payable obligations.
Provision for Income Taxes. Allaire incurred significant operating losses
for all periods from inception through September 30, 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. This 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.
25
<PAGE>
Services. Prior to 1997, Allaire provided minimal technical support to its
customers and recognized no revenue from such services during 1996. During
1997, Allaire introduced training and fee-based technical support to its
customers.
Cost of Revenue
Cost of Software License Fees. Cost of software license fees increased
311% from $234,000 for 1996 to $961,000 for 1997. The increase in absolute
dollars was due to higher unit sales volume. The decrease in software license
fee gross margins from 90% for 1996 to 86% for 1997 was primarily attributable
to an increase in licensed technology costs and fees paid to third-party agents
for order fulfillment.
Cost of Services. Allaire recognized no revenue from services during 1996.
The cost of services incurred during 1997 related to the establishment of
Allaire's training organization and the hiring of additional technical support
personnel.
Operating Expenses
Research and Development. Research and development expenses increased 210%
from $873,000 for 1996 to $2.7 million for 1997. The increase primarily
resulted from salaries associated with newly hired development personnel and
consulting costs related to product localization.
Sales and Marketing. Sales and marketing expenses increased 361% from $1.6
million for 1996 to $7.3 million for 1997. The increase was primarily
attributable to costs associated with additional direct sales, pre-sales
support and marketing personnel, and, to a lesser extent, an increase in
marketing programs, including trade shows, seminars and product launch and
brand awareness activities.
General and Administrative. General and administrative expenses increased
107% from $1.4 million for 1996 to $2.9 million for 1997. The increase was
primarily due to employee salaries associated with the hiring of executive and
financial personnel to help manage Allaire's growth. Allaire also settled a
wrongful termination action with a former employee and agreed to pay the
plaintiff a one-time cash settlement of $285,000.
Interest Income, Net. Interest income, net of interest expense, increased
from $14,000 for 1996 to $187,000 for 1997. The increase was primarily
attributable to interest earned on cash received from financing activities
during 1997, partially offset by interest expense attributable to Allaire's
capital lease obligations.
Period from Inception (May 5, 1995) through December 31, 1995
During the period from inception (May 5, 1995) through December 31, 1995,
Allaire was in the development stage and its operating activities consisted
primarily of recruiting of personnel, research and development of its
ColdFusion product line, and distribution of its initial version of ColdFusion.
Allaire generated no revenue and incurred operating expenses totaling $188,000
during this period. Accordingly, a comparison of the operating results for that
period and 1996 is not meaningful and has been omitted.
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<PAGE>
Quarterly Results of Operations
The following tables set forth a summary of Allaire's unaudited quarterly
operating results for each of the seven quarters in the period ended September
30, 1998. 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 a 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
----------------------------------------
Mar. 31, June 30, Sept. 30,
1997 1997 1997
------------ ------------- -------------
(In thousands)
<S> <C> <C> <C>
Statement of Operations Data:
Revenue:
Software license fees ................. $ 1,143 $ 1,304 $ 1,888
Services .............................. 68 76 116
-------- -------- --------
Total revenue .................... 1,211 1,380 2,004
-------- -------- --------
Cost of revenue:
Cost of software license fees ......... 157 186 197
Cost of services ...................... 146 303 396
-------- -------- --------
Total cost of revenue ............ 303 489 593
-------- -------- --------
Gross profit ........................... 908 891 1,411
-------- -------- --------
Operating expenses:
Research and development .............. 352 581 868
Sales and marketing ................... 1,006 1,184 2,026
General and administrative ............ 377 499 990
-------- -------- --------
Total operating expenses ......... 1,735 2,264 3,884
-------- -------- --------
Loss from operations ................... (827) (1,373) (2,473)
Interest income (expense), net ......... (9) 40 94
----------- -------- --------
Net loss ............................... $ (836) $ (1,333) $ (2,379)
========== ======== ========
As a Percentage of Total Revenue:
Revenue:
Software license fees ................. 94.4% 94.5% 94.2%
Services .............................. 5.6 5.5 5.8
---------- -------- --------
Total revenue .................... 100.0 100.0 100.0
---------- -------- --------
Cost of revenue:
Cost of software license fees ......... 13.0 13.5 9.8
Cost of services ...................... 12.0 21.9 19.8
---------- -------- --------
Total cost of revenue ............ 25.0 35.4 29.6
---------- -------- --------
Gross profit ........................... 75.0 64.6 70.4
---------- -------- --------
Operating expenses:
Research and development .............. 29.1 42.1 43.3
Sales and marketing ................... 83.1 85.8 101.1
General and administrative ............ 31.1 36.2 49.4
---------- -------- --------
Total operating expenses ......... 143.3 164.1 193.8
---------- -------- --------
Loss from operations ................... (68.3) (99.5) (123.4)
Interest income (expense), net ......... ( 0.7) 2.9 4.7
---------- -------- --------
Net loss ............................... (69.0)% (96.6)% (118.7)%
========== ======== ========
<CAPTION>
Quarter Ended
------------------------------------------------------
Dec. 31, Mar. 31, June 30, Sept. 30,
1997 1998 1998 1998
------------- ------------- ------------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Software license fees ................. $ 2,781 $ 3,568 $ 4,017 $ 4,131
Services .............................. 274 464 582 1,141
-------- -------- -------- -------
Total revenue .................... 3,055 4,032 4,599 5,272
-------- -------- -------- -------
Cost of revenue:
Cost of software license fees ......... 421 421 399 442
Cost of services ...................... 608 701 909 1,245
-------- -------- -------- -------
Total cost of revenue ............ 1,029 1,122 1,308 1,687
-------- -------- -------- -------
Gross profit ........................... 2,026 2,910 3,291 3,585
-------- -------- -------- -------
Operating expenses:
Research and development .............. 901 1,025 1,003 1,343
Sales and marketing ................... 3,056 3,120 3,824 4,617
General and administrative ............ 1,008 1,021 888 962
-------- -------- -------- -------
Total operating expenses ......... 4,965 5,166 5,715 6,922
-------- -------- -------- -------
Loss from operations ................... (2,939) (2,256) (2,424) (3,337)
Interest income (expense), net ......... 62 45 20 (36)
-------- -------- -------- -------
Net loss ............................... $ (2,877) $ (2,211) $ (2,404) $(3,373)
======== ======== ======== =======
As a Percentage of Total Revenue:
Revenue:
Software license fees ................. 91.0% 88.5% 87.3% 78.4%
Services .............................. 9.0 11.5 12.7 21.6
-------- -------- -------- -------
Total revenue .................... 100.0 100.0 100.0 100.0
-------- -------- -------- -------
Cost of revenue:
Cost of software license fees ......... 13.8 10.4 8.7 8.4
Cost of services ...................... 19.9 17.4 19.7 23.6
-------- -------- -------- -------
Total cost of revenue ............ 33.7 27.8 28.4 32.0
-------- -------- -------- -------
Gross profit ........................... 66.3 72.2 71.6 68.0
-------- -------- -------- -------
Operating expenses:
Research and development .............. 29.5 25.4 21.9 25.5
Sales and marketing ................... 100.0 77.4 83.1 87.6
General and administrative ............ 33.0 25.3 19.3 18.2
-------- -------- -------- -------
Total operating expenses ......... 162.5 128.1 124.3 131.3
-------- -------- -------- -------
Loss from operations ................... (96.2) (55.9) (52.7) (63.3)
Interest income (expense), net ......... 2.0 1.1 0.4 ( 0.7)
-------- -------- -------- -------
Net loss ............................... (94.2)% (54.8)% (52.3)% (64.0)%
======== ======== ======== =======
</TABLE>
27
<PAGE>
Allaire's total revenue has increased each consecutive quarter during the
seven fiscal quarters ending September 30, 1998, 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
decrease in the second quarter of 1998 primarily was the result of a decline in
the use of outside services and a reduction in bad debt expense.
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:
o the evolution of the market for Web development products;
o market acceptance of Allaire's products;
o Allaire's success and timing in developing and introducing new products
and enhancements to existing products;
o market acceptance of products developed by competitors;
o changes in pricing policies by Allaire or its competitors;
o an increase in the length of Allaire's sales cycle;
o changes in customer buying patterns;
o customer order deferrals in anticipation of new products or enhancements
by Allaire or competitors;
o market entry by new competitors;
o development and performance of Allaire's distribution channels;
o general economic conditions; and
o economic conditions specific to Internet-related industries.
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
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<PAGE>
such expenses are fixed, particularly in the short term. There can be no
assurance that Allaire's expectations regarding future revenue are accurate.
Moreover, Allaire may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall of revenue in relation to Allaire's expectations would likely cause
significant declines in Allaire's quarterly operating results.
Allaire is also increasing its sales and marketing efforts focused on
larger purchases by larger customers. Such transactions are generally more
complex and may increase the length of Allaire's average sales cycle. Allaire
anticipates that an increasing portion of its revenue could be derived from
larger orders, in which case the timing of receipt and fulfillment of any such
orders could cause fluctuations in Allaire's operating results, particularly on
a quarterly basis.
Due to the foregoing factors, Allaire's operating results are difficult to
forecast. Allaire believes that period-to-period comparisons of its historical
operating results are not meaningful and should not be relied upon as an
indication of future performance. Also, Allaire's operating results may fall
below its expectations or the expectations of securities analysts or investors
in some future quarter. In such event, the market price of Allaire's common
stock would likely be materially adversely affected.
Liquidity and Capital Resources
Since its inception, Allaire has funded operations primarily through net
cash proceeds from private placements of preferred stock totaling $12.3 million
through September 30, 1998. At September 30, 1998, Allaire had cash and cash
equivalents totaling $1.9 million. In December 1998, Allaire received gross
proceeds of $500,000 from the sale of 31,250 shares of Series A Preferred
Stock.
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 the nine months ended September 30, 1998 was $3.6 million,
primarily due to a net loss of $8.0 million, partially offset by increases in
accrued expenses and deferred revenue.
Cash used for investing activities for 1997 and the nine months ended
September 30, 1998 was $1.8 million and $1.7 million, respectively. Investing
activities for the periods were primarily purchases of equipment, consisting
largely of computer servers, workstations and networking equipment.
Cash provided by financing activities for 1997 was $10.0 million,
primarily due to the issuance of preferred stock for net proceeds totaling $9.6
million. Cash provided by financing activities for the nine months ended
September 30, 1998 was $1.6 million, primarily due to the issuance of notes
payable of $1.4 million and the proceeds from the exercise of common stock
options of $537,000.
Historically, Allaire established a high level of allowance for doubtful
accounts and sales returns as a percentage of accounts receivable to reserve
for a large balance of delinquent accounts. During the early stages of
Allaire's operations, it had limited general and administrative resources to
dedicate to the collection of accounts receivable. This situation led to the
accumulation of these delinquent accounts. In late 1997 and 1998, Allaire hired
additional general and administrative employees and implemented new
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<PAGE>
systems which substantially improved accounts receivable collections. Allaire
expects the level of allowance for doubtful accounts and sales returns will
decrease as a percentage of accounts receivable.
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 has been employed by Allaire.
In March 1998, Allaire entered into a new line of credit with a bank which
allows it to borrow up to $2.0 million for working capital purposes and for the
issuance of letters of credit. The line of credit expires on the earlier of the
closing of an initial public offering or March 26, 1999. Amounts available
under the line of credit are a function of eligible accounts receivable and
bear interest at the bank's prime rate (8.25% at September 30, 1998) plus 1%.
At September 30, 1998, there were letters of credit outstanding under the line
of $487,000 and an additional $1.5 million was available for borrowing. In
August 1998, Allaire received a covenant waiver from the bank for the months of
May and June 1998, and the bank amended the terms of the line of credit to
waive certain financial covenants through October 1998. In December 1998, the
bank extended the terms of the arrangement to waive certain financial covenants
from November 1998 through the earlier of the closing of an initial public
offering or March 26, 1999.
In May 1998, Allaire entered into an equipment loan line agreement that
allows it 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 September 30,
1998, Allaire had $1.3 million outstanding under the line, which was
collateralized by previous purchases of furniture and equipment. In December
1998, Allaire borrowed an additional $214,000.
As of September 30, 1998, Allaire's primary commitments consisted of
obligations outstanding under operating leases, $581,000 of capital lease
obligations and $1.3 million of notes payable under the equipment loan line.
As of September 30, 1998, Allaire had net operating loss carryforwards of
approximately $15.0 million available for federal purposes to reduce future
taxable income expiring at various dates through 2018. Under the provisions of
the Internal Revenue Code, certain substantial changes in Allaire's ownership
may have limited, or may limit in the future, the amount of net operating loss
carryforwards which could be utilized annually to offset future taxable income.
Allaire expects to experience significant growth in its operating expenses
for the foreseeable future in order to execute its business plan, particularly
research and development and sales and marketing expenses. As a result, Allaire
anticipates that such
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<PAGE>
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
offering, together with its current cash and cash equivalents, will be
sufficient to meet its anticipated cash requirements for working capital and
capital expenditures for at least 12 months. However, in the event that the
offering is not completed on a timely basis, Allaire would seek additional
funding through a private financing. There can be no assurance that such
additional funding would be available on terms attractive to Allaire, or at
all. In the event that Allaire has not completed the offering or obtained other
financing in excess of $3.0 million by February 28, 1999, Allaire has a
commitment from existing investors to provide a $3.0 million working capital
line of credit. Any borrowings under this arrangement would be payable at the
earlier of the closing of an initial public offering or February 28, 2000.
Thereafter, if cash generated from operations is insufficient to satisfy
Allaire's liquidity requirements, it may seek to sell additional equity or debt
securities, or obtain additional credit facilities.
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, operating results and
financial condition. Year 2000 complications may disrupt the operations,
viability or commercial acceptance of the Internet, which could have a material
adverse impact on Allaire's business, operating results and financial
condition.
In connection with Allaire's installation of new internal software systems
in October 1998, Allaire received verbal confirmations from software vendors
that the software it installed is Year 2000 compliant, and it is in the process
of obtaining written certifications from such vendors to the same effect. Based
on the foregoing, Allaire currently has no reason to believe that its internal
software systems are not Year 2000 compliant. To date, Allaire has not incurred
significant incremental costs in order to comply with Year 2000 requirements
and does not believe it will incur significant incremental costs in the
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<PAGE>
foreseeable future. However, there can be no assurance that Year 2000 errors or
defects will not be discovered in Allaire's internal software systems and, if
such errors or defects are discovered, there can be no assurance that the costs
of making such systems Year 2000 compliant will not have a material adverse
effect on Allaire's business, operating results and financial condition.
Allaire relies on third party vendors which may not be Year 2000 compliant
for certain equipment and services. In addition, many of Allaire's distributors
are dependent on commercially available operating systems, which may be
impacted by Year 2000 complications. To date, Allaire has not conducted a Year
2000 review of its vendors or distributors. Failure of systems maintained by
Allaire's vendors or distributors to operate properly with regard to the Year
2000 and thereafter could require Allaire to incur significant unanticipated
expenses to remedy any problems or replace affected vendors, could reduce
Allaire's revenue from its indirect distribution channel and could have a
material adverse effect on Allaire's business, operating results and financial
condition.
Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for the reporting and display of
comprehensive income and its components. SFAS No. 130 is effective beginning in
1998. Adoption of SFAS No. 130 is for presentation only and did not affect
Allaire's financial condition or results of operations.
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 is not expected to have a material impact on Allaire's
existing disclosures.
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 will not affect Allaire's financial condition or
results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Allaire does not
expect SFAS No. 133 to have a material effect on its financial condition or
results of operations.
In February 1998, the AcSEC issued SoP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SoP 98-1 establishes
the accounting for costs of software products developed or purchased for
internal use, including when such costs should
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<PAGE>
be capitalized. Allaire does not expect SOP 98-1, which is effective for
Allaire beginning January 1, 1999, to have a material effect on its financial
condition or results of operations.
In April 1998, the AcSEC issued SoP 98-5, Reporting on the Costs of
Start-Up Activities. Start-up activities are defined broadly as those one-time
activities relating to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for Allaire's fiscal 1999 financial statements and
Allaire does not expect its adoption to have a material effect on its financial
condition or results of operations.
33
<PAGE>
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. More than 30,000
ColdFusion application server licenses and more than 100,000 licenses for
Allaire's HomeSite Web design tool have been sold to date.
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.
Businesses are adopting Web technology rapidly to upgrade enterprise and
client-server applications. An IDC report estimates that, by mid-1997, 12% of
U.S. companies had implemented an Internet-based online transaction processing
application and 37% had an Internet-based online transaction processing project
in some stage of planning or evaluation. There are a number of reasons for
businesses to adopt Web technology. Among them, Web browsers provide a uniform
and intuitive graphical user interface, which significantly reduces remote
access and training costs. Web application server architecture is compatible
with legacy mainframe and client-server architectures, and server deployment
permits immediate availability of applications and upgrades throughout the
organization, reducing deployment and maintenance costs.
In addition to providing a means to upgrade legacy applications, Web
technology has enabled new online business models and the development and
deployment of software to facilitate an assortment of business interactions
that were not practical to address with traditional enterprise computing
systems. The Internet has created a public infrastructure for delivering
information and applications. This infrastructure has enabled businesses to
conduct transactions over secure extranets and has allowed businesses to reach
customers through electronic commerce applications. An IDC report estimates
that the volume of commerce over the Internet will increase from approximately
$12 billion in 1997 to over $230 billion by 2001.
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<PAGE>
Web technology also represents a potential replacement technology for
traditional print and broadcast media and telephone, mail delivery and other
communications services. The target hardware platforms for Web applications
extend beyond personal computers to encompass a variety of devices such as
televisions, telephones, hand-held computers and pagers. Communications service
providers, media vendors and other major participants in industries facing
encroachment by Web technology have made substantial investments in Web
technology and service providers. Recent examples include NBC's MSNBC joint
venture with Microsoft, MCI WorldCom's strategic relationship with Earthlink
Network and Disney's investment in Infoseek.
Demand from existing businesses and new Web-based enterprises for Web
application software has created a sizable market experiencing strong growth.
According to an IDC report, the total business application software market
accounted for $50.7 billion in revenue in 1997. According to a Gartner Group
survey of selected U.S. corporate information technology users, approximately
92% of all respondents plan to increase spending on intranet and Internet
applications in 1998, as corporations migrate applications from legacy
platforms to Web technology. An IDC report estimates that Internet-centric
software specifically designed for Web technology, which accounted for less
than $1 billion in revenue in 1996, will approach $10 billion in revenue by
2000 due to aggressive corporate adoption of Web technology.
In response to this growth, the number of Web developers is growing
quickly. An IDC report estimates that there were 7 million software developers
worldwide at the end of 1996. Of these, 3 million were rapid application
development ("RAD"), 4GL and analysis modeling and design developers, who used
tools such as Visual Basic and PowerBuilder. Allaire believes that many of
these developers are converting from enterprise and client-server application
development products to Internet-centric products. In addition to the migration
of these traditional developers, many other Web developers have emerged from
non-traditional application development backgrounds such as page layout,
graphic design, and desktop database and spreadsheet programming. IDC estimates
that professional Web development tools, including Web page design and Web
application development tools, will account for $548 million in license and
associated services revenue in 1998 and will grow to more than $1.5 billion in
license and associated services revenue by 2002.
Allaire believes that most existing Web-enabled RAD tools fail to address
the unique requirements and challenges faced by Web application developers.
Most Web developers are proficient with Hypertext Markup Language, or HTML, and
many are familiar with eXtensible Markup Language, or XML, core technologies
that are specifically designed for the Web platform. The ease of using
languages such as HTML and XML, which use declarative, English-like tags
consisting of a bracketed word with attributes, has enabled non-traditional
programmers to develop complex Web sites. These technologies enable Web
applications to unite rich content, traditional business transactions,
interactivity and personalization. Because the Web platform is a hybrid between
a communications medium and a traditional application environment, the
background of many developers drawn to Web development is different from the
background of traditional programmers. Web developers rely more heavily on
declarative, tag-based development languages than on traditional scripting
languages.
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<PAGE>
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.
Adding to the technological challenges facing Web developers is the time
challenge created by business demands for compressed development schedules.
Cutter Information Corporation estimates that 72% of Web application
development projects have a schedule of six months or less, and 14% have a
schedule of less than a month. Faced with a shortage of programmers familiar
with scripting languages, businesses are increasingly turning to HTML
developers who do not have a traditional programming background in order to
meet these compressed schedules, producing a new breed of Web application
developers and development teams.
Allaire believes that in order to successfully address Web development
requirements, a Web application development environment must provide Web
developers with a familiar, easy to use tag-based programming language similar
to HTML and XML. Such a language, when used in conjunction with HTML and XML,
should allow developers to develop Web applications without requiring them to
change programming syntax. The language should also include high-level building
blocks that encapsulate complex programming interfaces, reducing the amount of
code and development time required for links to enterprise technologies.
Allaire believes that the successful deployment of Web applications
requires a scalable platform, or 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. To meet the demands of customers that
applications handle increasing transaction volumes 24 hours a day, the
application server should also provide advanced load-balancing and fail-over
capabilities.
Furthermore, Allaire believes that application frameworks which provide
pre-built components for electronic commerce, content management and
personalization will be in demand as organizations look to develop new
Web-based business applications.
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:
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o Rapidly create complex Web sites and sophisticated Web applications
through the use of CFML;
o Efficiently build high-volume, interactive Web applications, including
applications for electronic commerce, content management and
personalization;
o Readily integrate leading Internet and enterprise technologies;
o Securely deploy scalable, platform-independent applications over the
Internet, across extranets and within intranets; and
o Obtain high-quality education, training and support from Allaire and its
partners.
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
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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.
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 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.
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HomeSite
HomeSite is a leading HTML design tool, which is principally used for the
creation of static Web sites. More than 100,000 licenses of HomeSite 4.0 and
earlier versions have been sold to date. HomeSite 4.0 and earlier versions have
won the following awards:
o 1998 Web Techniques Editors' Choice Award;
o 1998 Win 100 Award from Windows Magazine;
o PC Magazine's Editors' Choice Award;
o Internet Computing Magazine's 'Net Best' Award;
o Webdeveloper.com's Product Award;
o CNET's builder.com Editor's Choice Award;
o CNET's builder.com 1998 Product Award; and
o CNET's Internet Excellence Award.
HomeSite 4.0 runs on Microsoft Windows NT, Windows 95 and Windows 98.
ColdFusion
ColdFusion is a leading cross-platform Web application development system.
ColdFusion includes an integrated development environment, ColdFusion Studio,
and a Web application server, ColdFusion Server. More than 30,000 application
server licenses of ColdFusion 4.0 and earlier versions have been sold to date.
ColdFusion 4.0 and earlier versions have won the following awards:
o 1998 Codie Award for software excellence from the Software Publishers
Association;
o "Best of the Show Award" at the 1998 Fall Internet World;
o CNET's builder.com 1998 Product Award; and
o Network World Blue Ribbon Award.
ColdFusion Studio 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 HTML page design and High-quality static Web site developers
(Electronic Version Web site development tool corporate Web sites
$89; Packaged Version Web development
$99) Features an intuitive team managers
graphical interface
- -----------------------------------------------------------------------------------------------------------------
ColdFusion An integrated development Business systems (HR, Web application
Studio 4.0 environment with a financial, customer developers
($395) number of visual tools for support)
creating Web applications Enterprise and client-
Electronic commerce server programmers
Includes the award- (stores, business to
winning HomeSite HTML business) HTML and desktop
design tool database developers
Dynamic content
Features include publishing (document Development team
interactive debugging, management, dynamic managers
remote development news and personalized
capabilities and one-step information)
deployment
Collaboration (discussion,
Team development support project and workflow
management)
- -----------------------------------------------------------------------------------------------------------------
ColdFusion Server Supports up to four Business intranets and Large enterprises
Professional 4.0 processors and allows an extranets
($1,295) unlimited number of Large systems integrators
concurrent users Field office extranets
New Web-based
Features include open Single server applications businesses
state repository and shared using a relational database
server security Internet service providers
Access to any ODBC and
OLE-DB data source
- -----------------------------------------------------------------------------------------------------------------
ColdFusion Server Supports up to eight High-volume, business- Large enterprises
Enterprise 4.0 processors and allows an critical commerce sites
($3,495) unlimited number of and applications Large systems integrators
concurrent users
Enterprise intranet New Web-based
Includes all Professional 4.0 applications businesses
features, plus features
required for large scale Enterprise applications Internet service providers
applications, including requiring native database
clustering, load balancing drivers or CORBA
and automatic fail over and
CORBA support
Sybase, Oracle and
Microsoft SQL Server
native database drivers
- -----------------------------------------------------------------------------------------------------------------
</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
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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.
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.
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Code Example
The example below illustrates the declarative nature of CFML syntax and
the encapsulation of interaction with a database server. It compares the CFML
code required with the code required to accomplish the same result using a
scripting language, in this case JavaScript. This database retrieval example
demonstrates the code required to connect to a database, retrieve a list of
employees and output the list ordered by department, displaying the first name
and last name with one record per line.
[CODE EXAMPLES]
CFML Code
[Descriptive Computer Directives -- CFML Code]
JavaScript Code
[Descriptive Computer Directives -- JavaScript Code]
[/CODE EXAMPLES]
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Allaire's HomeSite 4.0 and ColdFusion 4.0 products provide a visual
editing environment to enable Web developers to quickly build state-of-the-art
static Web sites and interactive Web applications. Both tools provide two-way
visual programming, which enables Web developers to prototype and modify pages
from within a visual representation of the page itself. In addition, ColdFusion
Studio includes visual debugging capabilities. However, unlike the
"what-you-see-is-what-you-get" tools, HomeSite and ColdFusion Studio include
graphical support only where it is likely to enhance productivity. These
products focus on code development and maintaining the integrity of code
generated in the graphical editing mode. HomeSite and ColdFusion Studio both
include a number of additional productivity enhancements, and support emerging
Web technologies, including JavaScript, cascading style sheets, dynamic HTML
and XML. ColdFusion team development features permit geographically dispersed
Web development teams to work together productively and securely on large
projects across servers distributed throughout multiple locations.
Open Integration
Allaire specifically designs its products to be open by supporting key Web
client and Web server software platforms, technologies and protocols, as well
as key enterprise and client-server standards. ColdFusion is fully integrated
with a broad range of Internet protocols and technologies, enabling developers
to incorporate these technologies in ColdFusion applications through the use of
straightforward CFML tags. The CFML tag for XML supports automatic parsing of
XML data into CFML variables and the translation of query record sets into XML.
ColdFusion 4.0 enables interaction with any open database connectivity, or
ODBC, compliant relational database with a single CFQUERY tag. ColdFusion also
contains native database drivers for Oracle, Sybase or Microsoft SQL servers
and support for object linking and embedding database, or OLE-DB, which permits
ColdFusion applications to utilize additional datasource types such as Lotus
Notes and Microsoft Exchange. Additional tags enable interaction with other
servers, such as mail servers, for groupware and workflow applications.
ColdFusion supports a number of methods for extending ColdFusion
applications to interoperate with legacy systems and other enterprise
technologies. ColdFusion natively supports application components built using
cross-platform enterprise component object standards. CFML is also extensible
through ColdFusion extensions, or CFXs. CFXs can be used to extend the
functionality provided by the 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
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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.
Applications Built Using ColdFusion
Allaire believes that ColdFusion is well suited for a wide range of Web
application development projects. ColdFusion is particularly appropriate for
projects that:
o have a short development cycle;
o mix rich content with transactions;
o require interactivity and personalization; and
o require deployment to a variety of Web browsers from multiple server
platforms.
Although ColdFusion is used to build a wide range of applications, the
majority of ColdFusion applications fall into three basic categories:
electronic commerce, content management and personalization. The following are
examples of applications built by Allaire's customers using ColdFusion:
autobytel.com inc.
autobytel.com is the leading automobile Internet electronic commerce Web
site. autobytel.com enables consumers to research car and truck model
specifications, incentives, dealer invoice prices and promotions. Consumers
also may apply for financing, purchase automobiles and obtain insurance online.
According to autobytel.com, its site has aided more than 1.5 million car buyers
in their search for a vehicle. autobytel.com also includes a dealer extranet
that enables more than 2,700 accredited dealer franchises to access
autobytel.com to check the status of sales and financing, receive news and
upload inventory information and pictures.
In 1996, autobytel.com sought to migrate its static Web pages to dynamic,
transaction-oriented content. After evaluating several products based on their
ability to provide a rapid application development environment, scalability and
database integration capabilities, autobytel.com selected ColdFusion. During
development, autobytel.com used a team development approach, using a dedicated
database team to write SQL statement components which were then incorporated
into the Web site by a separate Web team.
autobytel.com employs more than 20 clustered ColdFusion 3.1 servers. In
January 1998, during Super Bowl XXXII, autobytel.com ran a television ad
promoting its online service. The clustered ColdFusion servers enabled
autobytel.com to handle loads many times greater than normal in response to the
ad and, as a result, to complete a greater number of purchase transactions.
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Internal Revenue Service
The IRS Compliance Division uses ColdFusion for an information delivery
extranet serving field offices agency-wide. The application was built and
deployed for the IRS by Booz, Allen & Hamilton. It enables employees to search
and retrieve research materials, which include more than 200,000 pages of
reports dating back 30 years, without traveling to the main IRS library in
Washington, D.C. The application also includes online project management, time
reporting, meetings and help desk. Through the applications, agents can create
content, publish news and information, assign tasks, share documents, schedule
events and communicate regarding various projects.
SmartMoney Interactive
SmartMoney Interactive, a joint venture of Dow Jones & Company and Hearst
Publishing, is an online publication that provides financial data services and
personalized online financial tools. SmartMoney Interactive uses ColdFusion to
generate personalized portfolio and investment information and for site
management. It integrates content from a number of financial data sources,
including quotes from a quote server, news from a wire feed and data from a
stock and mutual fund database.
Using ColdFusion, SmartMoney completed development within five months. As
part of the development process, SmartMoney created a number of ColdFusion
extensions, including a single CFX tag to retrieve live, 20-minute delayed
quotes from a PC Quote quote server system. This custom tag encapsulated the
complexity of accessing and retrieving data from the PC Quote system,
simplifying and accelerating the development process.
Anticipating more than 100,000 site visits and nearly 1 million page
requests per day, SmartMoney also required the publication to be highly
scalable. ColdFusion has scaled as the site's traffic has increased, both on
average and during periods of high demand, such as during significant market
fluctuations which occurred during the fall of 1998. As deployed, SmartMoney
uses a front-end cluster of four Web servers running ColdFusion for dynamic
content. The cluster interfaces with two back-end database servers, one serving
as a data warehouse and one for managing personalized content for more than
60,000 SmartMoney users.
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 1997 and the
nine months ended September 30, 1998, Allaire spent approximately $2.7 million
and $3.4 million, respectively, on research and development. Allaire intends to
continue to devote substantial resources toward research and development. As of
September 30, 1998, Allaire had 29 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 1997 and the nine months ended
September 30, 1998, 28% and 41%, respectively,
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of Allaire's total revenue was generated through the indirect distribution
channel. As of September 30, 1998, Allaire had 65 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 September
30, 1998, Allaire had 19 distributors in North America, Europe and Asia
Pacific, including Ingram Micro and Mitsubishi. In addition, as of September
30, 1998, Allaire had over 500 corporate and catalog resellers, original
equipment manufacturers and value-added resellers. Allaire has an original
equipment manufacturer agreement with Macromedia pursuant to which HomeSite is
bundled with Macromedia's Dreamweaver. Allaire also has an original equipment
manufacturer agreement with NetObjects pursuant to which HomeSite is bundled
with NetObjects Fusion. None of Allaire's distribution partners have exclusive
distribution rights.
Electronic Commerce. Allaire's Web site allows users to download, evaluate
and purchase its products. A number of third-party electronic commerce sites,
including CNET's Buydirect.com, Beyond.com, RealStore.com and JapanMarket.com,
distribute commercial copies of Allaire's products for delivery by direct
download. Electronic distribution provides Allaire with a low-cost, globally
accessible, 24-hour sales channel.
Allaire Alliance. Allaire believes that establishing a large community of
active users of its products and technology representing key segments of the
Web platform is critical to its success. To further the development of this
community, Allaire has established the Allaire Alliance program. Allaire
Alliance members include solution developers, application developers and
Internet service providers. Allaire Alliance members also include the
distributors, corporate and catalog resellers, original equipment manufacturers
and value-added resellers referenced above. Allaire typically enters into
written agreements with its Allaire Alliance members. These agreements
typically do not provide for firm financial commitments from the member, but
are intended to establish the basis upon which the parties will work together
to achieve mutually beneficial objectives.
Marketing Programs. Allaire engages in a broad range of marketing
activities, including sponsoring seminars for potential customers,
participating in trade shows and conferences, providing product information
through its Web site, promoting special events and advertising its products and
services in print and electronic media. During the nine months ended September
30, 1998, Allaire held 81 seminars in 43 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.
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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. From January 1, 1997 through September 30, 1998,
Allaire recognized revenue from sales to more than 20% of the Fortune 500
companies (based on 1997 revenue). End user customers from which Allaire has
recognized in excess of $25,000 in revenue include the following:
AT&T
Australian Trade Commission
Boeing
Booz, Allen & Hamilton
Credit Suisse First Boston
Hewlett-Packard
Intel
JC Penney
Lockheed Martin
Lucent Technologies
MCI Worldcom
Microsoft
PSINet
SBC Communications
State Street Global Advisors United
Kingdom Ltd.
United Parcel Service
United Space Alliance
UUNet Technologies
Visa International Service Association
Revenue from customers outside North America, primarily Asia and Europe,
were approximately 17%, 20% and 14% of total revenue in 1996 and 1997 and the
nine months ended September 30, 1998, respectively. Sales by Allaire to Ingram
Micro accounted for approximately 22% of Allaire's total revenue for the nine
months ended September 30, 1998. No single customer accounted for 10% or more
of Allaire's total revenue for 1996 or 1997.
Support and Professional Services
Allaire offers a broad range of support and 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.
Allaire provides training in the use of its products through classroom
instruction at its Cambridge facility and at authorized training centers
throughout North America and in Japan and Europe. Allaire also provides free
multimedia online training.
As of September 30, 1998, Allaire had 23 technical support engineers and
professional services employees.
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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.
New technologies and the expansion of existing technologies will likely
increase the competitive pressures on Allaire. There can be no assurance that
competing technologies developed by market participants or the emergence of new
industry standards will not adversely affect Allaire's competitive position or
render its products or technologies noncompetitive or obsolete. As a result of
the foregoing and other factors, there can be no assurance that Allaire will
compete effectively with current or future competitors or that competitive
pressures faced by Allaire will not have a material adverse effect on Allaire's
business, operating results and financial condition.
Competitive factors in the Web development products market include:
o the quality and reliability of software;
o features for creating, editing and adapting content;
o ease of use and interactive user features;
o application server scalability, availability and performance;
o cost per user; and
o compatibility with the user's existing network components and software
systems.
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<PAGE>
To expand its user base and further enhance the user experience, Allaire
must continue to innovate and improve the performance of its products. Allaire
anticipates that consolidation will continue in the Web development products
industry and related industries such as computer software, media and
communications. Consequently, competitors may be acquired by, receive
investments from or enter into other commercial relationships with, larger,
well-established and well-financed companies. There can be no assurance that
Allaire can establish or sustain a leadership position in this market 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
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<PAGE>
continue offering such products without substantial reengineering or that any
effort to undertake such reengineering would be successful, or that any
licenses would be available on commercially reasonable terms.
Allaire pursues the registration of certain of its trademarks and service
marks in the United States and in certain other countries, although it has not
secured registration of all its marks. Allaire has registered United States
trademarks for "Cold Fusion" and a related design, and has an application
pending for a United States trademark for "HomeSite." A significant portion of
Allaire's marks contain the word "Fusion" (such as ColdFusion). Allaire is
aware of other companies that use "Fusion" in their marks alone or in
combination with other words, and Allaire does not expect to be able to prevent
third party uses of the word "Fusion" for competing goods and services. For
example, NetObjects markets its principal products for designing, building and
updating Web sites under the names "NetObjects Fusion" and "NetObjects Team
Fusion."
Allaire currently licenses technology from third parties that it
incorporates into its products. Examples include licenses for the following:
o visual editing technology from Microsoft;
o load balancing and failover technology from Bright Tiger Technologies;
o security technology from Netegrity; and
o full-text indexing and searching technology from Verity.
In light of the rapidly evolving nature of the Web platform and Allaire's
strategy to pursue industry partnerships to ensure its support of and by the
emerging platform, Allaire 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.
Microsoft and other such technology partners are also significant
competitors in the Web development products market. There can be no assurance
that technology from others will continue to be available to Allaire on
commercially reasonable terms, if at all. The loss or inability to access such
technology could result in delays in development and introduction of new
products or enhancements by Allaire until equivalent or replacement technology
could be accessed, if available, or developed, if feasible, by Allaire, which
could have a material adverse effect on Allaire's business, operating results
and financial condition.
Moreover, although Allaire is generally indemnified against claims that
such third party technology infringes the proprietary rights of others, such
indemnification is not always available for all types of intellectual property
rights (for example, patents may be excluded) and in some cases the scope of
such indemnification is limited. Even if Allaire receives broad
indemnification, third party indemnitors are not always well capitalized and
may not be able to indemnify Allaire in the event of infringement, resulting in
substantial exposure to Allaire. There can be no assurance that infringement or
invalidity claims arising from the incorporation of third party technology, and
claims for indemnification from Allaire's customers resulting from such claims,
will not be asserted or prosecuted against Allaire. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources in addition to potential product redevelopment costs and
delays, all of which could materially adversely affect Allaire's business,
operating results and financial condition.
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<PAGE>
Employees
As of September 30, 1998, Allaire had 153 employees, 136 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 87,000 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 33,000 square feet of space, expires in December 2003. Allaire
has an option to extend the second lease for an additional five year term.
Allaire also leases office space in other cities for its sales personnel.
Allaire believes that these existing facilities are adequate to meet its
current foreseeable requirements or that suitable additional or substitute
space will be available on commercially reasonable terms.
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 ............. 39 President, Chief Executive Officer and
Director
Joseph J. Allaire .......... 29 Chairman of the Board of Directors, Chief
Technology Officer and Executive Vice
President, Products
David A. Gerth ............. 46 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
Peter R. Roberts ........... 44 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.
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<PAGE>
Amy E. Lewis has served as Allaire's Vice President, Worldwide Sales since
April 1997. From June 1995 to March 1997, Ms. Lewis served as Director, North
America Field Sales for Claris Corporation. Prior to that, Ms. Lewis served as
Manager, North America Channel Sales for Apple Computer since April 1994. From
February 1987 to December 1993, she was Director of Sales for Farallon
Communications, Inc., a networking hardware and software company.
Stephen F. Clark has served as Allaire's Vice President, Marketing since
September 1998. From January 1996 through September 1998, Mr. Clark held a
number of marketing positions of increasing responsibility at Sybase, a
computer software company, including Vice President, Tools and Application
Servers and Vice President and General Manager, Design Tools. From June 1993 to
December 1995, Mr. Clark was a Product Marketing Manager for Powersoft.
Jack P. Lull has served as Allaire's Vice President, Engineering and
Development since December 1996. From January 1996 to 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
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<PAGE>
Development for Powersoft since June 1990. Mr. Herring also serves as a
director of PSW Technologies, Inc.
Mitchell Kapor has served as a director of Allaire since March 1997. Mr.
Kapor co-founded the Electronic Frontier Foundation, a nonprofit Internet
organization, in 1990, and served as its Chairman from 1993 to 1995 and as a
director from 1995 to 1996. Mr. Kapor designed Lotus 1-2-3, and founded Lotus
Development Corporation in 1982 and served as its President and Chief Executive
Officer from 1982 to 1986. Mr. Kapor also serves as a director of RealNetworks,
Inc.
Peter R. Roberts has served as a director of Allaire since June 1997.
Since January 1993, Mr. Roberts has been a managing director of BancBoston
Ventures Inc., a private equity investment company.
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.
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<PAGE>
Executive Compensation
The following table sets forth the total compensation paid or accrued for
1998 for Allaire's Chief Executive Officer and the four other most highly
compensated executive officers who were employed by Allaire at December 31,
1998 (collectively, the "Named Executive Officers"). For Mr. Orfao, the number
of securities underlying options excludes 50,000 shares of common stock
underlying a below-market option granted in 1998 in lieu of a cash bonus for
services rendered in 1997. Ms. Lewis' bonus of $84,533 represents commissions
earned.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------ ---------------------
Number of Securities
Name and Principal Position Salary Bonus Underlying Options
- --------------------------------------- ----------- ---------- ---------------------
<S> <C> <C> <C>
David J. Orfao ........................ $167,355 $58,800 0
President, Chief Executive Officer
and Director
Joseph J. Allaire ..................... $162,124 $59,963 0
Chairman of the Board of Directors,
Chief Technology Officer and
Executive Vice President, Products
Amy E. Lewis .......................... $114,636 $84,533 0
Vice President, Worldwide Sales
David A. Gerth ........................ $151,159 $30,329 0
Vice President, Finance and Operations
Chief Financial Officer and Treasurer
Jack P. Lull .......................... $133,033 $26,400 0
Vice President, Engineering and
Development
</TABLE>
55
<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
-----------------------------------------------------
Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Exercise Annual Rates of
Underlying Granted to or Base Stock Price
Options Employees in Price Expiration Appreciation for
Granted Fiscal Year Per Share Date Option Term
------------ --------------- ----------- ------------ -----------------------
5% 10%
----------- -----------
<S> <C> <C> <C> <C> <C> <C>
David J. Orfao ............ 50,000 9.0% $ 0.01 1/15/08 $243,834 $388,561
Joseph J. Allaire ......... 0 -- -- -- -- --
Amy E. Lewis .............. 0 -- -- -- -- --
David A. Gerth ............ 0 -- -- -- -- --
Jack P. Lull .............. 0 -- -- -- -- --
</TABLE>
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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 the initial public offering price of $20.00.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Year-End at Fiscal Year-End
Acquired Value ------------------------------- ---------------------------------
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------------- ---------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
David J. Orfao ............ 305,000 $787,000 -- 255,000 -- $4,972,500
Joseph J. Allaire ......... -- -- -- --
Amy E. Lewis .............. 105,000 $262,500 -- -- -- --
David A. Gerth ............ 105,000 $262,500 -- -- -- --
Jack P. Lull .............. -- -- 129,375 100,625 $2,522,813 $1,962,188
</TABLE>
Severance Arrangement; Change in Control Arrangements
Mr. Orfao is entitled to continue to receive his base salary and benefits
for 12 months in the event he is involuntarily terminated for reasons other
than cause. Additionally, Mr. Orfao is entitled to accelerated vesting of his
unvested options to purchase common stock in the event there is a change in
control, as defined in Mr. Orfao's option agreement, of Allaire and
o he is terminated without cause within six months of the change in
control;
o he is not offered a position with the successor comparable to his
current position with Allaire after the change in control; or
o he is removed from a comparable position within six months of the change
in control.
The 1997 plan and the underlying option agreements provide for the
accelerated vesting of all unvested options and other rights granted pursuant
to the plan in the event there is a merger or consolidation involving Allaire,
unless appropriate provision shall be made for outstanding options and other
rights by the substitution of options, stock appreciation rights and
appropriate voting common stock of the corporation surviving any such merger or
consolidation (or the parent of such surviving corporation).
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<PAGE>
Benefit Plans
1997 Stock Incentive Plan
In 1997, the Board of Directors adopted and Allaire's stockholders
approved the 1997 Stock Incentive Plan. A total of 1,726,000 shares of common
stock have been reserved for issuance under the 1997 plan. The 1997 plan
authorizes the grant of options to purchase common stock intended to qualify as
incentive stock options, as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), and the grant of options that do not so
qualify. The exercise price of incentive options granted under the 1997 plan
must be at least equal to the fair market value of the common stock on the date
of grant. The exercise price of incentive options granted to an optionee who
owns stock possessing more than 10% of the voting power of Allaire's
outstanding capital stock must be at least equal to 110% of the fair market
value of the common stock on the date of grant, and such optionee must exercise
his or her option within five years from the date of the grant of such option.
The exercise price of nonqualified options granted under the 1997 plan must be
at least equal to 50% of the fair market value of the common stock on the date
of grant. The 1997 plan provides, 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
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<PAGE>
for awards of stock appreciation rights, performance shares, restricted stock
and other stock-based awards.
The 1998 plan is administered by the Compensation Committee. The
Compensation Committee selects the individuals to whom options will be granted
and determines the option exercise price and other terms of each award, subject
to the provisions of the 1998 plan. Incentive options may be granted under the
1998 plan to key employees of Allaire and its affiliates within the meaning of
the Code, including officers and directors of Allaire and its affiliates who
are also employees. Nonqualified options may be granted under the 1998 plan to
directors, officers and employees of Allaire and other individuals providing
services to Allaire.
1998 Employee Stock Purchase Plan
The Board of Directors has adopted and Allaire's stockholders have
approved the 1998 Employee Stock Purchase Plan. The stock purchase plan
authorizes the issuance of up to an aggregate of 300,000 shares of common stock
to participating employees. The stock purchase plan will be administered by the
Compensation Committee.
Under the terms of the stock purchase plan, all employees of Allaire
(other than seasonal employees) who have completed three months of employment
with Allaire and whose customary employment is more than part-time (i.e. more
than 20 hours per week and more than five months in the calendar year) will be
eligible to participate in the stock purchase plan. Employees who own stock,
and/or hold outstanding options to purchase stock, representing 5% or more of
the total combined voting power or value of all classes of stock of Allaire
will not be eligible to participate in the stock purchase plan.
The right to purchase common stock under the stock purchase plan will be
made available through a series of offerings. On the first day of an offering
period, Allaire will grant to each eligible employee who has elected in writing
to participate in the stock purchase plan an option to purchase shares of
common stock. The employee will be required to authorize an amount (between 1%
and 10% of the employee's compensation) to be deducted from the employee's pay
during the offering period. On the last day of the offering period, the
employee will be deemed to have exercised the option, at the option exercise
price, to the extent of accumulated payroll deductions. Under the terms of the
stock purchase plan, the option exercise price is an amount equal to 85% of the
fair market value of one share of common stock on either the first or last day
of the offering period, whichever is lower.
No employee may be granted an option that would permit the employee's
rights to purchase common stock to accrue at a rate in excess of $25,000 of the
fair market value of the common stock, determined as of the date the option is
granted, in any calendar year.
Allaire has made no determination as to when the first offering period
under the stock purchase plan will commence.
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%
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<PAGE>
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 (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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<PAGE>
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. Prior to the closing of the offering, Joseph J.
Allaire's shares are subject to a stock restriction agreement.
Sales of Stock
Beginning in June 1996, Allaire issued an aggregate of 514,306 shares of
its Series B Redeemable Convertible Preferred Stock ("Series B Preferred
Stock") to private investors for aggregate consideration of $2,324,664. Allaire
issued 364,684 shares of Series B Preferred Stock to Polaris Venture Partners
Limited Partnership ("Polaris Venture Partners L.P.") for $1,648,372, and
22,484 shares of Series B Preferred Stock to Polaris Venture Partners Founders'
Fund Limited Partnership ("Polaris Founders' Fund"; and together with Polaris
Venture Partners L.P., the "Polaris entities") for $101,628. The Polaris
entities own beneficially more than 5% of the outstanding shares of stock of
Allaire. In addition, Jonathan A. Flint, John Gannon and Thomas Herring, who
are directors of Allaire, are affiliated with the Polaris entities. Pursuant to
Allaire's Certificate of Incorporation, each share of Series B Preferred Stock
will automatically convert into two shares of common stock upon the closing of
the offering.
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 will automatically convert into two shares of common
stock upon the closing of the 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, and Peter R. Roberts, a director of Allaire, is a
managing director of BancBoston. Pursuant to Allaire's Certificate of
Incorporation, each share of Series D Preferred Stock will automatically
convert into one share of common stock upon the closing of the offering. Two
months prior to the issuance of the Series D Preferred Stock, Polaris Venture
Partners L.P. lent Allaire $238,412 pursuant to a Promissory Note at an
interest rate of 10%, and Polaris Founders' Fund lent Allaire $13,588 pursuant
to a Promissory Note at an interest rate of 10%
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<PAGE>
(collectively, the "Polaris Notes"). The Polaris Notes were converted in
connection with the issuance of Series D Preferred Stock to the Polaris
entities.
Issuance of Warrants
In connection with the issuance of the Polaris Notes, in March 1997
Allaire issued a warrant to Polaris Venture Partners L.P. to purchase 5,960
shares of common stock at an exercise price of $4.00 per share, and a warrant
to Polaris Founders' Fund to purchase 340 shares of common stock at an exercise
price of $4.00 per share. Both warrants are currently exercisable in whole or
in part, at any time or from time to time, until March 7, 2002, and both
contain certain protections against dilution resulting from stock splits, stock
dividends and similar events.
Stock Restriction Agreement
In May 1997, Allaire entered into an amended and restated stock
restriction agreement with the Polaris entities, BancBoston and certain other
stockholders (collectively, the "Holders"), and Joseph J. Allaire. Pursuant to
this agreement, Allaire and the Holders have a right of participation in and a
right of first refusal with respect to certain sales of shares of common stock
by Mr. Allaire. The agreement also grants Allaire the right to purchase a
certain number of Mr. Allaire's shares, at a price of $2.26 per share, in the
event he ceases to be affiliated with Allaire. In addition, the parties agreed
to fix the number of directors of Allaire at seven and to elect to the Board of
Directors the following individuals:
o Mr. Allaire, for as long as he is affiliated with Allaire;
o one member designated by Polaris Venture Partners L.P.;
o one member designated by BancBoston;
o Allaire's Chief Executive Officer;
o John J. Gannon; and
o Mitchell Kapor.
The directors designated pursuant to this agreement were Joseph J.
Allaire, Jonathan A. Flint, Peter R. Roberts, David J. Orfao, John J. Gannon
and Mitchell Kapor. This agreement will automatically terminate upon the
closing of the offering. This termination will eliminate Allaire's right to
purchase any of Mr. Allaire's remaining 170,000 unvested 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 has not
completed the offering or obtained other financing in excess of $3.0 million by
February 28, 1999. The line of credit would allow Allaire to borrow up to $3.0
million, would bear interest at a mutually agreed upon rate between 5% and 20%,
and would expire on the earlier of the closing of an initial public offering or
February 28, 2000.
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Yesler Software, Inc.
Allaire is a party to certain agreements with Yesler Software, Inc.
Initially capitalized in July 1998, Yesler was created to develop, market and
sell a commercial software application, conceived by Allaire, and designed for
use by end-users to create multimedia web-based presentations (the "Yesler
Software"). The principal stockholders of Yesler are Allaire, Weld, Brown LLC
and the Polaris entities.
Allaire acquired its ownership interest in Yesler pursuant to a
Contribution and Restricted Stock Purchase Agreement dated July 14, 1998,
between Allaire and Yesler. Pursuant to this agreement, Allaire acquired
907,591 shares of Yesler common stock, representing on that date approximately
34% of the outstanding shares of capital stock of Yesler. The stock acquired by
Allaire is subject to vesting requirements, a right of repurchase by Yesler and
certain transfer restrictions. In exchange for the shares of Yesler common
stock, Allaire assigned its rights to the Yesler Software source code to
Yesler, agreed to provide Yesler with technical, sales and marketing support
and agreed not to compete with Yesler. Also in connection with its acquisition
of the Yesler common stock, Allaire entered into an original equipment
manufacturer agreement with Yesler whereby Allaire granted Yesler the right to
obtain, at a 95% discount, certain of Allaire's commercial software products
for distribution together with the Yesler Software as a single commercial unit.
In addition, Allaire entered into a Voting Agreement with Weld Brown and the
Polaris entities which grants Allaire the right to designate one member of
Yesler's four-person board of directors. Allaire's designee to the Yesler board
is Joseph J. Allaire. Yesler also granted Allaire registration, information and
certain other rights pursuant to an Investor Rights Agreement among Yesler,
Allaire, Weld Brown and the Polaris entities. In August 1998, Allaire
transferred 76,903 shares of Yesler common stock owned by Allaire to three of
its employees, including 38,451 shares of Yesler common stock to Maria
Morrissey, Vice President, Worldwide Services and Support. The fair value of
the shares transferred was not material at the time of transfer.
On the date Allaire entered into the Yesler Agreement, the Polaris
entities purchased for $750,000 preferred stock of Yesler representing
approximately 33% of the outstanding shares of capital stock of Yesler on that
date. Jonathan A. Flint and Thomas Herring, who are directors of Allaire, are
directors of Yesler. See Note 4 of Notes to Financial Statements.
Allaire believes that all transactions set forth above were made on terms
no less favorable to it than would have been obtained from unaffiliated third
parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Allaire's common stock as of November 30, 1998, and as adjusted to
reflect the sale of the shares of common stock offered hereby, by: (a) each
person known by Allaire to be the beneficial owner of more than 5% of its
common stock; (b) each Named Executive Officer; (c) each of Allaire's
directors; and (d) all executive officers and directors as a group. Unless
otherwise noted below, the address of each person listed on the table is c/o
Allaire Corporation, One Alewife Center, Cambridge, MA 02140.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The following are deemed to be beneficially
owned and outstanding for purposes of calculating the number of shares and the
percentage beneficially owned by that person or entity:
o shares of common stock issuable by Allaire pursuant to options which may
be exercised within 60 days after November 30, 1998 and not subject to
repurchase by Allaire; and
o shares of common stock issuable by Allaire pursuant to warrants which
may be exercised within 60 days after November 30, 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 outstanding before the offering
includes: (a) 4,145,169 shares of common stock outstanding as of November 30,
1998; (b) 3,817,691 shares of common stock issuable upon the conversion of
preferred stock; and (c) the presently exercisable options and presently
exercisable warrants held by that person.
<TABLE>
<CAPTION>
Percentage of Common
Stock Outstanding
----------------------
Number of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
- ---------------------------------------- -------------------- ---------- ---------
<S> <C> <C> <C>
Joseph J. Allaire ...................... 2,005,000 25.2% 19.2%
Entities affiliated with Polaris Venture
Management Co., LLC (1) ............... 1,387,336 17.4% 13.3%
1000 Winter Street, Suite 3350
Waltham, MA 02154
Jonathan A. Flint (2) .................. 1,387,336 17.4% 13.3%
1000 Winter Street, Suite 3350
Waltham, MA 02154
BancBoston Ventures Inc. (3) ........... 1,000,000 12.6% 9.6%
175 Federal Street
Boston, MA 02110
Peter R. Roberts (4) ................... 1,000,000 12.6% 9.6%
175 Federal Street
Boston, MA 02110
David J. Orfao ......................... 305,000 3.8% 2.9%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Percentage of Common
Stock Outstanding
----------------------
Number of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
- ----------------------------------------- -------------------- ---------- ---------
<S> <C> <C> <C>
Amy E. Lewis ............................ 105,000 1.3% 1.0%
David A. Gerth .......................... 105,000 1.3% 1.0%
Jack P. Lull ............................ 135,917 1.7% 1.3%
John J. Gannon .......................... 16,146 * *
1000 Winter Street, Suite 3350
Waltham, MA 02154
Thomas A. Herring ....................... 25,000 * *
1000 Winter Street, Suite 3350
Waltham, MA 02154
Mitchell Kapor .......................... 216,675 2.7% 2.1%
One Broadway
Cambridge, MA 02142
All executive officers and directors as a
group (12 persons) ..................... 5,367,574 66.0% 50.5%
</TABLE>
- ------------
* Represents beneficial ownership of less than 1%.
(1) Polaris Venture Management Co., LLC manages Polaris Venture Partners L.P.
and Polaris Founders' Fund. Mr. Flint, a director of Allaire, is a
General Partner of Polaris Venture Management Co., LLC and has shared
voting and investment power with respect to the shares held by the
Polaris entities. However, Mr. Flint disclaims his beneficial ownership
of all such shares, except to the extent of his pecuniary interest
therein.
(2) Includes shares owned beneficially by Polaris Venture Management Co., LLC
(see note 1).
(3) Mr. Roberts, a director of Allaire, is a managing director of BancBoston
and has shared voting and investment power with respect to the shares
held by BancBoston. However, Mr. Roberts disclaims beneficial ownership
of all such shares, except to the extent of his pecuniary interest
therein.
(4) Includes shares owned beneficially by BancBoston (see note 3).
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<PAGE>
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 September 30, 1998, there were 7,958,260 shares of common stock
outstanding and held of record by 83 stockholders, after giving effect to the
conversion of all outstanding shares of preferred stock upon the closing of the
offering. Based upon the number of shares outstanding as of September 30, 1998
and giving effect to the issuance of the shares of common stock offered by
Allaire hereby, there will be 10,458,260 shares of common stock outstanding
upon the closing of the offering.
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. The shares of common stock to be issued by
Allaire in the offering will be fully paid and non-assessable.
Preferred Stock
Allaire has authorized four series of preferred stock. These consist of
200,000 shares of Series A Preferred Stock, 514,306 shares of Series B
Preferred Stock, 169,200 shares of Series C Preferred Stock and 2,500,000
shares of Series D Preferred Stock. All outstanding shares of preferred stock
(including 31,250 shares of Series A Preferred Stock sold on December 7, 1998)
will be automatically converted into an aggregate of 3,848,941 shares of common
stock upon the closing of the offering.
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.
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<PAGE>
Warrants
As of September 30, 1998, Allaire had outstanding two warrants to purchase
an aggregate of 17,699 shares of Series A Preferred Stock at an exercise price
of $4.52 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
the offering. Upon the closing of the offering, these outstanding warrants will
automatically convert into warrants to purchase an aggregate of 35,398 shares
of common stock at an exercise price of $2.26 per share. 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 September 30, 1998, 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 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 3,108,878 shares of preferred stock which will automatically
convert in the aggregate to 3,848,941 shares of common stock upon consummation
of the offering, the holders of warrants exercisable for 14,899 shares of
common stock, and the holders of warrants exercisable for 17,699 shares of
Series A Preferred Stock which will automatically convert to warrants to
purchase an aggregate of 35,398 shares of common stock upon the consummation of
the offering (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 the earlier of 180 days after Allaire's initial underwritten
public offering or June 30, 2000, 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.
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<PAGE>
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 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:
o the Board, provided that a quorum is then in office and present;
o by a majority of the directors then in office, if less than a quorum is
then in office; or
o 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
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<PAGE>
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 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:
o 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;
o 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
o 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.
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<PAGE>
Section 203 defines "business combination" to include:
o any merger or consolidation involving the corporation and the interested
stockholder;
o any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation to or with the interested stockholder;
o 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;
o 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
o 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.
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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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no market for Allaire's common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices from time to time. Furthermore,
since only a limited number of shares will be available for sale shortly after
the offering because of certain contractual and legal restrictions on resale
(as described below), sales of substantial amounts of common stock of Allaire
in the public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of Allaire to raise equity capital in
the future.
Upon completion of the offering (based on shares outstanding at September
30, 1998), Allaire will have outstanding an aggregate of 10,458,260 shares of
common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants. Of these shares, the
2,500,000 shares sold in the offering will be freely tradable without
restrictions or further registration under the Securities Act, unless such
shares are purchased by an existing "affiliate" of Allaire as that term is
defined in Rule 144 under the Securities Act (an "Affiliate").
The remaining 7,958,260 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act ("Restricted Shares") or are subject to the
contractual restrictions described below. Restricted Shares may be sold in the
public market only if registered or if they qualify for an exception from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which are summarized below. As a result of the contractual restrictions
described below, the provisions of Rules 144, 144(k) and 701, and Allaire's
intention to file registration statements covering shares of common stock
subject to outstanding stock options or issued pursuant to the exercise of
stock options, approximately 212,000 shares will be eligible for sale (and not
subject to repurchase by Allaire) during the 180 days after the date of this
prospectus. In addition, approximately 7,525,000 shares will be eligible for
sale (and not subject to repurchase by Allaire) upon expiration of the lock-up
agreements 180 days after the date of this prospectus.
All of the officers and directors and certain stockholders and
optionholders of Allaire have signed lock-up agreements in favor of the
underwriters. As a result, these individuals are not permitted to offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, any
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock or publicly disclose the intention to make any
such offer, sale, pledge or disposal for a period of 180 days after the date of
this prospectus, without the prior written consent of Credit Suisse First
Boston. Credit Suisse First Boston currently has no plans to release any
portion of the securities subject to lock-up agreements. When determining
whether or not to release shares from the lock-up agreements, Credit Suisse
First Boston will consider, among other factors, the stockholder's reasons for
requesting the release, the number of shares for which the release is being
requested and market conditions at the time.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell a certain number of shares within any three-month period. That certain
number of shares cannot exceed the greater of one percent
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<PAGE>
of the number of shares of common stock then outstanding (which will equal
approximately 104,583 shares immediately after the offering), or the average
weekly trading volume of the common stock on the Nasdaq National Market during
the four calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner
of sale provisions, notice requirements and the availability of current public
information about Allaire.
Under Rule 144(k), a person who is not deemed to have been an Affiliate of
Allaire at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Accordingly,
unless otherwise restricted, "144(k) shares" may therefore be sold immediately
upon the completion of the offering.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from Allaire by its employees,
directors, officers, consultants or advisors prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). To be eligible for resale under Rule
701, shares must have been issued pursuant to written compensatory benefit
plans or written contracts relating to the compensation of such persons. In
addition, the Securities and Exchange Commission has indicated that Rule 701
will apply to typical stock options granted by an issuer before it becomes
subject to the reporting requirements of the Exchange Act, along with the
shares acquired upon exercise of such options (including exercises after the
date of the offering). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, may be sold by persons
other than Affiliates, subject only to the manner of sale provisions of Rule
144, and by Affiliates, under Rule 144 without compliance with its one-year
minimum holding period requirements.
Allaire has agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock, or publicly disclose the
intention to make any such offer, sale, pledge, disposition or filing, for a
period of 180 days after the date of this prospectus, without the prior written
consent of Credit Suisse First Boston, subject to certain limited exceptions.
Following the offering, Allaire intends to file registration statements
under the Securities Act covering approximately 4,986,000 shares of common
stock issued pursuant to the exercise of stock options, subject to outstanding
options or reserved for issuance under Allaire's 1997 Stock Incentive Plan,
1998 Stock Incentive Plan and 1998 Employee Stock Purchase Plan. Accordingly,
shares registered under such registration statements will, subject to Rule 144
volume limitations applicable to Affiliates, be available for sale in the open
market, except to the extent that such shares are subject to Allaire's vesting
restrictions or the contractual restrictions described above. See "Management
- -- Benefit Plans."
72
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated January 22, 1999, the underwriters named below, for whom Credit
Suisse First Boston, Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated, and NationsBanc Montgomery Securities LLC are acting as
representatives, have severally but not jointly agreed to purchase from Allaire
the following respective number of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------------------------------------------- ----------
<S> <C>
Credit Suisse First Boston ................ 1,090,907
Dain Rauscher Wessels ..................... 545,454
NationsBanc Montgomery Securities ......... 545,454
Hambrecht & Quist LLC...................... 45,455
Invemed Associates, Inc. .................. 45,455
Needham & Company, Inc. ................... 45,455
Charles Schwab & Co., Inc. ................ 45,455
Tucker Anthony Incorporated................ 45,455
C.E. Unterberg, Towbin..................... 45,455
Wedbush Morgan Securities Inc. ............ 45,455
---------
Total ................................... 2,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to approval of certain conditions precedent and that
the underwriters will be obligated to purchase all of the shares of the common
stock offered hereby (other than those shares covered by the over-allotment
option described below) if any are purchased. The underwriting agreement
provides that, in the event of a default by an underwriter, in certain
circumstances the purchase commitments of non-defaulting underwriters may be
increased or the underwriting agreement may be terminated.
Allaire has granted to the underwriters an option expiring on the 30th day
after the date of this prospectus to purchase up to 375,000 additional shares
of common stock at the initial public offering price, less the underwriting
discounts and commissions, all as set forth on the cover page of this
prospectus. Such option may be exercised only to cover over-allotments in the
sale of shares of common stock. To the extent such option is exercised, each
underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of common stock as
it was obligated to purchase pursuant to the underwriting agreement.
Allaire has been advised by the representatives that the underwriters
propose to offer the shares of common stock to the public initially at the
public offering price set forth on the cover page of this prospectus and,
through the representatives, to certain dealers (who may include the
underwriters) at such price less a concession of $0.84 per share, and the
underwriters and such dealers may allow a discount of $0.10 per share on sales
to certain other dealers. After the offering, the public offering price and
concession and discount to dealers may be changed by the representatives.
73
<PAGE>
The following table summarizes the compensation to be paid to the
underwriters by Allaire and the expenses payable by Allaire.
<TABLE>
<CAPTION>
Total
----------------------------------
Without With
Per Share Over-allotment Over-allotment
----------- ---------------- ---------------
<S> <C> <C> <C>
Underwriting discounts and commissions
paid by Allaire ..................... $1.40 $3,500,000 $4,025,000
Expenses payable by Allaire .......... $0.40 $1,000,000 $1,000,000
</TABLE>
The representatives have informed Allaire that they do not expect
discretionary sales by the underwriters to exceed 5% of the shares being
offered hereby.
Allaire, its officers and directors, and certain other existing
stockholders and optionholders of Allaire have agreed that they will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
or, in the case of Allaire, file with the Securities and Exchange Commission a
registration statement relating to, any shares of common stock or securities
exchangeable or exercisable for or convertible into shares of common stock or
publicly disclose the intention to do any of the foregoing without the prior
written consent of Credit Suisse First Boston for a period of 180 days after
the date of this prospectus, except under certain circumstances.
The underwriters have reserved for sale, at the initial public offering
price, up to 125,325 shares of the common stock for employees, directors and
certain other persons associated with Allaire who have expressed an interest in
purchasing such shares of common stock in the offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same basis as
other shares offered hereby.
Allaire has agreed to indemnify the underwriters against certain
liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the underwriters may be required to make in
respect thereof.
WA&H Investments, LLC, a stockholder of Allaire, is affiliated with Dain
Rauscher Wessels, one of the representatives of the underwriters. In June 1996,
WA&H purchased 54,204 shares of Series B Preferred Stock at a purchase price of
$4.52 per share, which will automatically convert into 108,408 shares of common
stock upon the closing of the offering. In May 1997, WA&H purchased 62,500
shares of Series D Preferred Stock at a purchase price of $4.00 per share,
which will automatically convert into the same number of shares of common stock
upon the closing of the offering.
Credit Suisse First Boston has purchased approximately $90,000 of
Allaire's software products and related services since Allaire's inception.
Credit Suisse First Boston obtained such products and services through
arms-length negotiations on terms substantially similar to terms obtained by
other customers of Allaire for similar products and services.
The common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "ALLR."
74
<PAGE>
Prior to the offering, there has been no public market for the common
stock. The initial public offering price was determined by negotiation between
Allaire and the representatives. The principal factors considered in determining
the public offering price included:
o the information set forth in this prospectus and otherwise available to
the representatives;
o the history of, and the prospects for, Allaire and the industry in which
it competes;
o an assessment of Allaire's management;
o the prospects for, and the timing of, future earnings of Allaire;
o the present state of Allaire's development and its current financial
condition;
o the general condition of the securities markets at the time of the
offering;
o the recent market prices of, and the demand for, publicly-traded common
stock of companies in businesses similar to those of Allaire;
o market conditions for initial public offerings; and
o other relevant factors.
There can be no assurance that an active trading market will develop for the
common stock or that the common stock will trade in the market subsequent to
the offering at or above the initial public offering price.
The representatives, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934. Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position. Stabilizing transactions permit
bids to purchase the underlying security so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve purchases
of shares of the common stock in the open market after the distribution has
been completed in order to cover syndicate short positions. Penalty bids permit
the representatives to reclaim a selling concession from a syndicate when
shares of the common stock originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
75
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that Allaire prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of common stock are effected. Accordingly, any resale of the
common stock in Canada must be made in accordance with applicable securities
laws which will vary depending on the relevant jurisdiction, and which may
require resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to Allaire and the dealer from whom
such purchase confirmation is received that (1) such purchaser is entitled
under applicable provincial securities laws to purchase such common stock
without the benefit of a prospectus qualified under such securities laws, (2)
where required by law, that such purchaser is purchasing as principal and not
as agent, and (3) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to the offering. Such a report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from Allaire. Only one such
report must be filed in respect of common stock acquired on the same date and
under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
Legislation.
76
<PAGE>
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. Certain
legal matters will be passed upon for the underwriters by Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The financial statements of Allaire Corporation as of December 31, 1996
and 1997 and as of September 30, 1998 and for the period from inception (May 5,
1995) through December 31, 1995, for each of the two years in the period ended
December 31, 1997 and for the nine months ended September 30, 1998, all of
which are 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 offered hereby. This prospectus does not contain all
of the information set forth in the 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. Copies of
the registration statement 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.
Allaire intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm.
77
<PAGE>
<PAGE>
ALLAIRE CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Accountants ........................................... F-2
Balance Sheet as of December 31, 1996 and 1997 and September 30, 1998 ....... F-3
Statement of Operations for the period from inception (May 5, 1995)
through December 31, 1995, the years ended December 31, 1996
and 1997 and the nine months ended September 30, 1997 (unaudited) and 1998 . F-4
Statement of Redeemable Convertible Preferred Stock and Stockholders' Deficit
for the period from inception (May 5, 1995) through December 31, 1995, the
years ended December 31, 1996 and 1997 and the nine months ended
September 30, 1998 ......................................................... F-5
Statement of Cash Flows for the period from inception (May 5, 1995) through
December 31, 1995, the years ended December 31, 1996 and 1997 and the
nine months ended September 30, 1997 (unaudited) and 1998 .................. F-6
Notes to Financial Statements ............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Allaire Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of redeemable convertible preferred stock and stockholders' deficit
and of cash flows present fairly, in all material respects, the financial
position of Allaire Corporation at December 31, 1996 and 1997 and September 30,
1998, and the results of its operations and its cash flows for the period from
inception (May 5, 1995) through December 31, 1995, the two years in the period
ended December 31, 1997 and the nine months ended September 30, 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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 9, 1998
F-2
<PAGE>
ALLAIRE CORPORATION
BALANCE SHEET
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ....................................................... $ 526 $ 5,521
Accounts receivable, net of allowance for doubtful accounts and sales returns
of $220, $487, and $480 at December 31, 1996 and 1997 and September 30,
1998, respectively ............................................................. 617 1,413
Prepaid expenses and other current assets ....................................... 87 236
--------- ---------
Total current assets ....................................................... 1,230 7,170
Property and equipment, net ...................................................... 568 2,209
Other assets, net ................................................................ 240 318
--------- ---------
Total assets ............................................................... $ 2,038 $ 9,697
========= =========
Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Deficit
Current liabilities:
Current portion of capital lease obligations .................................... $ -- $ 315
Current portion of notes payable ................................................ 33 --
Accounts payable ................................................................ 486 1,601
Accrued expenses ................................................................ 120 1,320
Accrued employee compensation and benefits ...................................... 259 1,130
Deferred revenue ................................................................ 108 1,312
--------- ---------
Total current liabilities .................................................. 1,006 5,678
Capital lease obligations ........................................................ -- 499
Notes payable .................................................................... -- --
--------- ---------
Total liabilities .......................................................... 1,006 6,177
--------- ---------
Redeemable convertible preferred stock:
Series B, $.01 par value;
Authorized: 508,849 shares at December 31, 1996; 514,306
at December 31, 1997 and September 30, 1998 actual and pro forma
Issued and outstanding: 508,849 shares at December 31, 1996; 514,306 at
December 31, 1997 and September 30, 1998 actual; none at September 30, 1998
pro forma .................................................................... 2,300 2,325
Series C, $.01 par value;
Authorized: 84,600 shares at December 31, 1996; 169,200 at December 31, 1997
and September 30, 1998 actual and pro forma
Issued and outstanding: 84,600 shares at December 31, 1996; 169,200 at December
31, 1997 and September 30, 1998 actual; none at September 30, 1998 pro forma 500 1,000
Series D, $.01 par value;
Authorized: no shares at December 31, 1996; 2,500,000 at December 31, 1997 and
September 30, 1998 actual and pro forma
Issued and outstanding: no shares at December 31, 1996; 2,336,909 at
December 31, 1997 and September 30, 1998 actual; none at September 30, 1998
pro forma .................................................................... -- 9,348
--------- ---------
Total redeemable convertible preferred stock ..................................... 2,800 12,673
--------- ---------
Stockholders' deficit:
Series A convertible preferred stock, $.01 par value;
Authorized: 200,000 shares at December 31, 1996, December 31, 1997 and
September 30, 1998 actual and pro forma
Issued and outstanding: 43,557 shares at December 31, 1996; 56,557 at December
31, 1997; 57,213 at September 30, 1998 actual; none at September 30, 1998 pro
forma ........................................................................ 177 255
Common stock, $.01 par value;
Authorized: 10,000,000 shares at December 31, 1996, December 31, 1997 and
September 30, 1998 actual; 35,000,000 at September 30, 1998 pro forma
Issued and outstanding: 3,002,500 shares at December 31, 1996 and 1997;
4,143,986 issued and 4,140,569 outstanding at September 30, 1998 actual;
7,961,677 issued and 7,958,260 outstanding at September 30, 1998 pro forma 30 30
Additional paid-in capital ...................................................... 13 13
Accumulated deficit ............................................................. (1,968) (9,435)
Deferred compensation ........................................................... -- --
Stock subscriptions receivable .................................................. (20) (16)
--------- ---------
Total stockholders' deficit ...................................................... (1,768) (9,153)
--------- ---------
Commitments and contingencies (Note 13)
Total liabilities, redeemable convertible preferred stock and
stockholders' deficit ..................................................... $ 2,038 $ 9,697
========= =========
<CAPTION>
Pro Forma
Sept. 30, Sept. 30,
1998 1998
------------ ----------------
(Notes 2 and 7)
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ....................................................... $ 1,879 $ 1,879
Accounts receivable, net of allowance for doubtful accounts and sales returns
of $220, $487, and $480 at December 31, 1996 and 1997 and September 30,
1998, respectively ............................................................. 2,388 2,388
Prepaid expenses and other current assets ....................................... 610 610
---------- ----------
Total current assets ....................................................... 4,877 4,877
Property and equipment, net ...................................................... 3,072 3,072
Other assets, net ................................................................ 381 381
---------- ----------
Total assets ............................................................... $ 8,330 $ 8,330
========== ==========
Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Deficit
Current liabilities:
Current portion of capital lease obligations .................................... $ 334 $ 334
Current portion of notes payable ................................................ 352 352
Accounts payable ................................................................ 1,842 1,842
Accrued expenses ................................................................ 3,055 3,055
Accrued employee compensation and benefits ...................................... 2,302 2,302
Deferred revenue ................................................................ 2,933 2,933
---------- ----------
Total current liabilities .................................................. 10,818 10,818
Capital lease obligations ........................................................ 247 247
Notes payable .................................................................... 973 973
---------- ----------
Total liabilities .......................................................... 12,038 12,038
---------- ----------
Redeemable convertible preferred stock:
Series B, $.01 par value;
Authorized: 508,849 shares at December 31, 1996; 514,306
at December 31, 1997 and September 30, 1998 actual and pro forma
Issued and outstanding: 508,849 shares at December 31, 1996; 514,306 at
December 31, 1997 and September 30, 1998 actual; none at September 30, 1998
pro forma .................................................................... 2,325 --
Series C, $.01 par value;
Authorized: 84,600 shares at December 31, 1996; 169,200 at December 31, 1997
and September 30, 1998 actual and pro forma
Issued and outstanding: 84,600 shares at December 31, 1996; 169,200 at December
31, 1997 and September 30, 1998 actual; none at September 30, 1998 pro forma 1,000 --
Series D, $.01 par value;
Authorized: no shares at December 31, 1996; 2,500,000 at December 31, 1997 and
September 30, 1998 actual and pro forma
Issued and outstanding: no shares at December 31, 1996; 2,336,909 at
December 31, 1997 and September 30, 1998 actual; none at September 30, 1998
pro forma .................................................................... 9,348 --
---------- ----------
Total redeemable convertible preferred stock ..................................... 12,673 --
---------- ----------
Stockholders' deficit:
Series A convertible preferred stock, $.01 par value;
Authorized: 200,000 shares at December 31, 1996, December 31, 1997 and
September 30, 1998 actual and pro forma
Issued and outstanding: 43,557 shares at December 31, 1996; 56,557 at December
31, 1997; 57,213 at September 30, 1998 actual; none at September 30, 1998 pro
forma ........................................................................ 260 --
Common stock, $.01 par value;
Authorized: 10,000,000 shares at December 31, 1996, December 31, 1997 and
September 30, 1998 actual; 35,000,000 at September 30, 1998 pro forma
Issued and outstanding: 3,002,500 shares at December 31, 1996 and 1997;
4,143,986 issued and 4,140,569 outstanding at September 30, 1998 actual;
7,961,677 issued and 7,958,260 outstanding at September 30, 1998 pro forma 41 79
Additional paid-in capital ...................................................... 1,140 14,035
Accumulated deficit ............................................................. (17,423) (17,423)
Deferred compensation ........................................................... (383) (383)
Stock subscriptions receivable .................................................. (16) (16)
---------- ----------
Total stockholders' deficit ...................................................... (16,381) (3,708)
---------- ----------
Commitments and contingencies (Note 13)
Total liabilities, redeemable convertible preferred stock and
stockholders' deficit ..................................................... $ 8,330 $ 8,330
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ALLAIRE CORPORATION
STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period from
inception
(May 5, 1995) Year ended Nine months ended
through December 31, September 30,
December 31, ----------------------- ---------------------------
1995 1996 1997 1997 1998
-------------- ----------- ----------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Software license fees .............................. $ -- $ 2,358 $ 7,116 $ 4,335 $ 11,716
Services ........................................... -- -- 534 260 2,187
------- -------- -------- -------- ---------
Total revenue ................................... -- 2,358 7,650 4,595 13,903
------- -------- -------- -------- ---------
Cost of revenue:
Software license fees .............................. -- 234 961 540 1,262
Services ........................................... -- -- 1,453 845 2,855
------- -------- -------- -------- ---------
Total cost of revenue ........................... -- 234 2,414 1,385 4,117
------- -------- -------- -------- ---------
Gross profit ........................................ -- 2,124 5,236 3,210 9,786
------- -------- -------- -------- ---------
Operating expenses:
Research and development ........................... 65 873 2,702 1,801 3,371
Sales and marketing ................................ 49 1,576 7,272 4,216 11,561
General and administrative ......................... 74 1,387 2,874 1,866 2,871
------- -------- -------- -------- ---------
Total operating expenses ........................ 188 3,836 12,848 7,883 17,803
------- -------- -------- -------- ---------
Loss from operations ................................ (188) (1,712) (7,612) (4,673) (8,017)
Interest income, net ................................ -- 14 187 125 29
------- -------- -------- -------- ---------
Net loss ............................................ $ (188) $ (1,698) $ (7,425) $ (4,548) $ (7,988)
======= ======== ======== ======== =========
Basic and diluted net loss per share ................ $ (0.09) $ (0.97) $ (4.40) $ (2.87) $ (2.84)
Shares used in computing basic and diluted
net loss per share ................................. 2,200 1,743 1,687 1,584 2,813
Unaudited pro forma basic and diluted net
loss per share ..................................... $ (1.38) $ (1.13)
Shares used in computing unaudited pro
forma basic and diluted net loss per share ......... 5,378 7,054
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ALLAIRE CORPORATION
STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(In thousands, except share data)
<TABLE>
<CAPTION>
Redeemable
convertible
preferred Convertible
stock preferred stock Common stock
----------------------- ----------------- -------------------------
Shares Amount Shares Amount Shares Par value
------------ ---------- -------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Initial capital contribution by founders ..... $ $ 2,200,000 $22
Net loss ....................................
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 cancel-
lation 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 ............................ 656 5
Exercise of employee stock options .......... 1,141,486 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, September 30, 1998 .................. 3,020,415 $12,673 57,213 $260 4,143,986 $41
========= ======= ====== ==== ========= =====
<CAPTION>
Additional Stock Total
paid-in Accumulated Deferred subscriptions stockholders'
capital deficit compensation receivable deficit
------------ ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Initial capital contribution by founders ..... $ -- $ (15) $ -- $ -- $ 7
Net loss .................................... (188) (188)
--------- --------
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 cancel-
lation 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 ............................ 5
Exercise of employee stock options .......... 526 537
Repurchase of common stock held
in treasury ................................ (2) (2)
Deferred compensation relating to
grants of stock options .................... 454 (454) --
Compensation relating to grants of
stock options .............................. 149 71 220
Net loss .................................... (7,988) (7,988)
--------- ----------
Balance, September 30, 1998 .................. $1,140 $ (17,423) $ (383) $ (16) $(16,381)
======= ========= ====== ===== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ALLAIRE CORPORATION
STATEMENT OF CASH FLOWS
(In thousands, except share data)
<TABLE>
<CAPTION>
Period from
inception
(May 5, 1995) Year ended
through December 31,
December 31, -------------------------
1995 1996 1997
-------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ......................................................... $ (188) $ (1,698) $ (7,425)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization .................................. 1 94 726
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 ................................................... -- -- --
Changes in assets and liabilities:
Accounts receivable ........................................... (40) (577) (796)
Prepaid expenses and other current assets ..................... (11) (76) (149)
Other assets .................................................. -- (254) (55)
Accounts payable .............................................. 27 459 1,115
Accrued expenses .............................................. 11 368 2,071
Deferred revenue .............................................. 211 (103) 1,204
------ -------- --------
Total adjustments ........................................... 199 3 4,121
------ -------- --------
Net cash provided by (used for) operating activities ........ 11 (1,695) (3,304)
------ -------- --------
Cash flows from investing activities:
Purchases of property and equipment .............................. (47) (598) (1,502)
Payment for acquisition of Bradbury Software L.L.C. .............. -- -- (252)
------ -------- --------
Net cash used for investing activities ...................... (47) (598) (1,754)
------ -------- --------
Cash flows from financing activities:
Proceeds from sale leaseback transaction ......................... -- -- 421
Principal payments on capital lease obligations .................. -- -- (165)
Proceeds from issuance of convertible notes payable .............. -- 175 252
Proceeds from issuance of notes payable .......................... 60 88 --
Principal payments on notes payable .............................. (10) (195) (33)
Proceeds from sale of common stock ............................... 3 1 --
Proceeds from sale of redeemable convertible preferred stock,
net of issuance costs ........................................... -- 2,733 9,574
Payments to acquire treasury stock ............................... -- -- --
Payment received on stock subscription receivable ................ -- -- 4
------ -------- --------
Net cash provided by financing activities ................... 53 2,802 10,053
------ -------- --------
Net increase (decrease) in cash and cash equivalents .............. 17 509 4,995
Cash and cash equivalents, beginning of period .................... -- 17 526
------ -------- --------
Cash and cash equivalents, end of period .......................... $ 17 $ 526 $ 5,521
====== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................... $ -- $ 4 $ 46
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 $ --
Issuance of Series A convertible preferred stock for 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
<CAPTION>
Nine months ended
September 30,
----------------------------
1997 1998
------------ --------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................................... $ (4,548) $(7,988)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization .................................. 432 1,030
Interest converted into shares of preferred stock .............. 5 --
Compensation expense relating to issuance of note payable
under severance agreement ..................................... -- --
Compensation expense relating to issuance of equity
instruments ................................................... -- 220
Changes in assets and liabilities:
Accounts receivable ........................................... (243) (975)
Prepaid expenses and other current assets ..................... (158) (374)
Other assets .................................................. (35) (270)
Accounts payable .............................................. 506 241
Accrued expenses .............................................. 1,358 2,907
Deferred revenue .............................................. 856 1,621
-------- -------
Total adjustments ........................................... 2,721 4,400
-------- -------
Net cash provided by (used for) operating activities ........ (1,827) (3,588)
-------- -------
Cash flows from investing activities:
Purchases of property and equipment .............................. (794) (1,686)
Payment for acquisition of Bradbury Software L.L.C. .............. (252) --
-------- -------
Net cash used for investing activities ...................... (1,046) (1,686)
-------- -------
Cash flows from financing activities:
Proceeds from sale leaseback transaction ......................... 421 --
Principal payments on capital lease obligations .................. (90) (233)
Proceeds from issuance of convertible notes payable .............. 252 --
Proceeds from issuance of notes payable .......................... -- 1,406
Principal payments on notes payable .............................. (33) (81)
Proceeds from sale of common stock ............................... -- 537
Proceeds from sale of redeemable convertible preferred stock,
net of issuance costs ........................................... 9,574 5
Payments to acquire treasury stock ............................... -- (2)
Payment received on stock subscription receivable ................ -- --
-------- ---------
Net cash provided by financing activities ................... 10,124 1,632
-------- ---------
Net increase (decrease) in cash and cash equivalents .............. 7,251 (3,642)
Cash and cash equivalents, beginning of period .................... 526 5,521
-------- ---------
Cash and cash equivalents, end of period .......................... $ 7,777 $ 1,879
======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................... $ 30 $ 93
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 ...... $ -- $ --
Issuance of Series A convertible preferred stock for acquisition
of Bradbury Software L.L.C. ..................................... $ 78 $ --
Conversion of note payable and related accrued interest of $5
into 64,190 shares of Series D redeemable convertible
preferred stock ................................................. $ 252 $ --
Capital lease obligations ........................................ $ 979 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Allaire Corporation develops, markets and supports software for a wide
range of Web development, from building static Web pages to developing
high-volume, interactive Web applications. Allaire's products and services
enable organizations to link their information systems to the Web, as well as
to develop new Web-based business applications in areas such as electronic
commerce, content management and personalization. Allaire's products
interoperate with emerging Web application technologies as well as key
enterprise information systems technologies.
Allaire was incorporated in the state of Minnesota in February 1996 as the
surviving entity of a reorganization of Allaire, L.L.C., a Minnesota limited
liability company originally formed in May 1995. At the time of the
reorganization, the members of Allaire, L.L.C. exchanged their existing
ownership interests for a proportionate number of shares of Allaire's common
stock and substantially all assets and liabilities of Allaire, L.L.C. were
transferred to Allaire at historical cost. In April 1997, Allaire was
reorganized as a Delaware corporation.
Allaire 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.
Allaire has also experienced substantial net losses in each fiscal period
since its inception and, as of September 30, 1998, had an accumulated deficit
of $17.4 million. Such losses and accumulated deficit resulted from Allaire's
lack of substantial revenue and significantly increased costs incurred in the
development of Allaire's products and in the preliminary establishment of
Allaire's infrastructure. For the foreseeable future, Allaire expects to
continue to experience significant growth in its operating expenses in order to
execute its current business plan, particularly research and development and
sales and marketing expenses. As a result, Allaire's business plan indicates
that additional financing would be required to support its planned
expenditures. In the event that an initial public offering is not completed on
a timely basis, Allaire would seek such funding through a private financing. In
the event that it has not completed an initial public offering or obtained
other financing in excess of $3.0 million by February 28, 1999, Allaire has a
commitment from existing investors to provide a $3.0 million working capital
line of credit. Any borrowings under this arrangement would be payable at the
earlier of the closing of an initial public offering or February 28, 2000.
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
F-7
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
funds, commercial paper and U.S. Treasury securities which are subject to
minimal credit and market risk. Allaire's cash equivalents are classified as
available-for-sale and recorded at amortized cost which approximates fair
value.
Revenue Recognition
Allaire recognizes revenue from software license fees upon delivery to
customers provided no significant post-delivery obligations or uncertainties
remain and collection of the related receivable is probable. Allaire accrues
insignificant support costs associated with these licenses when revenue is
recognized. Revenue under arrangements where multiple products or services are
sold together under one contract is allocated to each element based on their
relative fair values, with these fair values being determined using the price
charged when that element is sold separately. For arrangements which include
specified upgrade rights, the fair value of such upgrade rights is deferred
until the specified upgrade is delivered. Allaire provides most of its
distributors with certain rights of return. An allowance for estimated future
returns is recorded at the time revenue is recognized based on Allaire's return
policies and historical experience. Allaire offers subscriptions which entitle
customers to all new releases for a specific product during the term of the
subscription agreement. Revenue from subscription sales is recognized ratably
over the term of the subscription agreement. Training and consulting services
revenue is recognized as services are rendered, and revenue under support
agreements is recognized ratably over the term of the support agreement.
Fair Value of Financial Instruments
The carrying amounts of Allaire's financial instruments, which include
cash equivalents, accounts receivable, accounts payable, accrued expenses,
notes payable and redeemable convertible preferred stock, approximate their
fair values at September 30, 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. No single customer
accounted for more than 10% of gross accounts receivable at December 31, 1996,
while one customer accounted for 22% and 28% of gross accounts receivable at
December 31, 1997 and September 30, 1998, respectively. In addition, this same
customer accounted for 22% of total revenue for the nine months ended September
30, 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
F-8
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
of computer software are expensed prior to the establishment of technological
feasibility (as defined by Statement of Financial Accounting Standards ("SFAS")
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed") and capitalized thereafter when material to Allaire's
financial position or results of operations. No software development costs have
been capitalized by Allaire since costs eligible for capitalization under SFAS
No. 86 have been insignificant.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their
estimated useful lives, generally three to five years, using the straight-line
method. Equipment held under capital leases are stated at the lower of fair
market value of the related asset or the present value of the minimum lease
payments at the inception of the lease and are amortized on a straight-line
basis over the shorter of the life of the related asset or the lease term.
Repair and maintenance costs are expensed as incurred.
Accounting for Stock-Based Compensation
Allaire accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recorded for options issued to
employees in fixed amounts and with fixed exercise prices at least equal to the
fair market value of Allaire's common stock at the date of grant. Allaire has
adopted the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," through disclosure only (Note 9). All stock-based awards to
non-employees are accounted for at their fair value in accordance with SFAS No.
123.
Income Taxes
Prior to its reorganization as a C Corporation in February 1996 (Note 1),
Allaire was treated as a partnership for federal and state income tax purposes.
Accordingly, no provision for corporate income taxes was recorded during this
period and all losses were passed through to Allaire's members. At the time of
its reorganization, Allaire adopted the liability method of accounting for
income taxes as set forth in SFAS No. 109, "Accounting for Income Taxes."
Advertising Expense
Allaire recognizes advertising expense as incurred. Advertising expense
was approximately $6,000, $152,000, $643,000, and $553,000 for the period from
inception (May 5, 1995) through December 31, 1995, the years ended December 31,
1996 and 1997 and the nine months ended September 30, 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
F-9
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Unaudited Interim Financial Statements
In the opinion of Allaire's management, the September 30, 1997 unaudited
interim financial statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for that period. The results of operations
for the nine month period ended September 30, 1998 are not necessarily
indicative of the results of operations for the full year of 1998.
Unaudited Pro Forma Balance Sheet
Upon the closing of Allaire's initial public offering, all of the
outstanding shares of preferred stock will automatically convert into 3,817,691
shares of common stock. These conversions have been reflected in the unaudited
pro forma balance sheet as of September 30, 1998, and exclude 31,250 shares of
common stock issuable upon the conversion of Series A Preferred Stock sold
after September 30, 1998.
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 loss per share does not differ from basic 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 shares, as if the shares had converted
immediately upon their issuance.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement establishes
standards for the reporting and display of comprehensive income and its
components. SFAS No. 130 was effective for Allaire's fiscal year ending
December 31, 1998. Adoption of SFAS No. 130 is for presentation purposes only
and had no effect on Allaire's financial position or results of operations.
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
F-10
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 will not
affect Allaire's financial position or results of operations.
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 will not affect Allaire's financial position or
results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Allaire does not
expect SFAS No. 133 to have a material affect on its financial position or
results of operations.
In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SoP 98-1 establishes
the accounting for costs of software products developed or purchased for
internal use, including when such costs should be capitalized. Allaire does not
expect SoP 98-1, which is effective for Allaire beginning January 1, 1999, to
have a material affect its financial position or results of operations.
In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for Allaire's fiscal 1999 financial statements and
Allaire does not expect its adoption to have a material affect on its financial
position or results of operations.
3. ACQUISITION
In March 1997, Allaire acquired the business and substantially all of the
assets of Bradbury Software L.L.C. ("Bradbury"), including all rights to
Bradbury's HomeSite software product, in exchange for $252,000 in cash and
13,000 shares of Allaire's Series A convertible preferred stock valued at
$78,000. The Bradbury acquisition has been 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
F-11
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
3. ACQUISITION (Continued)
relating to this excess purchase price totaled $88,000 during the year ended
December 31, 1997 and $79,000 during the nine months ended September 30, 1998.
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 year ended December 31, 1997 and the nine months ended September 30,
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 a stockholder
(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.
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,
---------------------------
September 30,
1996 1997 1998
----------- ------------- --------------
<S> <C> <C> <C>
Furniture and fixtures .................................. $106,000 $ 574,000 $ 835,000
Furniture and fixtures under capital lease .............. -- 127,000 78,000
Equipment ............................................... 502,000 638,000 1,857,000
Equipment under capital lease ........................... -- 852,000 843,000
Software ................................................ -- 316,000 420,000
Leasehold improvements .................................. 38,000 148,000 296,000
-------- ---------- ----------
646,000 2,655,000 4,329,000
Less: Accumulated depreciation and amortization ......... (78,000) (446,000) (1,257,000)
-------- ---------- ----------
$568,000 $2,209,000 $3,072,000
======== ========== ==========
</TABLE>
F-12
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
5. PROPERTY AND EQUIPMENT (Continued)
Depreciation and amortization expense for the period from inception (May
5, 1995) through December 31, 1995, the years ended December 31, 1996 and 1997
and the nine months ended September 30, 1998 was $1,000, $80,000, $434,000, and
$822,000, 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 $220,000
during the year ended December 31, 1997 and the nine months ended September 30,
1998, respectively. Accumulated amortization on property and equipment under
capital lease totaled $181,000 at December 31, 1997 and $401,000 at September
30, 1998. Interest expense relating to capital lease obligations totaled
$38,000 and $40,000 for the year ended December 31, 1997 and the nine months
ended September 30, 1998, respectively.
6. LINES OF CREDIT
Equipment and Working Capital Line
In December 1996, Allaire entered into an agreement with a bank to
establish a line of credit which enabled Allaire to borrow up to $400,000 for
the acquisition of fixed assets and for working capital purposes through June
1997. In March 1998, this line of credit agreement was canceled and replaced
with a new line of credit which provides for borrowings up to $2,000,000 for
working capital purposes and for the issuance of letters of credit through the
earlier of the closing of an initial public offering or March 26, 1999. Amounts
available under the line are determined based upon eligible accounts
receivable. All borrowings and letters of credit are collateralized by
substantially all of Allaire's assets and all borrowings bear interest at the
bank's prime rate (8.25% as of September 30, 1998) plus 1%. As of September 30,
1998, letters of credit totaling $487,000 had been issued against the line and
$1,513,000 was available for additional borrowings. The terms of the line of
credit require the maintenance of certain minimum financial ratios and
conditions and include other covenants similar to those in the initial
agreement. In August 1998, Allaire received a covenant waiver from the bank for
the months of May and June 1998, and the bank amended the terms of the
arrangement to waive certain financial covenants through October 1998. In
December 1998, the bank extended the terms of the arrangement to waive certain
financial covenants from November 1998 through the earlier of the closing of an
initial public offering or March 26, 1999.
F-13
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
6. LINES OF CREDIT (Continued)
Equipment Loan Line
In May 1998, Allaire entered into an equipment loan line agreement (the
"Equipment Loan Line") under which Allaire may 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. In June 1998, Allaire borrowed $1,406,000 under the Equipment
Loan Line, which was collateralized by previously purchased equipment. At
September 30, 1998, annual cash payments on the borrowings under the Equipment
Loan Line are as follows:
<TABLE>
<S> <C>
1998 (three months ended December 31, 1998) ......... $ 133,000
1999 ................................................ 532,000
2000 ................................................ 532,000
2001 ................................................ 477,000
----------
Total cash payments ................................. 1,674,000
Less--amount representing interest .................. 349,000
----------
Present value of notes payable ...................... $1,325,000
==========
</TABLE>
In December 1998, Allaire borrowed an additional $214,000 under the
Equipment Loan Line.
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
F-14
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
7. PREFERRED STOCK (Continued)
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 656 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.
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 shares which had an original purchase price per
share of $8.00. 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
F-15
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
7. PREFERRED STOCK (Continued)
holder of the Series B, Series C and Series D preferred stock will be entitled
to receive a cash payment equal to $4.52 per share, $5.91 per share and $4.00
per share, respectively, plus any declared but unpaid dividends.
Convertible Notes Payable
During 1996, Allaire issued 10% convertible notes payable totaling
$175,000 to two of Allaire's stockholders. All principal and accrued interest
of $2,000 on these notes was subsequently converted into 43,557 shares of
Series A preferred stock prior to December 31, 1996.
Preferred Stock Warrants
Pursuant to the terms of a capital lease line of credit (Note 5), Allaire
issued warrants to purchase 17,699 shares of Series A preferred stock at a
price of $4.52 per share, subject to certain anti-dilution adjustments. These
warrants are fully vested, exercisable at the option of the holder, in whole or
in part, and expire upon the earlier of ten years from the date of grant or
five years from the effective date of an initial public offering of Allaire's
common stock. The value ascribed to these warrants was not significant.
At September 30, 1998, Allaire has reserved 17,699 shares of its Series A
preferred stock for issuance upon exercise of outstanding warrants.
Undesignated Preferred Stock
At September 30, 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 September 30, 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 repurchase, for an
amount equal to the original consideration paid, any unvested common
F-16
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
8. COMMON STOCK (Continued)
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 an initial public
offering of Allaire's common stock, if earlier. At September 30, 1998, an
aggregate of 255,000 and 180,000 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 September 30, 1998,
Allaire had the right to repurchase 455,749 shares of common stock issued under
the 1997 Stock Incentive Plan.
Stock Subscriptions Receivable
Allaire held notes receivable from certain stockholders at September 30,
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.
Reserved Shares
At September 30, 1998, Allaire had 5,544,852 shares of common stock
reserved for issuance upon the exercise of common stock warrants and options
and the conversion of the preferred stock, including shares issuable upon the
conversion of preferred stock warrants.
Authorized Shares
On August 10, 1998, Allaire's Board of Directors approved, subject to
stockholder approval, an increase in the authorized shares of common stock,
$.01 par value, to 35,000,000.
F-17
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
9. STOCK OPTIONS
No options were granted during 1995 and 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
During 1997, Allaire's Board of Directors adopted the 1997 Stock Incentive
Plan (the "1997 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 September 30, 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
On August 10, 1998, the Board of Directors authorized, subject to
stockholder approval, the 1998 Stock Incentive Plan (the "1998 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 period from inception (May 5, 1995) through December 31, 1997,
compensation expense recognized for stock option grants made by Allaire under
APB Opinion No. 25 was not significant. For the nine months ended September 30,
1998, compensation expense recognized for stock option grants totaled $220,000.
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:
F-18
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
9. STOCK OPTIONS (Continued)
<TABLE>
<CAPTION>
Year ended Nine months
December 31, ended
----------------------------------- September 30,
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net loss:
As reported ...................... $ (1,698,000) $ (7,425,000) $ (7,988,000)
Pro forma ........................ (1,705,000) (7,485,000) (8,065,000)
Basic and diluted net loss per share:
As reported ...................... $ (0.97) $ (4.40) $ (2.84)
Pro forma ........................ (0.98) (4.44) (2.87)
</TABLE>
Because the determination of the fair value of all options granted after
Allaire becomes a public entity will include an expected volatility factor,
because additional option grants are expected to be made subsequent to
September 30, 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 and 1997 and the
nine months ended September 30, 1998: no dividend yield; risk free interest
rates of 5.9%, 6.1% and 5.3%, respectively; no volatility; and an expected
option term of 5 years.
Stock option activity during the years ended December 31, 1996 and 1997
and the nine months ended September 30, 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 $2.53) ......... 466,000 5.41
Exercised .............................................. (1,141,486) .47
Canceled ............................................... (21,750) 2.01
----------
Outstanding--September 30, 1998 .......................... 1,676,864 $ 1.86
==========
</TABLE>
As of September 30, 1998, 131,667 and 1,733,150 shares were available for
grant under the 1997 Stock Plan and the 1998 Stock Plan, respectively.
F-19
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
9. STOCK OPTIONS (Continued)
The following table summarizes information about stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
Vested and exercisable
-----------------------------
Weighted-average Number Weighted-average
remaining contractual of exercise
Exercise price Number outstanding life (in years) shares price
- ------------------- -------------------- ----------------------- --------- -----------------
<S> <C> <C> <C> <C>
$ .25- .50 1,140,772 8.3 363,646 $ .44
.75- 1.50 272,492 9.1 35,786 .75
4.00- 7.00 89,050 9.6 3,125 4.00
9.00-11.05 174,550 9.9 -- --
--------- -------
$ .25-11.05 1,676,864 8.7 402,557 $ .50
========= =======
</TABLE>
Deferred Compensation
During the period January 1998 through August 1998, Allaire granted stock
options to purchase 266,650 shares of its common stock with exercise prices
ranging from $.01 to $4.00. Allaire recorded compensation expense and deferred
compensation relating to these options totaling $149,000 and $454,000,
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
On August 10, 1998, the Board of Directors authorized, subject to
stockholder approval, the 1998 Employee Stock Purchase Plan (the "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
has made no determination as to when the first offering period under the
Purchase Plan will commence.
F-20
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES
<TABLE>
<CAPTION>
Deferred tax assets are comprised of the following:
December 31,
----------------------------- September 30,
1996 1997 1998
------------- --------------- --------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .................. $ 583,000 $ 3,442,000 $ 6,176,000
Reserves not currently deductible ................. 87,000 216,000 551,000
Research and development credit carryforwards ..... 17,000 95,000 208,000
Other ............................................. 29,000 85,000 167,000
---------- ------------ ------------
Total deferred tax assets ....................... 716,000 3,838,000 7,102,000
Deferred tax asset valuation allowance ............ (716,000) (3,838,000) (7,102,000)
---------- ------------ ------------
$ -- $ -- $ --
========== ============ ============
</TABLE>
Realization of total deferred tax assets is contingent upon the generation
of future taxable income. Due to the uncertainty of realization of these tax
benefits, Allaire has provided a valuation allowance for the full amount of its
deferred tax assets.
Income taxes computed using the federal statutory income tax rate differs
from Allaire's effective tax rate primarily due to the following:
<TABLE>
<CAPTION>
Year ended Nine months
December 31, ended
------------------------------- September 30,
1996 1997 1998
-------------- ---------------- ----------------
<S> <C> <C> <C>
Income tax benefit at U.S. federal statutory tax rate $ (594,000) $ (2,599,000) $ (2,796,000)
State taxes, net of federal tax impact ................... (105,000) (455,000) (473,000)
Permanent differences .................................... 2,000 18,000 117,000
Research and development credit carryforwards ............ (18,000) (91,000) (111,000)
Other .................................................... (1,000) 5,000 (1,000)
Change in valuation allowance ............................ 716,000 3,122,000 3,264,000
---------- ------------ ------------
Provision for income taxes .............................. $ -- $ -- $ --
========== ============ ============
</TABLE>
At September 30, 1998, Allaire had net operating losses and research and
development tax credit carryforwards of approximately $15.0 million and
$131,000 available for federal purposes to reduce future taxable income and
future tax liabilities, respectively. 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
have 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.
F-21
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
11. GEOGRAPHIC INFORMATION
Revenue was distributed geographically as follows:
<TABLE>
<CAPTION>
Year ended Nine months
December 31, ended
--------------------------- September 30,
1996 1997 1998
------------- ------------- --------------
<S> <C> <C> <C>
North America ............... $1,953,000 $6,153,000 $12,002,000
Europe ...................... 197,000 822,000 1,269,000
Other international ......... 208,000 675,000 632,000
---------- ---------- -----------
$2,358,000 $7,650,000 $13,903,000
========== ========== ===========
</TABLE>
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%, which is then invested in
one or more of several mutual funds selected by each employee. Allaire did not
make any contributions to the 401(k) plan on behalf of its employees for the
year ended December 31, 1997 or for the nine months ended September 30, 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 and 1997 and for the nine months ended
September 30, 1998, totaled approximately $163,000, $372,000, and $698,000,
respectively. In addition, Allaire also leases certain fixed assets under
capital leases, which expire at various dates through October 2000.
In May 1998, Allaire entered into a new facility lease for additional
office space. The lease commenced in September 1998 and has a term of five
years and four months.
Future minimum commitments under noncancelable operating and capital
leases at September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Capital
leases leases
-------------- ----------
<S> <C> <C>
1998 (three months ended December 31, 1998) ......... $ 423,000 $ 92,000
1999 ................................................ 2,611,000 366,000
2000 ................................................ 2,606,000 163,000
2001 ................................................ 2,595,000 --
2002 ................................................ 2,593,000 --
Thereafter .......................................... 1,379,000 --
----------- --------
Total minimum lease payments ........................ $12,207,000 621,000
===========
Less--amount representing interest ................................. 40,000
--------
Present value of capital lease obligations ......................... $581,000
========
</TABLE>
F-22
<PAGE>
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
13. COMMITMENTS AND CONTINGENCIES (Continued)
Restricted Time Deposit
In connection with a facility lease entered into during 1997, Allaire is
required to maintain, on behalf of the landlord, an irrevocable letter of
credit with a bank in the amount of $125,000 over the term of the lease. In
addition, Allaire was required to maintain a certificate of deposit in an equal
amount as security for the letter of credit. This certificate of deposit was
restricted, was automatically renewed on a monthly basis as long as the letter
of credit was in effect and was included in cash and cash equivalents at
December 31, 1997. In June 1998, the aforementioned letter of credit was
replaced with a letter of credit issued under a new line of credit (Note 6) and
the restricted certificate of deposit was released.
Legal Proceedings
In April 1996, a wrongful termination action was brought against Allaire
and its founder by a former employee under which the plaintiff sought severance
pay and the right to 400,000 shares of Allaire's common stock which were
canceled upon termination. Although Allaire continues to deny any liability in
this matter, Allaire determined during 1997 that it was in the best interest of
its shareholders to settle this dispute out of court due to the rising legal
costs, distraction of management and uncertainty present in this litigation. As
a result, Allaire agreed to pay the plaintiff a cash settlement totaling
$285,000 in exchange for the termination of all legal action against Allaire
and its founder. This amount was fully accrued at the time of the settlement.
In addition to the matter noted above, Allaire is from time to time
subject to legal proceedings and claims which arise in the normal course of its
business. In the opinion of management, the amount of ultimate liability with
respect to these actions will not have a material adverse effect on Allaire's
financial position or results of operations.
14. SUBSEQUENT EVENT
Series A Preferred Stock Sale
On December 7, 1998, Allaire sold 31,250 shares of Series A preferred
stock at a price of $16.00 per share to MC Silicon Valley, Inc., a subsidiary
of Mitsubishi Corporation, Allaire's Japanese distributor. Each of these shares
has the same rights and privileges as all other shares of Series A preferred
stock (Note 7), each share is convertible into one share of common stock,
subject to certain anti-dilution adjustments, and the liquidation preference
for each share is $16.00.
F-23
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
How ColdFusion Works
[Graphical depiction of how ColdFusion application server processes requests
for information through a series of interconnecting arrows, rectangles and
circles, labeled clockwise from the left side of the diagram: "Web Browser,"
"HTTP Request," "Internet or Intranet," "Web Server," "CF Page," "ColdFusion
Server," "Database Server," "File System," "Email Server," "Distributed
Objects," "Other Enterprise Systems," "Web Page," "Web Server," "Internet or
Intranet," "Web Page" and back to "Web Browser." The sections of the diagram
are labeled, from left to right, "Client," "Network" and "Server." Various
locations on the diagram bear numbers 1-5.]
1. When a user clicks a "submit" button on a form or a hypertext link on a Web
page, the user's Web browser sends an HTTP request to the Web server via
the Internet or an intranet.
2. The Web server passes the request to ColdFusion Server.
3. ColdFusion reads the request from the user and the server interacts with
database servers, file systems and/or other applications to process the
information based on CFML tags (ColdFusion Mark-Up Language).
4. ColdFusion then dynamically generates an HTML Web page, with the requested
information, and returns it to the Web server.
5. The Web server returns the HTML page to the user's Web browser.
Advanced Development Configuration
[Graphical depiction of how ColdFusion Studio and ColdFusion application
servers interoperate within a development environment. Three bi-directional
arrows connect a depiction of three computer terminals (each labeled "Studio")
to a rectangle above depicting a ColdFusion Server. This left section of the
diagram is labeled "Develop." An arrow points from this ColdFusion Server to a
second server in the center of the diagram. The second server is connected by a
bi-directional arrow to a computer terminal below it with the word "Testing" on
its screen. This center section of the diagram is labeled "Stage." An arrow
points from the center section's ColdFusion Server to a set of three ColdFusion
Servers on the right side of the diagram, each connected by bi-directional
arrows. This set of three servers is connected by a bi-directional arrow to a
circle labeled "The Internet" below it. This right section of the diagram is
labeled "Deliver."]
<PAGE>
[BACK COVER/PANEL PAGE]
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