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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-25265
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ALLAIRE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 41-1830792
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
275 GROVE STREET, NEWTON, MASSACHUSETTS 02466
(Address of Principal Executive Offices) (Zip Code)
(617) 219-2000
(Registrant's Telephone Number, Including Area Code)
ONE ALEWIFE CENTER
CAMBRIDGE, MA 02140
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
TITLE OF CLASS SHARES OUTSTANDING AT JULY 31, 2000
-------------- -----------------------------------
Common Stock, $.01 par value............... 27,247,402
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ALLAIRE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 2000 and December 31, 1999............................ 3
Consolidated Statement of Operations for the Three and Six Months Ended June 30, 2000 and 1999.. 4
Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2000 and 1999........... 5
Notes to Unaudited Consolidated Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................... 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................................. 14
Item 6. Exhibits and Reports on Form 8-K................................................................ 14
Signatures................................................................................................ 15
Exhibit Index............................................................................................. 15
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLAIRE CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
ASSETS
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JUNE 30, DECEMBER 31,
2000 1999
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Current assets:
Cash and cash equivalents............................................................................ $ 44,583 $106,624
Short-term investments............................................................................... 83,221 12,405
Investment in marketable securities.................................................................. 6,730 --
Accounts receivable, net of allowance for doubtful accounts and returns of $998 and $701 at
June 30, 2000 and December 31, 1999, respectively.................................................. 15,803 7,926
Prepaid expenses and other current assets............................................................ 1,579 1,028
--------- ---------
Total current assets............................................................................ 151,916 127,983
Property and equipment, net.......................................................................... 8,713 4,948
Goodwill and other intangibles, net.................................................................. 4,914 584
Other assets......................................................................................... 2,402 25
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TOTAL ASSETS....................................................................................... $ 167,945 $ 133,540
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations......................................................... $ 21 $ 159
Current portion of notes payable..................................................................... 526 488
Accounts payable..................................................................................... 4,502 3,358
Accrued expenses..................................................................................... 14,251 8,536
Accrued employee compensation and benefits........................................................... 7,466 6,591
Deferred revenue..................................................................................... 25,544 11,937
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Total current liabilities....................................................................... 52,310 31,069
Notes payable........................................................................................... 273 547
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TOTAL LIABILITIES............................................................................... 52,583 31,616
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Stockholders' equity
Preferred stock, $.01 par value; Authorized: 5,000,000 shares at June 30, 2000 and December 31, 1999 -- --
Common stock, $.01 par value;
Authorized: 100,000,000 shares at June 30, 2000 and 35,000,000 shares at December 31, 1999
Issued and outstanding: 27,267,727 shares issued and 27,234,507 shares outstanding at June 30,
2000 and 26,849,532 issued and 26,816,312 outstanding at December 31, 1999.................. 273 268
Additional paid-in capital......................................................................... 142,449 139,050
Accumulated deficit................................................................................ (33,970) (36,746)
Unrealized gain on marketable securities........................................................... 7,125 --
Deferred compensation.............................................................................. (505) (638)
Stock subscriptions receivable..................................................................... (10) (10)
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Total stockholders' equity.................................................................... 115,362 101,924
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................................... $ 167,945 $ 133,540
========= =========
</TABLE>
3
The accompanying notes are an integral part of these
consolidated financial statements.
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ALLAIRE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
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REVENUE:
Software license fees...................................................... $28,326 $10,761 $50,806 $17,724
Services................................................................... 4,980 2,314 9,119 4,048
------- ------- ------- -------
Total revenue......................................................... 33,306 13,075 59,925 21,772
------- ------- ------- -------
COST OF REVENUE:
Software license fees...................................................... 1,295 647 2,520 1,103
Services................................................................... 5,803 1,794 9,357 3,300
------- ------- ------- -------
Total cost of revenue................................................. 7,098 2,441 11,877 4,403
------- ------- ------- -------
GROSS PROFIT.................................................................... 26,208 10,634 48,048 17,369
------- ------- ------- -------
OPERATING EXPENSES:
Research and development................................................... 5,372 2,897 9,884 5,364
Sales and marketing........................................................ 15,936 6,795 29,985 12,461
General and administrative................................................. 3,862 1,606 7,261 3,043
Stock-based compensation................................................... 61 66 123 133
Amortization of goodwill and other intangibles............................. 319 -- 425 --
Merger costs............................................................... -- 2,700 -- 2,700
------- ------- ------- -------
Total operating expenses.............................................. 25,550 14,064 47,678 23,701
------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS................................................. 658 (3,430) 370 (6,332)
Interest income, net....................................................... 1,722 517 3,331 803
------- --- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES............................................. 2,380 (2,913) 3,701 (5,529)
Income tax provision....................................................... 595 -- 925 --
------- ------- ------- -------
NET INCOME (LOSS)............................................................. $ 1,785 $(2,913) $ 2,776 $(5,529)
------- -------- ------- --------
NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share.......................................... $ 0.07 $ (0.13) $ 0.10 $ (0.26)
Diluted net income (loss) per share........................................ 0.06 (0.13) 0.09 (0.26)
Pro forma basic net loss per share......................................... (0.25)
Pro forma diluted net loss per share....................................... (0.25)
WEIGHTED AVERAGE SHARES:
Shares used in computing basic net income (loss) per share................. 27,105 22,744 26,997 20,899
Shares used in computing diluted net income (loss) per share............... 30,953 22,744 31,132 20,899
Shares used in computing pro forma basic net loss per share................ 21,831
Shares used in computing pro forma diluted net loss per share.............. 21,831
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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ALLAIRE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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SIX MONTHS ENDED
JUNE 30,
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2000 1999
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income (loss) ................................................................................. $ 2,776 $ (5,529)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization .................................................................. 2,911 1,122
Compensation expense relating to the issuance of equity instruments ............................ 123 133
Tax benefit from stock options exercised ....................................................... 888 --
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable .......................................................................... (7,877) (1,859)
Prepaid expenses and other current assets .................................................... (551) 347
Other assets ................................................................................. 43 (1)
Accounts payable ............................................................................. 1,144 (1,220)
Accrued expenses ............................................................................. 6,590 3,351
Deferred revenue ............................................................................. 13,607 3,428
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Total adjustments ............................................................................ 16,878 5,301
--------- ---------
Net cash provided by (used for) operating activities ......................................... 19,654 (228)
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments ............................................................... (209,348) (33,971)
Sales of short-term investments ................................................................... 138,532 496
Purchase of Open Sesame ........................................................................... (5,125) --
Purchases of property and equipment ............................................................... (5,906) (1,441)
Investment in partners ............................................................................ (2,000) --
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Net cash used for investing activities ....................................................... (83,847) (34,916)
Cash flows from financing activities:
Principal payments on capital lease obligations ................................................... (138) (167)
Principal payments on promissory notes ............................................................ -- (1,500)
Principal payments on notes payable ............................................................... (236) (1,346)
Proceeds from sale of common stock, net of issuance costs ......................................... 2,526 54,426
Payment received on stock subscription receivable ................................................. -- 16
--------- ---------
Net cash provided by financing activities .................................................... 2,152 51,429
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Net increase (decrease) in cash and cash equivalents ................................................ (62,041) 16,285
Cash and cash equivalents, beginning of period ...................................................... 106,624 3,247
--------- ---------
Cash and cash equivalents, end of period ............................................................ $ 44,583 $ 19,532
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for income taxes ........................................................................ $ 56 --
Cash paid for interest ............................................................................ 76 $ 206
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain on marketable securities .......................................................... $ 7,125 $ --
Conversion of Series A convertible preferred stock to common stock ................................ -- 751
Conversion of redeemable convertible preferred stock to common stock .............................. -- 12,673
</TABLE>
5
The accompanying notes are an integral part of these
consolidated financial statements.
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ALLAIRE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Allaire
Corporation and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Allaire Corporation and its
subsidiaries are collectively referred to as the "Company" or "Allaire." Certain
1999 amounts have been reclassified to conform to the 2000 method of
presentation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all financial information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of operations for the interim
periods reported and of the financial condition of the Company as of the date of
the interim balance sheet. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999 and the
Company's Registration Statement on Form S-1 filed on September 29, 1999,
(Registration No. 333-86563).
Net Income (Loss) Per Share
Net income (loss) per share is computed under SFAS No. 128, "Earnings Per
Share." Basic net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding, excluding shares of common stock
subject to repurchase. Diluted net income (loss) per share is computed using the
weighted average number of shares of common stock outstanding, including
potential common shares from conversion of stock options and warrants. Pro forma
basic and diluted net income (loss) per share have been calculated assuming the
conversion of all outstanding shares of preferred stock into common stock, as if
the shares had converted immediately upon their issuance. Options to purchase
641,540 and 216,519 shares for the second quarter and first six months of 2000
were outstanding but were not included in the computations of diluted EPS
because the price of the options was greater than the average market price of
the common stock for the period reported.
2. COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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2000 1999 2000 1999
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Net income (loss)....................................... $ 1,785 $(2,913) $ 2,776 $(5,529)
Unrealized gain (loss) on marketable securities......... (7,125) -- 7,125 --
-------- ------- ------- -------
COMPREHENSIVE NET INCOME (LOSS)......................... $ (5,340) $(2,913) $ 9,901 $(5,529)
======== ======= ======= =======
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3. ACQUISITION
In March 2000, Allaire acquired Open Sesame from Bowne Internet Solutions
for a total purchase price of $5.1 million. Open Sesame is profiling and
personalization technology that delivers personalized customer interaction
capabilities. Allaire accounted for this acquisition as a purchase. The excess
of the purchase price over identified tangible and intangible assets was
considered goodwill. Goodwill and other intangibles are amortized over four
years. Pro forma financial statements have not been disclosed due to
immateriality.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. The
forward-looking statements involve known and unknown risks, uncertainties and
other factors, including the factors set forth below in "Certain Factors that
may Affect Future Results," that may cause the actual results, performance and
achievements of Allaire to differ materially from those indicated by the
forward-looking statements.
ColdFusion is a U.S. registered trademark, and Allaire, Allaire Spectra,
HomeSite and JRun are trademarks of Allaire Corporation. All other company
names, brand names and product names are the property of their respective
holder(s).
OVERVIEW
Allaire develops, markets and supports Web application servers, packaged
applications and visual tools that enable the development and deployment of
sophisticated e-business Web sites and applications. Allaire derives a majority
of its revenue from its four primary products, Allaire Spectra, ColdFusion, JRun
and HomeSite.
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, consulting 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 to 24 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 such time as 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.
Allaire generates its software license 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 its Web site. The
indirect distribution channel includes distributors, direct and original
equipment manufacturer resellers, system integrators and Allaire Alliance
members. Revenue generated by the indirect distribution channel accounted for
62% and 49% of total revenue for the three months ended June 30, 2000 and June
30, 1999, respectively. Revenue generated by the indirect distribution channel
accounted for 62% and 49% of total revenue for the six months ended June 30,
2000 and June 30, 1999, respectively. Allaire anticipates that revenue derived
from the indirect distribution channel will continue to represent a significant
percentage of total revenue. Allaire primarily derives its international revenue
through its indirect distribution channel. International revenue outside of
North America accounted for 19% and 11% of total revenue for the three months
ended June 30, 2000 and June 30, 1999, respectively, and 19% and 13% of total
revenue for the six months ended June 30, 2000 and June 30, 1999, respectively.
RESULTS OF OPERATIONS
REVENUE
Total revenue increased 155% from $13.1 million for the three months ended
June 30, 1999 to $33.3 million for three months ended June 30, 2000. Total
revenue increased 175% from $21.8 million for the six months ended June 30, 1999
to $59.9 million for the six months ended June 30, 2000.
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Software License Fees. Revenue from software license fees increased 163%
from $10.8 million for the three months ended June 30, 1999 to $28.3 million for
the three months ended June 30, 2000. Revenue from software license fees
increased 187% from $17.7 million for the six months ended June 30, 1999 to
$50.8 million for the six months ended June 30, 2000. The increase was primarily
due to an increase in the number of licenses sold to use the Company's Allaire
Spectra, ColdFusion and JRun products. Allaire's first shipment of Allaire
Spectra occurred in the fourth quarter of 1999. Increases in product prices
associated with the release of new versions of Allaire's products in March 2000
also contributed to the growth in revenue.
Services. Revenue from services increased 115% from $2.3 million for the
three months ended June 30, 1999 to $5.0 million for the three months ended June
30, 2000. Revenue from services increased 125% from $4.0 million for the six
months ended June 30, 1999 to $9.1 million for the six months ended June 30,
2000. 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 100% from $647,000 for the three months ended
June 30, 1999 to $1.3 million for the three months ended June 30, 2000. Cost of
software license fees increased 128% from $1.1 million for the six months ended
June 30, 1999 to $2.5 million for the six months ended June 30, 2000. The
increase in absolute dollars was due to higher unit sales volume. The
improvement in software license fees gross margins from 94% for the three months
ended June 30, 1999 to 95% for the three months ended June 30, 2000 and 94% for
the six months ended June 30, 1999 to 95% for the six months ended June 30,
2000, was primarily attributable to economies of scale achieved with higher
sales volume in 2000.
Cost of Services. Cost of services consists primarily of personnel costs.
Cost of services increased 223% from $1.8 million for the three months ended
June 30, 1999 to $5.8 million for the three months ended June 30, 2000. 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, consulting and technical support. The decline in services
gross margins from 22% for the three months ended June 30, 1999 to (17)% for the
three months ended June 30, 2000 and from 18% for the six months ended June 30,
1999 to (3)% for the six months ended June 30, 2000 was primarily attributable
to the investment in additional consulting and technical support resources to
support Allaire Spectra, the Company's newly released packaged e-business
application product.
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 revenue 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 85% from $2.9 million for the three months ended
June 30, 1999 to $5.4 million for the three months ended June 30, 2000. Research
and development expenses increased 84% from $5.4 million for the six months
ended June 30, 1999 to $9.9 million for the six months ended June 30, 2000. The
increase primarily resulted from salaries associated with newly hired
development personnel and costs related to the localization of Allaire's
products. 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 advertising, seminars, trade shows and new product launch activities.
Sales and marketing expenses increased 135% from $6.8 million for the three
months ended June 30, 1999 to $15.9 million for the three months ended June 30,
2000. Sales and marketing expenses increased 141% from $12.5 million for the six
months ended June 30, 1999 to $30.0 million for the six months ended June 30,
2000. The increase was primarily attributable to costs associated with
additional direct sales, pre-sales support and marketing personnel, and an
increase in marketing programs, including advertising, and seminars. Allaire
anticipates that
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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, recruiting and insurance
costs. General and administrative expenses increased 140% from $1.6 million for
the three months ended June 30, 1999 to $3.9 million for the three months ended
June 30, 2000. General and administrative expenses increased 139% from $3.0
million for the six months ended June 30, 1999 to $7.3 million for the six
months ended June 30, 2000. The increase was primarily attributable to salaries
associated with newly hired personnel and related costs required to manage
Allaire's growth and facilities expansion. Allaire expects that its general and
administrative expenses will increase in absolute dollars as it continues to
expand its staffing to support expanding facilities and operations.
Stock-based Compensation. The amount that the estimated fair market value of
Allaire's common stock exceeds the exercise price of stock options on the date
of grant is recorded as deferred compensation and amortized to stock-based
compensation expense as the options vest. Allaire recognized $66,000 of
stock-based compensation for the three months ended June 30, 1999 compared to
$61,000 of stock based compensation for the three months ended June 30, 2000.
Allaire recognized $133,000 of stock-based compensation for the six months ended
June 30, 1999 compared to $123,000 of stock based compensation for the six
months ended June 30, 2000.
Amortization of Goodwill and Other Intangibles. The amortization of goodwill
and other intangibles of $319,000 for the three months ended June 30, 2000 and
$425,000 for the six months ended June 30, 2000 related to the amortization of
costs associated with the purchase of the Open Sesame technology from Bowne
Internet Solutions in March 2000.
Merger Costs. The merger costs of $2.7 million in the six months ended June
30, 1999 relate to the mergers with Bright Tiger and Live Software. The costs
include professional fees, facility closings, severance packages and related
costs associated with these acquisitions.
INTEREST INCOME, NET
Interest income, net of interest expense, increased 233% from $517,000 for
the three months ended June 30, 1999 to $1.7 million for the three months ended
June 30, 2000. Interest income, net of interest expense, increased 315% from
$803,000 for the six months ended June 30, 1999 to $3.3 million for the six
months ended June 30, 2000.The increase was due to interest income earned from
the investment of the net cash proceeds from Allaire's initial public offering
in January 1999 and follow-on public offering in September 1999.
PROVISION FOR INCOME TAXES
Allaire's effective tax rate for the second quarter and six months ended
June 30, 2000 was 25% compared to a zero rate for the same periods in 1999. For
the second quarter of 1999, Allaire incurred a net operating loss for which no
tax benefit was recognized as a full valuation allowance was recorded for the
related deferred tax asset since realization of the tax benefit was not
sufficiently assured.
The effective tax rate of 25% for 2000 is different from the Federal
statutory rate of 35% due to the realization of the benefit of operating loss
carryforwards from prior years that were not recognized as a deferred tax asset.
Due to Allaire's continuing trend in positive earnings, Allaire reversed a
portion of its valuation allowance related to the previously established
deferred tax asset for which realization is considered more likely than not.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, Allaire had cash, cash equivalents and short-term
investments of $127.8 million, up from $119.0 million at December 31, 1999.
Cash provided by operating activities for the six months ended June 30, 2000
was $19.7 million, primarily related to increases in accrued expenses and
deferred revenue and net income of $2.8 million, offset by an increase in
accounts receivable. Cash used for
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operating activities for the six months ended June 30, 1999 was $228,000
primarily related to a net loss of $5.5 million, partially offset by increases
in deferred revenue and accrued expenses.
Cash used for investing activities for the six months ended June 30, 2000
was $83.8 million, primarily related to net purchases of short-term investments.
Cash used by investing activities for the six months ended June 30, 2000 was
$34.9 million primarily related to the purchase of short term investments.
Cash provided by financing activities for the six months ended June 30, 2000
was $2.2 million, primarily due to common stock issuances. Cash provided by
financing activities for the six months ended June 30, 1999 was $51.4 million,
primarily related to net proceeds from Allaire's initial public offering.
As of June 30, 2000, Allaire's primary commitments consisted of obligations
related to operating leases, $799,000 of notes payable under equipment lines and
$21,000 of capital lease obligations.
In March 2000, Allaire acquired Open Sesame from Bowne Internet Solutions
for a total purchase price of $5.1 million.
Allaire expects to experience significant growth in its operating expenses
for the foreseeable future in order to execute its business plan, particularly
research and development and sales and marketing expenses. As a result, Allaire
anticipates that such operating expenses, as well as planned capital
expenditures, will constitute a material use of its cash resources. In addition,
Allaire may utilize cash resources to fund acquisitions or investments in
complementary businesses, technologies or product lines. Allaire believes that
its current cash and cash equivalents and short-term investments will be
sufficient to meet its anticipated cash requirements for working capital and
capital expenditures for the foreseeable future.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Allaire does not
expect SFAS No. 133 to have a material affect on its financial position or
results of operations.
In March 2000, the Financial Accounting-Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 to certain issues including: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a noncompensatory plan; the
accounting consequence of various modifications to the terms of previously fixed
stock options or awards; and the accounting for the exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in FIN 44 are applicable retroactively to specific
events occurring after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Allaire has substantial net losses and may not be profitable in the future.
Allaire's limited operating history and the undeveloped nature of the market for
Web development products make predicting future revenue and operating results
difficult. Allaire has experienced substantial net losses in each fiscal year
since its inception and, as of June 30, 2000, had an accumulated deficit of $34
million. These net losses and accumulated deficit resulted primarily from the
significant costs incurred in the development of Allaire's products and in the
preliminary establishment of its infrastructure. Although Allaire recorded a
small profit for the quarters ended December 31, 1999, March 31, 2000 and June
30, 2000, it cannot be certain that Allaire will continue to be profitable.
Disappointing quarterly revenue and operating results could cause the price
of Allaire's common stock to fall. Allaire's quarterly revenue may fluctuate for
several reasons, including:
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- The market for web application server and packaged e-business
applications is in an early stage of development and it is therefore
difficult to accurately predict customer demand; and
- The sales cycle for Allaire's products and services varies substantially
from customer to customer and, if Allaire's average sales price
continues to increase as expected, it expects the sales cycle to
lengthen. As a result, Allaire may have difficulty determining whether
and when it will receive license revenue from a particular customer.
In addition, most of Allaire's expenses, such as employee compensation and
rent, are relatively fixed. Allaire's expense levels are based, in part, on its
expectations regarding future revenue increases. As a result, any shortfall in
revenue in relation to Allaire's expectations could cause significant changes in
its operating results from quarter to quarter and could result in quarterly
losses. If Allaire's quarterly operating results fall below the expectations of
investors or public market analysts, the price of Allaire's common stock could
fall substantially.
Allaire operates in highly competitive markets and may not be able to
compete effectively. The web application server and packaged e-business
applications market is intensely competitive and rapidly changing. Many of
Allaire's current and potential competitors have longer operating histories and
substantially greater financial, technical, marketing, distribution and other
resources than Allaire does and therefore may be able to respond more quickly
than Allaire can to new or changing opportunities, technologies, standards or
customer requirements. In the portion of the market with the highest product
prices, Allaire competes with large web and database platform companies that
offer a variety of software products. Allaire also competes with a number of
medium-sized and start-up companies that have introduced or that are developing
web application servers and packaged e-business applications. In the middle
range of the market where product prices are significantly lower, Allaire
competes primarily against Microsoft. Allaire expects that additional
competitors will enter the market with competing products as the size and
visibility of the market opportunity increases. Increased competition could
result in pricing pressures, reduced margins or the failure of Allaire's
products to achieve or maintain market acceptance.
If, in the future, a competitor chooses to bundle a competing web
application server or packaged e-business application with other products, the
demand for Allaire's products might be substantially reduced. In addition, new
technologies will likely increase the competitive pressures that Allaire faces.
The development of competing technologies by market participants or the
emergence of new industry standards may adversely affect Allaire's competitive
position. As a result of these and other factors, Allaire may not be able to
compete effectively with current or future competitors, which would have a
material adverse effect on its business, operating results and financial
condition.
Future success will depend on Allaire's ability to market and sell Allaire
Spectra successfully. Allaire expects that its future financial performance will
depend in part on sales of Allaire Spectra. Allaire began commercial shipments
of Allaire Spectra in December 1999. Market acceptance of Allaire Spectra will
depend on the market for packaged e-business applications and customer demand
for the specific functionality of Allaire Spectra. If Allaire Spectra does not
meet customer needs or expectations, for whatever reason, Allaire's reputation
could be damaged, or it could be required to upgrade or enhance the product,
which could be costly and time consuming.
Allaire's failure to expand its sales force and distribution channels would
adversely affect its revenue growth and financial condition. To increase its
revenue, Allaire must increase the size of its sales force and the number of its
indirect channel partners, including original equipment manufacturers,
value-added resellers and systems integrators. A failure to do so could have a
material adverse effect on Allaire's business, operating results and financial
condition. There is intense competition for sales personnel in Allaire's
business, and there can be no assurance that Allaire will be successful in
attracting, integrating, motivating and retaining new sales personnel. Allaire's
existing or future channel partners may choose to devote greater resources to
marketing and supporting the products of other companies. In addition, Allaire
will need to resolve potential conflicts among its sales force and channel
partners.
Allaire depends on a small number of distributors for a significant portion
of its revenue. Allaire derives a substantial portion of its revenue from a
small number of distributors. For the six months ended June 30, 2000, revenue
from Allaire's indirect distribution channel accounted for 62% of total revenue
and one distributor, Ingram Micro, accounted for 33% of total revenue. For the
six months ended June 30, 1999, revenue from the indirect distribution channel
accounted for 49% of Allaire's total revenue, and Ingram Micro accounted for 37%
of total revenue. The loss of, or a reduction in orders from, Ingram Micro or
any other significant distributor could have a material adverse effect on
Allaire's business, operating results and financial condition.
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Allaire may experience lost or delayed sales as its sales cycle lengthens. A
longer sales cycle reduces Allaire's ability to forecast revenue levels and may
result in lost sales. Any delay or loss in sales of Allaire's products could
have a material adverse effect on its business, operating results and financial
condition, and could cause operating results to vary significantly from quarter
to quarter. As Allaire increases its sales and marketing focus on larger sales
to businesses and other large organizations, it expects that increased
executive-level involvement of information technology officers and other senior
managers of its customers will be required. Potential large sales may be
delayed, or lost altogether, because Allaire will have to provide a more
comprehensive education to prospective customers regarding the use and benefits
of its products. Allaire's customers' purchase decisions may be subject to
delays over which Allaire may have little or no control.
If Allaire is unable to continue licensing technology for its products from
third parties, its product development efforts could be delayed. Allaire
licenses technology that is incorporated into its products from third parties.
The loss of access to this technology could result in delays in Allaire's
development and introduction of new products or enhancements until equivalent or
replacement technology could be accessed, if available, or developed internally,
if feasible. These delays could have a material adverse effect on its business,
operating results and financial condition. In light of the rapidly evolving
nature of web technology and Allaire's strategy to pursue industry partnerships,
Allaire believes that it will increasingly need to rely on technology from third
party vendors, such as Microsoft, which may also be competitors. There can be no
assurance that technology from others will continue to be available to Allaire
on commercially reasonable terms, if at all.
Allaire's failure to properly manage its growth could strain its resources
and adversely affect its business. Allaire's failure to manage its rapid growth
could have a material adverse effect on the quality of its products, its ability
to retain key personnel and its business, operating results and financial
condition. Allaire's revenue increased 175% for the six months ended June 30,
2000 from the same period in 1999. The number of Allaire's employees increased
from 93 at January 1, 1998 to 509 at June 30, 2000. To manage future growth
effectively Allaire must maintain and enhance its financial and accounting
systems and controls, integrate new personnel and manage expanded operations.
Allaire's business could be adversely affected if its products fail to
perform properly. Software products as complex as Allaire's may contain
undetected errors or "bugs," which result in product failures or security
breaches or otherwise fail to perform in accordance with customer expectations.
Errors in certain Allaire products have been detected after the release of the
product. The occurrence of errors could result in loss of or delay in revenue,
loss of market share, failure to achieve market acceptance, diversion of
development resources, injury to Allaire's reputation, or damage to its efforts
to build brand awareness, any of which could have a material adverse effect on
its business, operating results and financial condition. In addition, any
failure in a customer's web application developed and deployed with Allaire's
products could result in a claim for substantial damages against Allaire,
regardless of Allaire's responsibility for the failure. Although Allaire
maintains general liability insurance, including coverage for errors and
omissions, there can be no assurance that its existing 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.
Claims by Other Companies That Allaire Infringes Their Copyrights or Patents
Could Adversely Affect Allaire's Financial Condition. If any of Allaire's
products violate third party proprietary rights, Allaire may be required to
reengineer these products or seek to obtain licenses from third parties to
continue to offer them. Any efforts to reengineer Allaire's products or obtain
licenses on commercially reasonable terms may not be successful, and, in any
case, would substantially increase costs and have a material adverse effect on
Allaire's business, operating results and financial condition. Allaire does not
conduct comprehensive patent searches to determine whether the technology used
in its products infringes patents held by third parties. In addition, product
development is inherently uncertain in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies.
Although Allaire is generally indemnified against claims that third party
technology that it licenses infringes the proprietary rights of others, this
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 in Allaire's
products, and claims for indemnification from customers resulting from these
claims, will not be asserted or prosecuted against Allaire. These claims, even
if not meritorious, could result in the expenditure of significant financial
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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.
In addition, any claim of infringement could cause Allaire to incur
substantial costs defending against the claim, even if the claim is invalid, and
could distract Allaire's management from their business. A party making a claim
also could secure a judgment that requires Allaire to pay substantial damages. A
judgment could also include an injunction or other court order that could
prevent Allaire from selling its products. Any of these events could have a
material adverse effect on Allaire's business, operating results and financial
condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2000, Allaire was exposed to market risks which primarily
include changes in U.S. interest rates. Allaire maintains a significant portion
of its cash and cash equivalents and short-term investments in financial
instruments with purchased maturities of 12 months or less. Allaire does not
hold derivative financial instruments in its investment portfolio. Allaire's
cash equivalents and short-term investments consist of high-quality corporate
and government debt. These financial instruments are subject to interest rate
risk and will decline in value if interest rates increase. Due to the short
duration of these financial instruments, an immediate increase in interest rates
would not have a material effect on Allaire's financial condition or results of
operations.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders of Allaire was held on May 17, 2000.
At that meeting, the stockholders elected Joseph J. Allaire, David J. Orfao,
Jonathan A. Flint, John J. Gannon, Thomas A. Herring, Ronald G. Ward and W.
Frank King III to serve as directors of Allaire, for a term expiring at the
Annual Meeting of Stockholders of Allaire in 2001 or a special meeting in lieu
thereof. The results of the votes to elect each of the directors were as
follows:
Number of Shares
------------------------
For Withheld
---------- --------
Joseph J. Allaire 20,453,497 127,719
Jonathan A. Flint 20,453,541 127,675
John J. Gannon 20,453,541 127,675
Thomas A. Herring 20,453,441 127,775
W. Frank King III 20,462,861 118,355
David J. Orfao 20,453,141 128,075
Ronald G. Ward 20,463,261 117,955
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10.1 Sublease termination agreement between Allaire and New Boston
Alewife Limited Partnership dated April 4, 2000
Exhibit 10.2 Sublease termination agreement between Allaire and The Center
for Quality Management dated April 19, 2000
Exhibit 10.3 First lease amendment between Allaire and EOP - Riverside
Project, L.L.C. dated May 31, 2000
Exhibit 10.4 Sublease agreement between Allaire and Nervewire Inc., dated
February 14, 2000
Exhibit 10.5 1998 Incentive Stock Option Agreement for David J. Orfao
Exhibit 10.6 1998 Non Statutory Employee Stock Option Agreement for
David J. Orfao
Exhibit 11 Statement re: Computation of Unaudited Net Income (Loss)
Per Share and Pro Forma Net Income (Loss) Per Share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
Allaire filed no reports on Form 8-K during the quarter ended June 30,
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 11, 2000
ALLAIRE CORPORATION
By: /s/ DAVID A. GERTH
---------------------------------------------
DAVID A. GERTH
VICE PRESIDENT, FINANCE AND OPERATIONS, TREASURER
AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
EXHIBIT INDEX
Exhibit 10.1 Sublease termination agreement between Allaire and New Boston
Alewife Limited Partnership dated April 4, 2000
Exhibit 10.2 Sublease termination between Allaire and The Center for
Quality Management dated April 19, 2000
Exhibit 10.3 First lease amendment between Allaire and EOP - Riverside
Project, L.L.C. dated May 31, 2000
Exhibit 10.4 Sublease agreement between Allaire and Nervewire Inc., dated
February 14, 2000
Exhibit 10.5 1998 Incentive Stock Option Agreement for David J. Orfao
Exhibit 10.6 1998 Non Statutory Employee Stock Option Agreement for
David J. Orfao
Exhibit 11 Statement re: Computation of Unaudited Net Income (Loss) Per
Share and Pro Forma Net Income (Loss) Per Share
Exhibit 27 Financial Data Schedule
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