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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-80759
PROSPECTUS SUPPLEMENT DATED MARCH 31, 2000 (REGISTRATION NO. 333-80759)
TO
PROSPECTUS DATED JULY 19, 1999
AND
PROSPECTUS SUPPLEMENTS DATED AUGUST 16, 1999, SEPTEMBER 7, 1999 AND
NOVEMBER 15, 1999
ALLAIRE CORPORATION
This Prospectus Supplement includes the attached Annual Report on Form 10-K
of Allaire Corporation ("Allaire") for the year ended December 31, 1999 and
Exhibit 13.1 thereto previously filed by Allaire with the Securities and
Exchange Commission.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined whether
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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PART I
ITEM 1. BUSINESS
ALLAIRE
We develop, market and support Internet software products for companies
building their businesses on the Web. The products in the Allaire Business
Platform enable customers to rapidly build, deploy, and manage sophisticated
e-business Web sites that provide dynamic content, personalized interaction, and
secure business transactions. Based on open Internet technologies, our platform
provides a robust, secure, scalable foundation for building online applications
that support online commerce, strengthen customer and partner relationships,
publish and personalize content, and automate key business processes. Companies
as varied as Williams-Sonoma, Kaiser Permanente and autobytel.com have all used
the Allaire Business Platform to build and manage large-scale, content-rich,
transaction-oriented Web sites and applications.
INDUSTRY OVERVIEW
GROWTH OF THE INTERNET
The Internet has experienced dramatic growth, both in terms of the number
of users and as a means of conducting business transactions, and is expected to
continue to grow rapidly. International Data Corporation estimates that the
number of Internet users will increase from 196 million in 1999 to 502 million
in 2003. The emergence of the Internet has enabled new online business models
and spurred the development and deployment of Web applications to facilitate
business interactions that were not practical to address with traditional
computing systems. This public infrastructure enables companies to market and
sell their products and services to customers through e-business applications as
well as forge closer ties with their partners and suppliers. International Data
Corporation estimates that the volume of commerce over the Internet will
increase from approximately $111 billion in 1999 to approximately $1.3 trillion
by 2003.
As the number of companies conducting business online has increased, the
Internet has become a highly competitive business environment and has in turn
energized the entire business world. A growing number of companies are building
Web applications that perform a combination of marketing, sales and operational
functions. The Internet promotes competition in markets and makes it easy for
customers to locate and transact business with competitive vendors. As a result,
companies are seeking to differentiate themselves from competitors by developing
increasingly sophisticated capabilities for attracting and retaining customers.
Online businesses are looking for innovative technology solutions that enable
them to deliver products and information targeted to their customers' interests
and that enable them to provide a higher level of customer service. More
broadly, this heightened competition is raising the importance of technology in
increasing business efficiency. Companies are increasingly looking to Internet
technology to help them manage their supplier and distributor networks more
effectively -- by automating inter- and intra-company business processes and
integrating diverse systems where key information is managed and where key
business transactions reside.
Combined, these factors have created demand for comprehensive software
platforms that can enable businesses to execute on their key Internet business
initiatives quickly and reliably. Such a platform includes application servers
that provide the basic infrastructure for hosting Web applications and
integrating them with existing enterprise applications; packaged solutions that
provide advanced services for content management, commerce, and personalization;
standards-based middleware for integrating the systems of different businesses
across the Internet; as well as productive tools that enable both developers and
business users to participate in the construction, maintenance and management of
online businesses.
WEB APPLICATION SERVERS
A Web application server is a software program that hosts Web applications
and enables access to these applications through Web browsers, client hardware
devices and other applications. A Web application server
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also enables hosted applications to access a company's servers and other
internal systems. Application servers are central to the Web as a computing
platform, much as the operating system is central to the desktop computing
platform. According to Forrester Research, the market for Web application
servers will triple from $692 million in 1999 to $2.1 billion in 2002. We
believe that the central technology role of Web application servers places
leading Web application server vendors in a strong position to sell related
software products. This additional software includes development tools,
business-to-business integration tools, Web management products and packaged
e-business applications.
PACKAGED E-BUSINESS APPLICATIONS
Packaged e-business applications enable companies to rapidly deploy
Internet applications by providing pre-built functionality based on best
practices in online commerce, content management, and personalization. Using
these packages, companies can dynamically deliver information and transactional
capabilities to a broad group of users, including customers, vendors and
employees. More companies are seeking to gain a competitive advantage by
deploying applications with sophisticated content management, commerce and
personalization capabilities. An International Data Corporation report estimates
that the market for e-business applications will grow from $1.7 billion in 1999
to $13.2 billion in 2003.
INDUSTRY CHALLENGES
Companies are deploying Web applications to address a wide range of
strategic business needs, with the greatest activity occurring in the following
areas:
- Online commerce -- the marketing and sale of products or services online
- Customer service -- the use of Internet applications to increase customer
satisfaction and drive downstream revenue
- Content management -- the facilitation of communication and
decision-making through improved information management
- Business process automation -- the use of Web technology to further
automate core business tasks
Many of the applications in these four key Internet disciplines were not
practical or feasible using mainframe, desktop or client-server technologies.
However, the Internet's open standards and the low cost of deploying Web
applications open up a wide vista of new opportunities for companies to innovate
and achieve significant competitive advantage.
To make the full range of Web application deployments economically
feasible, a Web application platform must be flexible, highly functional, and
affordably priced. Similarly, successful Web applications must be based on
standards that are specific to the Web, as these enable their portability and
broad reach. Standard Web protocols such as HTTP, HTML and XML form the core of
Web application technology. These protocols evolved independently from
mainframe, desktop or client-server technologies, which form the backbone of
most established companies' computer systems. Thus, to be successful, Web-based
applications must be able to integrate with a company's existing hardware and
software systems where key applications and data reside, including databases,
directories, messaging servers and transaction monitors.
To date, few Web application server products have achieved broad market
acceptance. Widespread and sustained acceptance of a product promotes market
entry by technology vendors and service providers offering complementary
products and professional services to customers. Broad customer and developer
support enhances a vendor's ability to launch new products and product versions
by improving the quality of pre-release customer testing, by enhancing the
vendor's ability to secure reference customers prior to a new product's release,
and by helping to ensure widespread customer awareness and availability of new
products through the vendor's distribution channel.
As competition among companies conducting online commerce increases,
businesses are becoming increasingly focused on speeding the development and
deployment process. Cutter Information Corporation estimates that 72% of Web
application development projects have a schedule of six months or less, and 14%
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have a schedule of less than a month. As a consequence, Web application servers
and packaged e-business applications must contain features, such as visual
tools, templates and wizards, which promote productive development and simplify
deployment. The graphical, content-rich and data-intensive nature of e-business
applications requires the involvement of a variety of contributors. These
include enterprise systems programmers, database developers and application
programmers as well as a variety of non-traditional contributors such as Web and
multimedia designers, business managers, and business users. To ensure
productive Web application development and deployment, the Web application
server must provide appropriate tools to each set of participants, while
preserving the integrity of the application and coordinating the efforts of
geographically-dispersed, multi-disciplinary teams.
THE ALLAIRE SOLUTION
We are a leading provider of Internet software and services that enable
organizations to build their businesses on the Web. The products in the Allaire
Business Platform offer companies the following benefits:
- A comprehensive software platform that enables customers to rapidly
build, deploy and manage Web applications in each of the four key
Internet business disciplines -- online commerce, customer service,
content management and business process automation. The Allaire Business
Platform consists of enterprise-class, competitively-priced Web
application servers, packaged e-business applications and visual tools
and is complemented by high-quality consulting, training, and support
offerings that support the full life cycle of design, development,
testing, and deployment.
- Support for the latest Web standards, such as HTML, XML and Java, and
integration with a large number of enterprise information systems
technologies. The products in our platform are not constrained by a need
to support or promote a particular legacy technology or a particular
operating system.
- Widespread industry adoption among corporations, independent developers,
consultants, and software vendors. The Allaire Alliance partner program
includes over 1000 technology partners, direct and indirect distributors,
systems integrators, and other professionals that support and extend the
use and functionality of our products through complementary products and
services.
- Features and technologies designed to reduce time to market. Allaire
Spectra speeds development by providing packaged functionality based on
industry best practices, and our platform includes visual tools that
simplify development and administration tasks for technical and business
users alike. In addition, innovative technologies such as ColdFusion
Markup Language (CFML), JavaServer Pages (JSP), Web Distributed Data
eXchange (WDDX), and a large number of third-party components all enhance
developer productivity.
ALLAIRE STRATEGY
Our goal is to be the leading e-business platform provider for businesses
building and deploying sophisticated e-business Web sites and applications. Key
elements of our strategy to attain this goal are:
Make Enterprise-Class Products that are Easy to Use and Affordable. We
believe that we have become a leader in the Web application server market by
providing enterprise-class products that have high performance, scalability and
security, but that are much easier to use and cost significantly less than
products available from most other vendors. Because our products are easier to
use and cost less than other products, they can be adopted by a larger number of
businesses to develop and deploy a wider variety of applications. We intend to
continue to sell easy-to-use, high-quality products at affordable prices to
capture a significant portion of the Internet software market.
Maximize Product Adoption. We have established significant market presence
for our products by making components of our technology freely and widely
available. Non-commercial versions of our ColdFusion, JRun and HomeSite products
are available for free electronic distribution and are also distributed by
original equipment manufacturers. By promoting access to our technology, we seek
to associate the Allaire
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brand with high-quality, highly-productive Web application products, and to
encourage users to progress from free versions to commercial products.
Leverage Leadership Position in Web Application Server Market. We intend
to continue to introduce new products that complement our Internet business
platform. We believe that our leadership position in the Web application server
market gives us a competitive advantage over vendors that have sold fewer
products. We believe the broad customer base and developer support of our Web
application servers enhance our ability to introduce complementary products.
Continue to Support Open Web Standards. We designed our products to be
open by supporting development for key Web application platforms and
technologies, as well as integration with key enterprise and client-server
standards. We have helped to introduce innovative technologies for Web
application development and deployment, such as CFML, WDDX and JSP, that are
used by large numbers of Web developers. We intend to continue to develop
innovative Web technologies to meet changing customer requirements and to align
our products with additional Internet standards as they emerge. This will enable
our customers to preserve their investments in existing computer systems without
compromising Web application functionality or performance.
Expand Channel Distribution. To maximize the effectiveness of our sales
and marketing resources, we intend to continue to expand the depth and breadth
of our channel distribution. We believe that increasing the dollar amount of the
sales opportunities handled by our indirect channel distribution will increase
the strength and motivation of our channel while allowing our direct sales force
to focus on increasingly larger sales to Fortune 1000 companies and other major
organizations.
Expand Sales Through the OEM Channel. We intend to increase the dollar
amount of sales to companies that embed our technology in their products. By
providing low-cost, flexible, and productive software, we believe we can attract
a large number of customers that need Web application server technology in their
products but do not wish to develop and maintain it themselves.
Enhance Co-Selling Relationships with Systems Integrators. We intend to
continue to develop our relationships with systems integrators and other Web
consultants that implement e-business applications using our Web application
products. By providing significant opportunities to these firms to generate
consulting revenue, we believe that they will promote our products over those
sold by competing vendors that seek to keep implementation and consulting
services revenue for themselves. The substantial resources of systems
integrators and Web consultants help ensure the successful development and
deployment of our customers' e-business applications.
Win Enterprise Standards Decisions. As companies invest in Web application
servers and related software products, their purchasing decisions more often
require approval of a vendor's technology as a company-wide standard. We intend
to expand the support and coverage of these accounts within our direct sales
force, and to continue to present the business advantages of adopting our
technology as a company-wide standard.
PRODUCTS
Our products enable companies and other organizations to develop and deploy
sophisticated e-business applications. The discussion and chart below describe
our products.
COLDFUSION
ColdFusion Server. ColdFusion Server is an open, scalable and secure Web
application server. Web applications built with ColdFusion range from simple,
database-driven pages to large-scale, content-rich, transaction-oriented Web
sites. ColdFusion Server is available in two editions, Professional and
Enterprise, running on Windows NT. The Enterprise edition also runs on Sun
Solaris and HP-UX. An Enterprise edition
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running on Linux (an open source version of Unix) is expected to be released
during the second quarter of 2000. ColdFusion Server has won the following
awards:
- 1999 Best of 1999 Award from PC Magazine;
- 1999 Editors' Choice Award from PC Magazine;
- 1999 Jolt Product Excellence Award from Software Development Magazine;
- 1999 Well-Connected Award from Network Computing;
- 1999 Reader's Choice Award from the Visual Basic Programmer's Journal;
and
- "Best of Show Award" at the 1998 Fall Internet World.
ColdFusion Studio. ColdFusion Studio is the integrated development
environment for ColdFusion Server. 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 runs on Microsoft Windows NT, Windows 95 and
Windows 98.
JRUN
JRun provides companies with a system for deploying Web applications based
on Java Servlets and JSP. Java Servlets are Web application components written
in the Java programming language, a language developed by Sun Microsystems. JSP
is a Web application scripting model used to create dynamic Web pages and
applications. Java addresses the needs of more advanced, object-oriented systems
programmers. JRun has won numerous industry awards, including the 1999 Java
Developer's Journal Editor's Choice award for "Most Innovative Java Product of
the Year" and the 1998 WebTechniques' Best Java Tool award. JRun runs on any
software platform that supports Java.
JRun 3.0, which we expect to release in 2000, will incorporate additional
Java services into JRun, including Enterprise JavaBeans, Java Messaging Service,
and the Java Transaction API. These new capabilities will be based on the Ejipt
product we acquired as part of Valto Systems. By expanding the range of services
provided by JRun, we will increase the size and complexity of Web applications
that can be developed using this product. This will in turn increase the number
of projects and developers that can take advantage of our Internet business
platform.
ALLAIRE SPECTRA
Allaire Spectra is a packaged e-business application for building and
managing large-scale Web sites and applications that require advanced content
management, commerce and personalization capabilities. Allaire Spectra provides
systems administrators, Web developers and business users and managers with the
necessary pre-built software components and visual tools to rapidly deploy and
manage large-scale publishing efforts, e-commerce sites, enterprise portals, and
intranets. Applications built with Allaire Spectra run on the ColdFusion
application server. Allaire Spectra was released in December 1999. Allaire
Spectra was ranked among the top 3 commerce platforms by a leading independent
research firm in October 1999.
HOMESITE
HomeSite is a leading HTML design tool, which is principally used for the
creation of Web pages. HomeSite runs on Microsoft Windows NT, Windows 95 and
Windows 98. HomeSite has won a large number of industry awards as a leading HTML
design tool.
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<TABLE>
<CAPTION>
PRODUCT
(SUGGESTED LIST PRICE
AS OF MARCH 1, 2000) DESCRIPTION TYPICAL APPLICATIONS TARGET USERS
--------------------- ------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
ColdFusion Server Professional Licensed for four Business intranets and Large enterprises
($1,295) processors and allows an extranets
unlimited number of Large systems
concurrent users Field office extranets integrators
Features include open Single server New Web-based businesses
state repository and applications
shared server security using a relational Internet service
database providers
Access to any ODBC and
OLE-DB data source
ColdFusion Server Enterprise Licensed for eight High-volume, business- Large enterprises
($4,995) processors and allows an critical commerce and
unlimited number of applications Large systems
sites concurrent users integrators
Enterprise intranet
Includes all applications New Web-based businesses
Professional features,
plus features required Enterprise applications Internet service
for large scale requiring native providers
applications, including database
clustering, load drivers or CORBA
balancing and automatic
failover and CORBA
support IBM DB2,
Informix, Oracle and
Sybase native database
drivers
ColdFusion Studio ($495) An integrated Business systems (human Web application
development environment resources, financial, developers
with a number of visual customer support)
tools for creating Web Enterprise and
applications Electronic commerce client-server
(stores, business-to- programmers
Includes the business)
award-winning HomeSite HTML and desktop
HTML design Tool Dynamic content database developers
publishing (document
Features include (management, dynamic Development team
interactive debugging, news and personalized managers
remote development information)
capabilities and
one-step deployment Collaboration
(discussion, project,
Team development support and workflow management)
Allaire Spectra ($15,000) Licensed per server and Corporate intranets Large enterprises
allows an unlimited
number of users Enterprise portals Large systems
integrators
Requires a ColdFusion Internet portals
Enterprise license for
each server Online commerce sites Internet service
providers
Includes all of the core B2B extranet sites
Spectra services, Webtop New Web-based businesses
productivity tools, and
administration console
JRun Pro ($595) Supports any number of Corporate Internet, Java developers
processors and allows an intranet, and extranet
unlimited number of sites that utilize Java Large enterprises
concurrent users as their primary
development architecture Large systems
Features full support integrators
for Java Servlets and Enterprise Web
JSPs applications requiring New Web-based businesses
connectivity to CORBA,
Licensed per processor Enterprise Java Beans Software publishers
and other distributed
environments
JRun Pro Unlimited ($1,995) Includes all Pro High-volume, business- Large enterprises
features, plus the critical commerce sites
ability to use any and applications Large systems
number of concurrent utilizing a large number integrators
Java Virtual Machines of processors and/ or
Java Virtual Machines New Web-based businesses
Licensed per machine
Internet service
providers
Software publishers
HomeSite (Electronic HTML page design and Web High-quality static Web site developers
Version $89; Packaged Version $99) site development tool corporate Web sites
Web development team
Features an intuitive
graphical interface
</TABLE>
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TECHNOLOGY
We develop, market and support Web application servers, packaged
applications, visual tools and related software products that enable the
development and deployment of sophisticated e-business Web sites and
applications. Our products support emerging Web application technologies as well
as integrate with key enterprise information systems. They include features and
tools that increase the productivity of Web developers and ensure the
scalability and reliability of the applications they deploy.
Open Integration
At the core of our Web application technology are the ColdFusion and JRun
application servers. Both are built on an open architecture and can be deployed
on Windows 98/NT, Sun Solaris and HP-UX. JRun can also be deployed on AIX, IRIX,
or any other operating system that has a Java virtual machine. This openness
ensures that a customer can switch core operating system platforms and maintain
the same core application server technology. Our open architecture supports
native, high-performance connectivity into major enterprise databases, such as
Oracle, Sybase, SQL Server, Informix and IBM DB2. Our application server
technology supports major distributed computing standards, including DCOM,
CORBA, Java and Enterprise Java Beans. This support enables existing legacy
corporate applications infrastructure to be extended into Internet-based
systems. Additionally, all major Internet protocols and key enterprise
information systems, including messaging servers, directory servers, file
servers and other network technology, are supported. Future versions of our Web
application server products will provide tighter integration between the Java
and ColdFusion environments.
Scalable, Secure Deployment
To successfully support high-volume sites and transaction-intensive
applications, a Web application platform requires high performance, availability
and scalability from a Web application server. Our application server technology
provides a high degree of cross-platform performance and fault-tolerance from
individual servers and multiple server clusters. The ColdFusion application
server runs as a 32-bit multi-threaded system service, which permits
applications to experience an increase in processing performance as processors
are added to the server. Clusters of multiple servers significantly enhance an
application's availability and scalability. ColdFusion automatically balances
load among servers deployed in a cluster, so that performance is optimized.
ColdFusion permits a cluster deployment to store client state information in a
shared repository, so it will not be lost when a server fails. If any machine in
the cluster fails or is heavily loaded, ColdFusion automatically transfers its
responsibilities to one of the remaining servers. Because ColdFusion clusters
use a software-based system for load balancing and failover, there is no single
point of failure.
ColdFusion also provides a 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 each other's resources. Other security features
include authentication and encryption for e-business Web applications. The
application server security technology also provides a set of tools for
authenticating end users and tracking their interaction with a Web system. This
technology forms the foundation for personalized customer experiences and rich
business intelligence. Additionally, this security technology meets the needs of
hosting and application server provider companies, which require robust security
to host multiple, outsourced corporate Web sites and business applications on a
shared infrastructure. We license portions of this security technology from a
third party.
JRun includes a similar set of features for supporting high-volume Web
sites, including Java's native multithreaded architecture which maximizes the
scalability of multiprocessor machines. JRun also includes a sophisticated
administration application that allows users to easily maintain their deployed
JRun applications. In addition, JRun 3.0, which we plan to release in 2000, will
incorporate load balancing technology similar to that currently available in
ColdFusion, enabling greater scalability and reliability, as well as addition
security features.
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Multi-Language Development
Our Internet business platform supports multiple programming language
technologies and models. At the core of ColdFusion is the ColdFusion Markup
Language, or CFML, which provides developers with a highly-productive, tag-based
scripting model that tightly integrates with Web-based programming languages
such as HTML, XML, and Wireless Markup Language (WML).
As a result of our merger with Live Software and our acquisition of Valto
Systems, we acquired JRun and Ejipt, two server-side Java development and
deployment environments. JRun provides developers with a system for deploying
Web applications based on Java Servlets and JSP -- a standards-based model for
deploying Java on Web application servers. Ejipt is a product for deploying
applications based on more Java models, including Enterprise JavaBeans, the Java
Transaction API, and the Java Messaging Service. These products are currently
being merged to provide a complete environment for the construction, deployment,
and management of enterprise-scale server-side Java applications. Java addresses
the needs of more advanced, object-oriented system programmers. By integrating
the key Java technologies into our platform, we have further expanded the range
of projects and developers that can use our products as well as reinforced our
support for open Internet standards.
Productive Development and Management
In addition to our innovative approaches to Web-based programming
languages, we offer a wide range of visual development tools. We believe that
company-wide adoption of the Web requires rich productivity tools for system
administrators, developers, designers, and business users and managers. Our
visual tools include HomeSite, an HTML design tool and ColdFusion Studio, our
ColdFusion rapid application development tool. Additionally, Allaire Spectra
includes Web-based productivity tools for business users and managers to assist
them in managing content, controlling business workflow and using decision
support tools to analyze their Web-based sales and marketing activities.
In addition to these development tools, we have announced plans to release
a new product for Web systems management, code-named "Harvest." Harvest will
provide an array of advanced management features designed to lower the cost of
ownership of and increase the reliability of Internet business systems,
including deployment and replication as well as real-time monitoring and
control.
Packaged e-Business Applications
Allaire Spectra consists of three core components: the ContentObject API,
the core solution services, and a Web-based productivity tool. The ContentObject
API is an XML-based object programming system and content repository. It allows
companies to model their Web business technology and data using an object-based
programming model, implemented in ColdFusion, and to store their Web information
in an XML-based content repository. This technology helps companies build an
extensible and reusable information management solution and syndicating content
and applications across the Internet.
The six core solution services of Allaire Spectra include:
- Content management -- a system for managing content infrastructure;
- Workflow and process automation -- a set of services for building custom
workflow templates and process automation;
- Role-based security -- an open authentication framework to assign users
and groups to activities and processes;
- Personalization -- a three-tier model that supports user profiling,
rules-based dynamic targeting and the integration of third party
personalization engines;
- Business intelligence -- a model for logging, measuring and reporting on
user activities; and
- Syndication -- a set of XML-based capabilities for extending Web business
to Internet partners or site affiliates.
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The final core technology in Allaire Spectra is a Web-based user interface
and productivity tool, which provides business users and managers with a simple
user interface for managing content, workflow, and business rules as well as
decision support and analysis tools.
Internet Middleware and XML
In addition to our tools, application servers and packaged e-business
applications, we have developed a core technology aimed at supporting
business-to-business commerce and application syndication. Web Distributed Data
eXchange, or WDDX, was developed to support the integration of business systems
across the Internet. WDDX was released in late 1998 as an open source
technology, freely available from a separate Web site, www.wddx.org. Since its
release, over 7,000 users have downloaded a software development kit for using
WDDX, and several major software programming languages now support it, including
Java, ASP, JavaScript, PHP and Python. We intend to foster broad adoption of the
technology and have incorporated it directly into our own platforms, including
extensive use within Allaire Spectra for enabling business-to-business commerce
applications.
We have also announced plans to develop a new Web business-to-business
(B2B) integration server, code-named "Tron," which will incorporate and extend
XML technologies such as WDDX. By automating the way businesses communicate with
each other using a common set of open XML technologies and supporting emerging
industry standards, Tron will enable new business models based on application
syndication and Web-based business system integration.
RESEARCH AND DEVELOPMENT
We devote a substantial portion of our resources to developing new products
and product features, extending and improving our products and technology, and
strengthening our technological expertise. Our research and development
expenditures were $5.0 million in 1997, $8.0 million in 1998 and $12.9 million
in 1999. We intend to continue to devote substantial resources toward research
and development. As of December 31, 1999, we had 74 employees engaged in
research and development activities. We must hire additional skilled software
engineers to continue to increase our research and development efforts. Our
business, operating results and financial condition could be adversely affected
if we are not able to hire and retain the required number of engineers.
SALES, MARKETING AND DISTRIBUTION
We market and sell our products and services to businesses using a
combination of direct and indirect distribution channels, including a corporate
sales force, domestic and international distribution, electronic commerce and
sales through business partners. The percentage of our total revenue generated
through our indirect distribution channel was 28% in 1997, 44% in 1998 and 53%
in 1999. As of December 31, 1999, we had 94 sales and marketing employees
worldwide.
Corporate Sales Force. Our corporate account sales force focuses on sales
to institutional customers worldwide. Corporate account sales can be filled
either directly by our sales force or through our indirect channel partners. The
corporate account sales force is comprised of field representatives and
telesales representatives. The field representatives market and sell to
corporate, government and higher education institutional customers primarily
interested in application servers and packaged applications for e-business
applications. The telesales representatives qualify, develop and pursue leads
generated from inquiries on our Web site, from seminars and from downloads of
our products. We intend to add a significant number of additional field
representatives over the next 12 months.
Indirect Distribution. We have a number of domestic and international
distributors and resellers that market and sell our products. We have
distributors in North America, Europe and Asia Pacific, including Ingram Micro
and Mitsubishi. As of December 31, 1999, we had over 500 corporate and catalog
resellers, original equipment manufacturers and value-added resellers.
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Electronic Commerce. Our Web site allows visitors to download, evaluate
and purchase our products. A number of third-party electronic commerce sites,
including Beyond.com, Intraware.com, JapanMarket.com and RealStore.com,
distribute commercial copies of our products for delivery by direct download.
Electronic distribution provides us with a low-cost, globally accessible,
24-hour sales channel.
Allaire Alliance. We believe that establishing a large community of active
users of our products and technology is critical to our success. To further the
development of this community, we have established the Allaire Alliance program.
Allaire Alliance members include Web developers, application vendors and systems
integrators. Allaire Alliance members also include the distributors, corporate
and catalog resellers, original equipment manufacturers and value-added
resellers referenced above. We typically enter into written agreements with
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.
Product Marketing Programs. We engage in a broad range of product
marketing activities, including sponsoring seminars for potential customers,
providing product information through our Web site and promoting special events.
During 1999, we held over 100 seminars in over 35 cities and conducted over 10
seminars over the Web. Our product marketing programs are aimed at informing
customers of the capabilities and benefits of our products and services 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 our products and technology.
Branding Strategy. We continue to develop market awareness of the
"Allaire" brand. Our branding strategy includes participating in trade shows and
conferences, promoting special events and advertising our products and services
in print and electronic media.
CUSTOMERS
Our products are marketed and distributed to a diverse group of customers,
ranging from small, independent consultants and Internet presence providers to
Fortune 1000 businesses and other large organizations. Many of our customers are
global organizations that use our products to create Web sites and Web
applications with electronic commerce, content management and personalization
capabilities for Internet, intranet and extranet use.
Revenue from customers outside North America, primarily Asia and Europe, as
a percentage of our total revenue, was 19% in 1997, 13% in 1998 and 14% in 1999.
Sales to Ingram Micro accounted for 28% of our total revenue in 1998 and 37% in
1999. No single customer accounted for 10% or more of our total revenue in 1997.
SUPPORT AND PROFESSIONAL SERVICES
We offer a broad range of consulting, support and training services to our
customers. We believe 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. Our customers have a broad choice of support options depending
on the level of service desired. We maintain a technical support hotline staffed
by engineers from 8:00 a.m. to 8:00 p.m., Eastern time, Monday through Friday,
from our corporate office in Cambridge, Massachusetts. Internationally,
distribution partners provide telephone support to customers with technical
assistance from us. Our support staff also responds to e-mail inquiries. We
track support requests through a series of customer databases, including current
status reports and historical customer interaction logs. We use customer
feedback as a source of ideas for product improvements and enhancements.
We also provide training and consulting to assist our customers in the
development and deployment of e-business applications using our products. As of
December 31, 1999 we had 40 technical support engineers and professional service
employees.
10
<PAGE> 12
COMPETITION
The Web application products market is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
activities of market participants. Primary competitors in the high end of the
market include large Web and database platform companies that offer a variety of
software products, such as IBM, Oracle and Sun Microsystems. We also compete
against a number of companies that offer Web application servers, such as BEA
Systems, Bluestone and SilverStream Software. In addition, our Allaire Spectra
application competes against packaged e-commerce applications from companies
such as Broadvision, Vignette, and Art Technology Group. These companies
generally sell their products at significantly higher prices than our products.
In the middle range of the market, where product prices are generally lower, we
compete primarily against Microsoft.
As the size and visibility of the market opportunity increases, we believe
that additional competitors may enter the market with competing products.
Increased competition could result in pricing pressures, reduced margins or the
failure of our products to achieve or maintain market acceptance, any of which
could have a material adverse effect on our business, operating results and
financial condition. Many of our current and potential competitors have longer
operating histories and substantially greater financial, technical, marketing
and other resources than we do. Therefore, they may be able to respond more
quickly 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 our products might be
substantially reduced and the our ability to distribute our products
successfully would be substantially diminished.
Competitive factors in the Web application products market include:
- the quality and reliability of software;
- cost per user;
- application server scalability, availability and performance;
- productivity features for creating, editing and adapting content;
- ease of use and interactive user features;
- compatibility with the user's existing network components and software
systems; and
- interoperability with emerging Internet standards such as XML, Java, and
HTML.
To expand our customer base, we must continue to innovate and improve the
performance of our products. We anticipate that consolidation will continue in
the Web application products market and related markets 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.
INTELLECTUAL PROPERTY
Our success and competitiveness are dependent to a significant degree on
the protection of our proprietary technology. We rely primarily on a combination
of copyrights, trademarks, licenses, trade secret laws and restrictions on
disclosure to protect our intellectual property and trade secrets. We also enter
into confidentiality agreements with our employees and consultants, and
generally control access to and distribution of our documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise attain and use our intellectual property or
trade secrets without authorization.
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 some jurisdictions. Moreover, the laws of other countries in which we
market our products may afford us little or no effective protection of our
intellectual
11
<PAGE> 13
property. There can be no assurance that the precautions taken by us will
prevent misappropriation or infringement of our technology. In addition, there
can be no assurance that others will not independently develop substantially
equivalent intellectual property. Our failure to protect our intellectual
property in a meaningful manner could have a material adverse effect on our
business, operating results and financial condition.
In addition, the laws of some foreign countries do not protect our
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. We license some of our 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 our
business, operating results and financial condition.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. This 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
our business, operating results and financial condition.
We attempt to avoid infringing known proprietary rights of third parties in
our product development efforts. However, we have not conducted and 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
them which are confidential when filed, with regard to similar technologies. If
we were to discover that one or more of our products violated third party
proprietary rights, there can be no assurance that we would be able to obtain
licenses to continue offering such products without substantial reengineering or
that any effort to undertake such reengineering would be successful, or that any
licenses would be available on commercially reasonable terms.
We pursue the registration of some of our trademarks and service marks in
the United States and in some other countries, although we have not secured
registration of all of our marks. We have registered United States trademarks
for "Cold Fusion" and a related design for "Bright Tiger". A significant portion
of our marks contain the word "Fusion", such as ColdFusion. We are aware of
other companies that use "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."
We currently license technology from third parties that we incorporate into
our products. Examples include licenses for the following: visual editing
technology from Microsoft, security technology from Netegrity, and full-text
indexing and searching technology from Verity.
In addition, our current JRun product and much of our future product plans
depend on the availability, stability, and performance of the Java programming
language and the associated Java virtual machine as well as on the broad
adoption of Java by our customers. Sun Microsystems controls and maintains the
Java programming language and associated technologies. Java may fall out of
favor among developers, or Sun may not continue to make the Java virtual
machines available at commercially reasonable terms or at all. Furthermore, if
Sun were to make significant changes to the Java language or its Java virtual
machines, or fail to correct defects and limitations in these products, our
ability to continue to improve and ship our products could be impaired.
In light of the rapidly evolving nature of the Web platform and our
strategy to pursue industry partnerships to ensure our support of and by the
emerging platform, we will increasingly need to rely on technology that we
license from other vendors which is integrated with internally developed
software and used in our products to perform key functions.
12
<PAGE> 14
EMPLOYEES
As of December 31, 1999, Allaire had 270 employees, 238 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.
ITEM 2. PROPERTIES
Allaire's headquarters is located in Cambridge, Massachusetts. The lease,
which covers approximately 54,000 square feet of space in Cambridge, expires in
March 2003. Allaire plans to move its headquarters from the Cambridge location
to Newton, Massachusetts in July 2000 and is seeking to terminate its Cambridge
lease or sublet the space thereafter. The Newton lease, which covers
approximately 270,000 square feet of space, expires in June 2010. Allaire also
leases office space in other cities for its sales and development personnel.
Allaire believes that these facilities are adequate to meet its current
foreseeable requirements or that suitable additional or substitute space will be
available on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time Allaire has been, and expects to continue to be, subject
to legal proceedings and claims in the ordinary course of its business,
including claims of alleged infringement of third party trademarks and other
intellectual property rights by Allaire and its licensees. Such claims, even if
not meritorious, could result in the expenditure of significant financial and
managerial resources. Allaire is not aware of any legal proceedings or claims
that it believes will have, individually or in the aggregate, a material adverse
effect on its business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to page
48 of the Company's 1999 Annual Report to Shareholders.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required by this Item is incorporated by reference to page
20 of the Company's 1999 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference to pages
21-27 of the Company's 1999 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
The information required by this Item is incorporated by reference to pages
28-46 of the Company's 1999 Annual Report to Shareholders and the Report of
Independent Accountants on Financial Statement Schedule dated March 13, 2000 is
contained in this report.
13
<PAGE> 15
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts is contained in this
report.
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is incorporated by reference in
this Annual Report on Form 10-K from the Company's definitive proxy statement
for its 2000 Annual Meeting of Stockholders to be filed pursuant to Regulation
14A (the "Proxy Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from the
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report:
1. Financial Statements: The financial statements filed as part of this
report are listed on the Index to Financial Statements included in Item
8 and are incorporated herein by reference.
2. Financial Statement Schedule: The financial statement schedule filed as
part of this report is included in Item 8 and is incorporated herein by
reference.
3. Exhibits
The following exhibits are filed as part of, or incorporated by reference
into, this Form 10-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation (filed as
Exhibit 3.3 to the Company's Registration Statement on Form
S-1 (File No. 333-68639) and incorporated herein by
reference)
3.2 Certificate of Amendment of Amended and Restated Certificate
of Incorporation
3.3 Amended and Restated By-Laws of the Company (filed as
Exhibit 3.5 to the Company's Registration Statement on Form
S-1 (File No. 333-68639) and incorporated herein by
reference)
4.1 Specimen certificate for the Common Stock of Allaire(1)
10.1 1997 Stock Incentive Plan as amended(1)
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C>
10.2 1998 Stock Incentive Plan as amended
10.3 1998 Employee Stock Purchase Plan(1)
10.4 Option Agreement for David J. Orfao(1)
10.5 Form of Incentive Stock Option Agreement for other executive
officers
10.6 Office Lease Agreement between Allaire and One Alewife
Center Realty Trust, dated November 5, 1997(1)
10.7 Lease Agreement between Allaire and CambridgePark Two, L.P.,
dated May 21, 1998(1)
10.8 Loan and Security Agreement between Allaire and Silicon
Valley Bank, dated March 26, 1998(1)
10.9 Negative Pledge Agreement between Allaire and Silicon Valley
Bank, dated March 26, 1998(1)
10.10 Loan Modification Agreement between Allaire and Silicon
Valley Bank, dated August 6, 1998(1)
10.11 Loan Modification Agreement between Allaire and Silicon
Valley Bank, dated December 9, 1998(1)
10.12 Senior Loan and Security Agreement between Allaire and
Phoenix Leasing Incorporated, dated May 1, 1998(1)
10.15 Warrant Agreement between Allaire and Polaris Venture
Partners, L.P., dated March 7, 1997(1)
10.16 Warrant Agreement between Allaire and Polaris Venture
Partners Founders' Fund, L.P., dated March 7, 1997(1)
10.17 Amended and Restated Registration Rights Agreement, dated
May 15, 1997(1)
10.18 Waiver and Amendment No. 1 to Amended and Restated
Registration Rights Agreement, dated December 7, 1998(1)
10.19 Letter of Offer of Employment from Allaire to David J.
Orfao, dated December 23, 1996(1)
10.20 Contribution and Restricted Stock Purchase Agreement between
Allaire and Yesler Software, Inc., dated July 14, 1998(1)
10.21 Working Capital Line of Credit Letter from Polaris Ventures
Partners, L.P., and Polaris Venture Partners Founders' Fund,
L.P., dated December 4, 1998(1)
10.22 Agreement and Plan of Merger, dated as of April 2, 1999, by
and among Allaire, Bengal Acquisition Corp. and Bright Tiger
Technologies, Inc. (included as Exhibit 2.1 to Allaire's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 27, 1999 and incorporated
herein by reference)
10.23 Lease Agreement between Allaire and EOP-Riverside Project,
L.L.C., dated November 23, 1999
10.24 Loan Modification Agreement between Allaire and Silicon
Valley Bank, dated November 30, 1999
11.1 Statement re computation of per share earnings
13.1 Pages 20-48 of the 1999 Annual Report to Shareholders of
Allaire Corporation
21.1 Subsidiaries of Allaire Corporation
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedules
99.1 Report of Independent Accountants on Financial Statement Schedule
</TABLE>
- ---------------
(1) Previously filed with the Securities and Exchange Commission as the
identically numbered exhibit to Allaire's Registration Statement on Form S-1
(File No. 333-68639) and incorporated herein by reference
(b) Reports on Form 8-K:
None.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ALLAIRE CORPORATION
By: /s/ DAVID J ORFAO
------------------------------------
David J. Orfao
President and Chief Executive
Officer
March 30, 2000
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOSEPH J. ALLAIRE Chairman of the Board March 30, 2000
- ------------------------------------
JOSEPH J. ALLAIRE
/s/ DAVID J. ORFAO President, Chief Executive Officer March 30, 2000
- ------------------------------------ and Director (principal executive
DAVID J. ORFAO officer)
/s/ DAVID A. GERTH Vice President, Finance and March 30, 2000
- ------------------------------------ Operations, Treasurer and Chief
DAVID A. GERTH Financial Officer (principal
financial and accounting officer)
/s/ JONATHAN A. FLINT Director March 30, 2000
- ------------------------------------
JONATHAN A. FLINT
/s/ JOHN J. GANNON Director March 30, 2000
- ------------------------------------
JOHN J. GANNON
/s/ THOMAS A HERRING Director March 30, 2000
- ------------------------------------
THOMAS A. HERRING
/s/ RONALD G. WARD Director March 30, 2000
- ------------------------------------
RONALD G. WARD
</TABLE>
16
<PAGE> 18
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.............................. $220 $487 $502
Additions:
Charged to expense........................................ 164 61 233
Charged against other accounts............................ 165 56 63
Deductions:
Write-offs and returns.................................... (62) (102) (97)
---- ---- ----
Balance at end of period.................................... $487 $502 $701
==== ==== ====
</TABLE>
17
<PAGE> 19
Exhibit 13.1
Allaire Corporation 1999
F I N A N C I A L
Statements
<PAGE> 20
table of
C O N T E N T S
20 Selected Consolidated Financial Data
21 Management's Discussion & Analysis of Financial
Condition and Results of Operations
28 Consolidated Balance Sheet
29 Consolidated Statement of Operations
30 Consolidated Statement of Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit)
32 Consolidated Statement of Cash Flows
33 Notes to Financial Statements
47 Report of Independent Accountants
48 Corporate Information
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below have been derived from
Allaire's audited consolidated financial statements. These data should be read
in conjunction with Allaire's consolidated financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," appearing elsewhere in this document.
<TABLE>
<CAPTION>
May 5, 1995 to Year Ended December 31,
December 31, ----------------------------------------------
(In thousands, except per share data) 1995 1996 1997 1998 1999
------ ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenue:
Software license fees .............. $ -- $ 2,358 $ 7,133 $ 17,966 $ 45,555
Services ........................... -- -- 655 3,396 9,608
------ ------- --------- --------- ---------
Total revenue ................. -- 2,358 7,788 21,362 55,163
------ ------- --------- --------- ---------
Cost of revenue:
Software license fees .............. -- 234 973 1,937 2,525
Services ........................... -- 1,452 4,057 7,480
------ ------- --------- --------- ---------
Total cost of revenue ......... -- 234 2,425 5,994 10,005
------ ------- --------- --------- ---------
Gross profit ............................... -- 2,124 5,363 15,368 45,158
------ ------- --------- --------- ---------
Operating expenses:
Research and development ........... 65 1,109 4,984 8,027 12,873
Sales and marketing ................ 49 1,618 8,820 19,135 30,294
General and administrative ......... 74 1,437 3,410 4,946 7,148
Stock-based compensation ........... -- -- -- 412 263
Merger costs ....................... -- -- -- -- 2,930
------ ------- --------- --------- ---------
Total operating expenses ...... 188 4,164 17,214 32,520 53,508
------ ------- --------- --------- ---------
Loss from operations ....................... (188) (2,040) (11,851) (17,152) (8,350)
Interest income, net ....................... -- 13 315 13 2,811
------ ------- --------- --------- ---------
Net loss .................................. $ (188) $(2,027) $ (11,536) $ (17,139) $ (5,539)
====== ======= ========= ========= =========
Basic and diluted net loss per share ....... $(0.04) $ (0.58) $ (2.67) $ (2.39) $ (0.24)
Shares used in computing basic and
diluted net loss per share ......... 4,400 3,513 4,316 7,175 22,771
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents .................. $ 17 $ 595 $ 7,190 $ 3,247 $ 106,624
Working capital (deficit) .................. (231) 242 7,383 (9,691) 96,914
Total assets ............................... 119 2,160 17,094 12,708 133,540
Total long-term debt, net of current portion -- 50 1,251 1,193 547
Total redeemable convertible preferred stock -- 2,800 12,673 12,673 --
Total stockholders' equity (deficit) ....... (181) (1,747) (3,022) (18,882) 101,924
</TABLE>
All periods have been restated to reflect the mergers with Bright Tiger
Technologies and Live Software, which were accounted for as poolings of
interests. In addition, all share and per share data have been restated to
reflect the two-for-one stock split in March 2000.
-20-
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report 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.
OVERVIEW
Allaire develops, markets and supports Web application servers and related
software products that enable the development and deployment of sophisticated
e-business Web sites and applications. Allaire derives a majority of its revenue
from its three primary products, ColdFusion, JRun and HomeSite. In the fourth
quarter of 1999, Allaire released versions 4.5 of its ColdFusion and HomeSite
products, along with the introduction of a new packaged e-business application,
Allaire Spectra. 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 our 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 the specified upgrade is delivered. We provide most of our distributors
with rights of return. An allowance for estimated future returns is recorded at
the time revenue is recognized based on our 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
28%, 44%, and 53% of total revenue for 1997, 1998 and 1999, respectively.
Allaire anticipates that revenue derived from the indirect distribution
channel will continue to represent a significant percentage of total revenue.
Allaire primarily derives its international revenue through its indirect
distribution channel. International revenue outside of North America
accounted for 19%, 13% and 14% of total revenue for 1997, 1998 and 1999,
respectively.
In April 1999, Allaire completed a merger with Bright Tiger Technologies by
issuing 577,166 shares of its common stock for all of the issued and outstanding
equity securities of Bright Tiger. Bright Tiger provides software designed to
enhance the performance, availability and manageability of large-scale Internet
sites and Web applications. Allaire had previously licensed technology from
Bright Tiger that was incorporated in certain ColdFusion products. In June 1999,
Allaire completed a merger with Live Software by issuing 1,056,752 shares of its
common stock for all of the issued and outstanding equity securities of Live
Software. Live Software develops, markets and supports server-side Java
development and deployment technology. Live Software's principal product, JRun,
is a leading server-side Java development and deployment engine. Allaire
recorded merger related costs of $2.7 million in the quarter ended June 30, 1999
primarily related to professional fees, facility closings, severance packages
and related costs associated with these acquisitions. Allaire accounted for
these acquisitions as poolings of interests.
In December 1999, Allaire completed its merger with Valto Systems by issuing
450,000 shares of its common stock for all of the issued and outstanding equity
securities of Valto Systems. Valto Systems develops and markets Enterprise
JavaBeans (EJB) server technology. Allaire recorded merger related costs of
$230,000 in the quarter ended December 31, 1999 primarily related to
professional fees associated with this acquisition. Allaire accounted for this
acquisition as a pooling of interests. Acquired net liabilities of approximately
$37,000 have been recorded at historical amounts. Prior periods were not
restated due to immateriality, and accordingly, results of operations have been
included since the date of acquistion.
-21-
<PAGE> 23
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 consolidated statement of
operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1998 1999
------ ----- -----
<S> <C> <C> <C>
Revenue:
Software license fees ....... 91.6% 84.1% 82.6%
Services .................... 8.4 15.9 17.4
------ ----- -----
Total revenue ....................... 100.0 100.0 100.0
------ ----- -----
Cost of revenue:
Cost of software license fees 12.5 9.1 4.6
Cost of services ............ 18.6 19.0 13.5
------ ----- -----
Total cost of revenue ............... 31.1 28.1 18.1
------ ----- -----
Gross profit ........................ 68.9 71.9 81.9
------ ----- -----
Operating expenses:
Research and development .... 64.0 37.6 23.3
Sales and marketing ......... 113.2 89.6 54.9
General and administrative .. 43.8 23.1 13.0
Stock-based compensation .... 0.0 1.9 0.5
Merger costs ................ 0.0 0.0 5.3
------ ----- -----
Total operating expenses ............ 221.0 152.2 97.0
------ ----- -----
Loss from operations ................ (152.1) (80.3) (15.1)
Interest income, net ................ 4.0 0.1 5.1
------ ----- -----
Net loss ............................ (148.1)% (80.2)% (10.0)%
====== ===== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1998 AND 1999
REVENUE
Total revenue increased 158% from $21.4 million for 1998 to $55.2 million for
1999.
SOFTWARE LICENSE FEES Revenue from software license fees increased 154% from
$18.0 million for 1998 to $45.6 million for 1999. The increase was primarily due
to an increase in the number of licenses sold to use Allaire's ColdFusion and
JRun products. Increases in product prices associated with the release of new
versions of our products during the fourth quarter of 1998 also contributed to
the growth in revenue.
SERVICES Revenue from services increased 183% from $3.4 million for 1998 to $9.6
million for 1999. 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 30% from $1.9 million for 1998 to $2.5 million
for 1999. The increase in absolute dollars was due to higher unit sales volume.
The improvement in software license fees gross margins from 89% for 1998 to 94%
for 1999 was primarily attributable to economies of scale achieved with higher
sales volume in 1999.
-22-
<PAGE> 24
COST OF SERVICES Cost of services consists primarily of personnel costs. Cost of
services increased 84% from $4.1 million for 1998 to $7.5 million for 1999. The
increase in absolute dollars resulted primarily from the hiring of additional
employees and the use of contract trainers to support increased customer demand
for training classes and technical support. The improvement in services gross
margins from (19)% for 1998 to 22% for 1999 was primarily attributable to the
substantial growth in training revenue. Allaire anticipates that services gross
margins will decrease in the near term as Allaire invests in additional
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 60% from $8.0 million for 1998 to $12.9 million for 1999. The
increase primarily resulted from salaries associated with newly hired
development personnel and product development consulting costs. 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 58% from $19.1 million for 1998 to $30.3 million
for 1999. The increase was primarily attributable to costs associated with
additional direct sales, pre-sales support and marketing personnel, and an
increase in marketing programs, including promotions and advertising. Allaire
anticipates that sales and marketing expenses will continue to increase in
absolute dollars as it continues to expand its 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 45% from $4.9 million for 1998 to $7.1
million for 1999. The increase was primarily attributable to salaries associated
with newly hired personnel and related costs required to manage Allaire's growth
and facilities expansion. Allaire expects that its general and administrative
expenses will increase in absolute dollars as it continues to expand its
staffing to support 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 $412,000 of
stock-based compensation for 1998 compared to $263,000 of stock based
compensation for 1999. The decrease was primarily attributable to the grant of a
fully vested option with an exercise price substantially below fair market value
during the quarter ended March 31, 1998.
MERGER COSTS The merger costs of $2.9 million for 1999 relate to the mergers
with Bright Tiger, Live Software and Valto Systems. 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 from $13,000 for 1998 to
$2.8 million for 1999. The increase was due to interest income earned from the
investment of the net cash proceeds from Allaire's initial public offering in
January 1999 and follow-on public offering in September 1999.
-23-
<PAGE> 25
PROVISION FOR INCOME TAXES
Allaire has incurred significant operating losses for all periods from inception
through September 30, 1999. Allaire has recorded a valuation allowance for the
full amount of its net deferred tax assets as the future realization of the tax
benefit is not sufficiently assured.
YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUE
Total revenue increased 174% from $7.8 million for 1997 to $21.4 million for
1998.
SOFTWARE LICENSE FEES Revenue from software license fees increased 152% from
$7.1 million for 1997 to $18.0 million for 1998. The increase was primarily due
to an increase in the number of licenses sold to use our software products
including HomeSite, which we 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 our
products during the second half of 1997 and the fourth quarter of 1998.
SERVICES Revenue from services increased 418% from $655,000 for 1997 to $3.4
million for 1998. The increase was primarily attributable to growth in training
revenue resulting from an increase in our installed customer base.
COST OF REVENUE
COST OF SOFTWARE LICENSE FEES Cost of software license fees increased 99% from
$973,000 for 1997 to $1.9 million for 1998. The increase in absolute dollars was
due to higher unit sales volume. The improvement in software license fees gross
margins from 86% for 1997 to 89% for 1998 was primarily attributable to
economies of scale achieved with higher sales volume in 1998.
COST OF SERVICES Cost of services increased 179% from $1.5 million for 1997 to
$4.1 million for 1998. The increase in absolute dollars resulted primarily from
the hiring of additional employees and the use of contract trainers to support
increased customer demand for training classes and technical support. The
improvement in services gross margins from (122)% for 1997 to (19)% for 1998 was
primarily attributable to the substantial growth in services revenue.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT Research and development expenses increased 61% from
$5.0 million for 1997 to $8.0 million for 1998. The increase primarily resulted
from salaries associated with newly hired development personnel and product
development consulting costs.
SALES AND MARKETING Sales and marketing expenses increased 117% from $8.8
million for 1997 to $19.1 million for 1998. The increase was primarily
attributable to costs associated with additional direct sales, pre-sales support
and marketing personnel, and, to a lesser extent, an increase in marketing
programs, including trade shows, seminars and product launch activities.
GENERAL AND ADMINISTRATIVE General and administrative expenses increased 45%
from $3.4 million for 1997 to $4.9 million for 1998. The increase was primarily
attributable to salaries associated with newly hired personnel and related costs
required to manage our growth and facilities expansion. In addition, we incurred
a charge of $400,000 in the fourth quarter of 1998 for costs relating to exiting
a facilities lease.
STOCK-BASED COMPENSATION The amount that the estimated fair market value of our
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. We recognized zero and $412,000 of stock based
compensation for 1997 and 1998, respectively.
INTEREST INCOME, NET
Interest income, net of interest expense, decreased from $315,000 for 1997 to
$13,000 for 1998. The decrease was primarily due to an increase in interest
expense attributable to our capital lease and notes payable obligations.
-24-
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
In January 1999, Allaire sold 5,750,000 shares of its common stock through an
initial public offering. Net proceeds from the offering were approximately $52.3
million after deducting the underwriting discount and other offering expenses.
In September 1999, Allaire sold 2,000,000 shares of common stock and selling
stockholders sold 2,800,000 shares of common stock through a follow-on public
offering. Allaire's net proceeds from the offering were approximately $58.1
million after deducting the underwriting discount and other offering expenses.
Proceeds from this transaction were received by Allaire in October 1999. Prior
to these public offerings, Allaire had funded its operations primarily through
net cash proceeds from private placements of preferred stock. At December 31,
1999, Allaire had cash, cash equivalents and short-term investments of $119.0
million, up from $3.7 million at December 31, 1998.
Cash provided by operating activities for 1999 was $8.3 million, primarily
related to increases in accrued expenses and deferred revenue, offset by an
increase in accounts receivable and a net loss of $5.5 million. Cash used for
operating activities for 1998 was $9.2 million primarily related to a net loss
of $17.1 million, partially offset by increases in accrued expenses and deferred
revenue.
Cash used for investing activities for 1999 was $15.4 million, primarily
relating to net purchases of short-term investments. Cash provided by investing
activities for 1998 was $1.5 million, primarily relating to net sales of
short-term investments, partially offset by net property and equipment
purchases.
Cash provided by financing activities for 1999 was $110.5 million, primarily due
to common stock issuances. Cash provided by financing activities for 1998 was
$3.8 million, primarily due to the issuance of notes payable.
As of December 31, 1999, Allaire's primary commitments consisted of obligations
related to operating leases, $1.0 million of notes payable under equipment lines
and $159,000 of capital lease obligations.
In April 1999, Allaire completed a merger with Bright Tiger by issuing 577,166
shares of Allaire common stock for all of the issued and outstanding equity
securities of Bright Tiger. In connection with the merger, Allaire assumed and
paid off Bright Tiger debt obligations totaling approximately $2.6 million. In
June 1999, Allaire completed a merger with Live Software by issuing 1,056,752
shares of Allaire common stock for all of the issued and outstanding equity
securities of Live Software. In December 1999, Allaire completed a merger with
Valto Systems by issuing 450,000 shares of Allaire common stock for all of the
issued and outstanding equity securities of Valto Systems.
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.
YEAR 2000 COMPLIANCE
To date, Allaire has not incurred significant incremental costs in order to
comply with Year 2000 requirements and does not believe it will incur
significant incremental costs in the foreseeable future. However, there can be
no assurance that Year 2000 errors or defects will not be discovered in
Allaire's internal software systems and, if such errors or defects are
discovered, there can be no assurance that the costs of making such systems Year
2000 compliant will not have a material adverse effect on Allaire's business,
operating results and financial condition.
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.
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 December 31, 1999, had an accumulated deficit of
$36.7 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 we recorded a
small profit for the quarter ended December 31, 1999, we cannot be certain that
we will continue to be profitable.
-25-
<PAGE> 27
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:
~ 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, we expect the sales
cycle to lengthen. As a result, Allaire may have difficulty
determining whether and when we 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 our quarterly operating results fall below the expectations of
investors or public market analysts, the price of our 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 announced the release of the
beta test version of Allaire Spectra on July 21, 1999 and began commercial
shipments 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 year ended December 31, 1999, revenue from the
indirect distribution channel accounted for 53% of Allaire's total revenue, and
one distributor, Ingram Micro, accounted for 37% of total revenue. For the year
ended December 31, 1998, revenue from Allaire's indirect distribution channel
accounted for 44% of total revenue and Ingram Micro accounted for 28% 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.
-26-
<PAGE> 28
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 158% for the year ended December 31, 1999
from the same period in 1998. The number of Allaire's employees increased from
93 at January 1, 1998 to 270 at January 1, 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 of Allaire's products have been detected after the release of the
product. The occurrence of errors could result in loss of or delay in revenue,
loss of market share, failure to achieve market acceptance, diversion of
development resources, injury to 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1999, Allaire was exposed to market risks which primarily
include changes in U.S. interest rates. Allaire maintains a significant portion
of its cash and cash equivalents and short-term investments in financial
instruments with purchased maturities of 12 months or less. We do not hold
derivative financial instruments or equity securities in our investment
portfolio. Our 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.
-27-
<PAGE> 29
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
(In thousands, except share and per share data) 1998 1999
-------- ---------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents ......................................................................... $ 3,247 $ 106,624
Short-term investments ............................................................................ 496 12,405
Accounts receivable, net of allowance for doubtful accounts and sales returns
of $502 and $701 at December 31, 1998 and 1999, respectively ............................... 3,196 7,926
Prepaid expenses and other current assets ......................................................... 1,094 1,028
-------- ---------
Total current assets .................................................................... 8,033 127,983
Property and equipment, net ....................................................................... 4,300 4,948
Other assets, net ................................................................................. 375 609
-------- ---------
Total assets ........................................................................................... $ 12,708 $ 133,540
======== =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations ...................................................... $ 340 $ 159
Promissory notes .................................................................................. 1,500 --
Current portion of notes payable .................................................................. 1,564 488
Accounts payable .................................................................................. 3,326 3,358
Accrued expenses .................................................................................. 3,963 8,536
Accrued employee compensation and benefits ........................................................ 2,238 6,591
Deferred revenue .................................................................................. 4,793 11,937
-------- ---------
Total current liabilities ............................................................... 17,724 31,069
Capital lease obligations .............................................................................. 159 --
Notes payable .......................................................................................... 1,034 547
-------- ---------
Total liabilities ....................................................................... 18,917 31,616
-------- ---------
Commitments and contingencies (Note 14)
Redeemable convertible preferred stock:
Series B, $.01 par value;
Authorized: 514,306 shares at December 31, 1998, none at December 31, 1999
Issued and outstanding: 514,306 shares at December 31, 1998, none at December 31, 1999 ...... 2,325 --
Series C, $.01 par value;
Authorized: 169,200 shares at December 31, 1998, none at December 31, 1999
Issued and outstanding: 169,200 shares at December 31, 1998, none at December 31, 1999 ....... 1,000 --
Series D, $.01 par value;
Authorized: 2,500,000 shares at December 31, 1998, none at December 31, 1999
Issued and outstanding: 2,336,909 shares at December 31, 1998, none at December 31, 1999 ..... 9,348 --
-------- ---------
Total redeemable convertible preferred stock ........................................................... 12,673 --
-------- ---------
Stockholders' equity (deficit):
Preferred stock, $.01 par value; Authorized: none at December 31, 1998, 5,000,000 shares
at December 31, 1999
Series A convertible preferred stock, $.01 par value;
Authorized: 200,000 shares at December 31, 1998, none at December 31, 1999
Issued and outstanding: 88,463 at December 31, 1998, none at December 31, 1999 ............... 751 --
Common stock, $.01 par value;
Authorized: 35,000,000 shares at December 31, 1998 and December 31, 1999
Issued and outstanding: 9,718,768 shares issued and 9,711,934 outstanding at
December 31, 1998; 26,849,532 issued and 26,816,312 outstanding at December 31, 1999 .... 97 268
Additional paid-in capital ........................................................................ 12,316 139,050
Accumulated deficit ............................................................................... (31,170) (36,746)
Deferred compensation ............................................................................. (850) (638)
Stock subscriptions receivable .................................................................... (26) (10)
-------- ---------
Total stockholders' equity (deficit) ................................................................... (18,882) 101,924
-------- ---------
Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit) ........... $ 12,708 $ 133,540
======== =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-28-
<PAGE> 30
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
(In thousands, except per share data) 1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
Software license fees .................................... $ 7,133 $ 17,966 $ 45,555
Services ................................................. 655 3,396 9,608
--------- --------- ---------
Total revenue ....................................... 7,788 21,362 55,163
--------- --------- ---------
Cost of revenue:
Software license fees .................................... 973 1,937 2,525
Services ................................................. 1,452 4,057 7,480
--------- --------- ---------
Total cost of revenue ............................... 2,425 5,994 10,005
--------- --------- ---------
Gross profit ..................................................... 5,363 15,368 45,158
--------- --------- ---------
Operating expenses:
Research and development ................................. 4,984 8,027 12,873
Sales and marketing ...................................... 8,820 19,135 30,294
General and administrative ............................... 3,410 4,946 7,148
Stock-based compensation ................................. -- 412 263
Merger costs ............................................. -- -- 2,930
--------- --------- ---------
Total operating expenses ............................ 17,214 32,520 53,508
--------- --------- ---------
Loss from operations ............................................. (11,851) (17,152) (8,350)
Interest income, net ............................................. 315 13 2,811
--------- --------- ---------
Net loss ......................................................... $ (11,536) $ (17,139) $ (5,539)
========= ========= =========
Basic and diluted net loss per share ............................. $ (2.67) $ (2.39) $ (0.24)
Shares used in computing basic and diluted net loss per share .... 4,316 7,175 22,771
</TABLE>
-29-
<PAGE> 31
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Redeemable |
Convertible | Convertible
Preferred Stock | Preferred Stock Common Stock Additional
---------------------- | ------------------- ------------------ Paid-In
(In thousands, except share data) Shares Amount | Shares Amount Shares Par Value Capital
- --------------------------------- ------ ------ | ------ ------ ------ --------- -------
<S> <C> <C> | <C> <C> <C> <C> <C>
Balance, December 31, 1996 ......................... 593,449 $ 2,800 | 43,557 $ 177 6,091,140 $ 61 $ 342
Stock issued by pooled companies, net .............. | 1,270,730 13 10,208
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 7,361,870 74 10,550
Stock issued by pooled companies, net .............. | 64,726 1 (13)
Issuance of Series A convertible preferred |
stock, net of issuance costs of $9 ............ | 31,906 496
Exercise of employee stock options ................. | 2,292,172 22 519
Repurchase of common stock held in treasury ........ | (2)
Deferred compensation relating to grants of |
stock options ................................. | 997
Compensation relating to grants of stock |
options ....................................... | 265
Dividend paid to shareholder ....................... |
Net loss ........................................... |
--------- --------- | ------ ------ --------- ---- --------
Balance, December 31, 1998 ......................... 3,020,415 12,673 | 88,463 751 9,718,768 97 12,316
Pooling of interests with Valto (Note 4) ........... | 450,000 4 (4)
Stock issued by pooled companies ................... | 212,322 2 1,969
Conversion of redeemable convertible preferred |
stock and convertible preferred stock to |
common stock .................................. (3,020,415) (12,673) | (88,463) (751) 7,697,882 77 13,347
Issuance of common stock in initial public |
offering, net of issuance costs of $5,200 ..... | 5,750,000 58 52,271
Issuance of common stock in follow-on public |
offering, net of issuance costs of $3,910 ..... | 2,000,000 20 58,070
Exercise of employee stock options ................. | 1,020,560 10 1,042
Repurchase of common stock held in treasury ........ | (12)
Deferred compensation relating to grants of |
stock options ................................. | 125
Compensation relating to grants of stock options ... | (74)
Repayment of stock subscription receivable ......... |
Net loss ........................................... |
--------- --------- | ------ ------ --------- ---- --------
Balance, December 31, 1999 ......................... - $ - | - $ - 26,849,532 $268 $139,050
========= ========= | ====== ====== ========== ==== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-30-
<PAGE> 32
<TABLE>
<CAPTION>
Stock Total
Deferred Accumulated Subscriptions Stockholders'
(In thousands, except share data) Compensation Deficit Receiveable Equity (Deficit)
- --------------------------------- ------------ ------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 ......................... $ -- $ (2,307) $ (20) $ (1,747)
Stock issued by pooled companies, net .............. 10,221
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 ........................................... (11,536) (11,536)
---- --------- ----- ---------
Balance, December 31, 1997 ......................... -- (13,885) (16) (3,022)
Stock issued by pooled companies, net .............. (10) (22)
Issuance of Series A convertible preferred
stock, net of issuance costs of $9 ............ 496
Exercise of employee stock options ................. 541
Repurchase of common stock held in treasury ........ (2)
Deferred compensation relating to grants of
stock options ................................. (997) --
Compensation relating to grants of stock
options ....................................... 147 412
Dividend paid to shareholder ....................... (146) (146)
Net loss ........................................... (17,139) (17,139)
---- --------- ----- ---------
Balance, December 31, 1998 ......................... (850) (31,170) (26) (18,882)
Pooling of interests with Valto (Note 4) ........... (37) (37)
Stock issued by pooled companies ................... 1,971
Conversion of redeemable convertible preferred
stock and convertible preferred stock to
common stock .................................. 12,673
Issuance of common stock in initial public
offering, net of issuance costs of $5,200 ..... 52,329
Issuance of common stock in follow-on public
offering, net of issuance costs of $3,910 ..... 58,090
Exercise of employee stock options ................. 1,052
Repurchase of common stock held in treasury ........ (12)
Deferred compensation relating to grants of
stock options ................................. (125) --
Compensation relating to grants of stock options ... 337 263
Repayment of stock subscription receivable ......... 16 16
Net loss ........................................... (5,539) (5,539)
----- --------- ----- ---------
Balance, December 31, 1999 ......................... $(638) $ (36,746) $ (10) $ 101,924
===== ========= ===== =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-31-
<PAGE> 33
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(In thousands, except share data) 1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(11,536) $(17,139) $ (5,539)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation and amortization 875 1,801 3,105
Interest converted into shares of preferred stock 5 -- --
Compensation expense relating to issuance of equity instruments -- 412 263
Changes in assets and liabilities:
Accounts receivable (815) (1,764) (4,730)
Prepaid expenses and other current assets (149) (858) 66
Other assets (68) (237) (465)
Accounts payable 1,310 1,514 32
Accrued expenses 2,233 3,571 8,411
Deferred revenue 1,204 3,481 7,111
-------- -------- ---------
Total adjustments 4,595 7,920 13,793
-------- -------- ---------
Net cash provided by (used for) operating activities (6,941) (9,219) 8,254
-------- -------- ---------
Cash flows from investing activities:
Purchases of short-term investments (8,817) (6,283) (80,422)
Proceeds from sales of short-term investments 4,100 10,504 68,513
Purchases of property and equipment (2,502) (2,720) (3,511)
Payment for acquisition of Bradbury Software L.L.C (252) -- --
-------- -------- ---------
Net cash provided by (used for) investing activities (7,471) 1,501 (15,420)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from sale leaseback transaction 421 -- --
Proceeds from issuance of promissory notes -- 1,500 --
Principal payments on promissory notes -- -- (1,500)
Principal payments on capital lease obligations (165) (315) (340)
Proceeds from issuance of convertible notes payable 252 -- --
Proceeds from issuance of notes payable 808 1,891 --
Principal payments on notes payable (33) (168) (1,563)
Proceeds from sale of common stock 10,146 519 113,942
Proceeds from sale of redeemable convertible preferred stock, net of issuance costs 9,574 -- --
Proceeds from sale of convertible preferred stock, net of issuance costs -- 496 --
Payments to acquire treasury stock -- (2) (12)
Payment received on stock subscription receivable 4 -- 16
Payment of dividend to shareholders -- (146) --
-------- -------- ---------
Net cash provided by financing activities 21,007 3,775 110,543
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents 6,595 (3,943) 103,377
Cash and cash equivalents, beginning of year 595 7,190 3,247
-------- -------- ---------
Cash and cash equivalents, end of year $ 7,190 $ 3,247 $ 106,624
======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 75 $ 258 $ 325
Supplemental disclosure of non-cash investing and financing activities:
Series A convertible preferred stock issued in acquisition of Bradbury Software L.L.C $ 78 $ -- $ --
Conversion of note payable and related accrued interest of $5 into
64,190 shares of Series D redeemable convertible preferred stock $ 252 $ -- $ --
Capital lease obligations $ 979 $ -- $ --
Common stock issued for property and equipment $ 75 $ -- $ --
Conversion of redeemable convertible preferred stock to common stock $ -- $ -- $ 12,673
Conversion of Series A into common stock $ -- $ -- $ 751
Common stock issued in acquisition of Valto $ -- $ -- $ 2
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-32-
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1: NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Allaire Corporation develops, markets and supports Web application servers and
related software products that enable the development and deployment of
sophisticated e-business Web sites and applications. Allaire's products
interoperate with emerging Web application technologies as well as key
enterprise information systems technologies, and include features and tools that
increase the productivity of Web developers.
Allaire was incorporated in the state of Minnesota in February 1996 as the
surviving entity of a reorganization of Allaire, L.L.C., a Minnesota limited
liability company originally formed in May 1995. At the time of the
reorganization, the members of Allaire, L.L.C. exchanged their existing
ownership interests for a proportionate number of shares of Allaire's common
stock and substantially all assets and liabilities of Allaire, L.L.C. were
transferred to Allaire at historical cost. In April 1997, Allaire was
reorganized as a Delaware corporation.
The consolidated financial statements include the accounts of Allaire and its
subsidiaries. All significant intercompany transactions have been eliminated.
Certain 1997 and 1998 amounts have been reclassified to conform to the 1999
method of presentation.
As described in Note 4, during 1999 Allaire completed three acquisitions, all of
which were accounted for as poolings of interests. Accordingly, the accompa
nying financial statements and notes have been restated for all periods
presented to include the two material poolings of interests acquisitions.
Allaire operates in one industry segment and is subject to risks and
uncertainties common to growing technology-based companies, including rapid
technological change, growth and commercial acceptance of the Internet,
dependence on principal products and third party technology, new product
development, new product introductions and other activities of competitors,
dependence on key personnel, reliance on a limited number of distributors,
international expansion, lengthening sales cycle and limited operating history.
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS Allaire considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents. Allaire invests its excess cash, cash equivalents and
short term investments in money market funds, commercial paper and U.S. Treasury
securities which are subject to minimal credit and market risk. Allaire's cash
equivalents and short term investments are classified as available-for-sale and
recorded at amortized cost which approximates fair value. Gross unrealized and
realized gains or loss on sales of securities as of December 1998 and 1999 and
for the years ended December 31, 1997, 1998 and 1999 were not significant.
REVENUE RECOGNITION Allaire recognizes revenue from software license fees upon
delivery to customers provided no significant post-delivery obligations or
uncertainties remain and collection of the related receivable is probable.
Revenue under arrangements where multiple products or services are sold together
under one contract is allocated to each element based on their relative fair
values, with these fair values being determined using the price charged when
that element is sold separately. For arrangements that include specified upgrade
rights, the fair value of such upgrade right is deferred until the specified
upgrade is delivered. Allaire provides most of its distributors with certain
rights of return. An allowance for estimated future returns is recorded at the
time revenue is recognized based on Allaire's return policies and historical
experience. Allaire offers subscriptions that entitle customers to all new
releases for a specific product during the term of the subscription agreement.
Revenue from subscription sales is recognized ratably over the term of the
subscription agreement. Training and consulting services revenue is recognized
as services are rendered, and revenue under support agreements is recognized
ratably over the term of the support agreement. Revenue from long-term
consulting and service contracts are recognized over the term of the contract
using the percentage of completion method of accounting, based upon the
proportion of costs incurred to total estimated costs at completion.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of Allaire's financial
instruments, which include cash equivalents, short term investments, accounts
receivable, accounts payable, accrued expenses, and notes payable, approximate
their fair values at December 31, 1999.
-33-
<PAGE> 35
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS Financial instruments
which potentially expose Allaire to concentrations of credit risk consist
primarily of trade accounts receivable. To minimize this risk, ongoing credit
evaluations of customers' financial condition are performed, although collateral
generally is not required. One customer accounted for 43% and 37% of gross
accounts receivable at December 31, 1998 and 1999, respectively. In addition,
this same customer accounted for 28% and 37% of total revenue for the years
ended December 31, 1998 and 1999, respectively. No single customer accounted for
10% of total revenue for the year ended December 31, 1997. Allaire maintains
reserves for potential credit losses and such losses, in the aggregate,
historically have not exceeded existing reserves.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS Costs incurred in the
research and development of Allaire's products are expensed as incurred, except
for certain software development costs. Costs associated with the development of
computer software are expensed prior to the establishment of technological
feasibility (as defined by Statement of Financial Accounting Standards ("SFAS")
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed") and capitalized thereafter when material to Allaire's
financial position or results of operations. Allaire has capitalized no software
development costs since costs eligible for capitalization under SFAS No. 86 have
been insignificant.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and
depreciated over their estimated useful lives, generally three to five years,
using the straight-line method. Equipment held under capital leases are stated
at the lower of fair market value of the related asset or the present value of
the minimum lease payments at the inception of the lease and are amortized on a
straight-line basis over the shorter of the life of the related asset or the
lease term. Repair and maintenance costs are expensed as incurred.
ACCOUNTING FOR STOCK-BASED COMPENSATION Allaire accounts for stock-based awards
to employees using the intrinsic value method as prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no compensation expense is
recorded for options issued to employees in fixed amounts and with fixed
exercise prices at least equal to the fair market value of Allaire's common
stock at the date of grant. Allaire has adopted the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," through disclosure only (Note 10).
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 $842,000, $1,021,000 and $4,052,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
-34-
<PAGE> 36
NET LOSS PER SHARE Net loss per share is computed under SFAS No. 128, "Earnings
Per Share." Basic net loss per share is computed using the weighted average
number of shares of common stock outstanding, excluding shares of common stock
subject to repurchase. Diluted net loss per share does not differ from basic net
loss per share since potential common shares from conversion of preferred stock,
stock options and warrants and outstanding shares of common stock subject to
repurchase are anti-dilutive for all periods presented. Pro forma basic and
diluted net loss per share have been calculated assuming the conversion of all
outstanding shares of preferred stock into common stock, as if the shares had
converted immediately upon their issuance. Unaudited pro forma basic and diluted
net loss per share for the years ended December 31, 1998 and 1999 was $(1.10)
and $(0.24), respectively. Shares used in computing unaudited pro forma basic
and diluted net loss per share for the years ended December 31, 1998 and 1999
were 15,577,000 and 23,234,000, respectively.
COMPREHENSIVE INCOME Allaire adopted SFAS No. 130 in 1998. SFAS No. 130
requires that a full set of general purpose financial statements be
expanded to include the reporting of "comprehensive income". Comprehensive
income is comprised of two components, net income and other comprehensive
income. During the years ended December 31, 1997, 1998, and 1999, Allaire had
no items qualifying as other comprehensive income; accordingly, the adoption
of SFAS No. 130 had no impact on Allaire's financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 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.
3. PUBLIC OFFERINGS
In January 1999, Allaire sold 5,750,000 shares of its common stock through an
initial public offering. Net proceeds from the offering were approximately $52.3
million after deducting the underwriting discount and other offering expenses.
At the time of the initial public offering, all of Allaire's outstanding
preferred stock automatically converted into 7,697,882 shares of common stock.
In September 1999, Allaire sold 2,000,000 shares of common stock and selling
stockholders sold 2,800,000 shares of common stock through a follow-on public
offering. The Company's net proceeds from the offering were approximately $58.1
million after deducting the underwriting discount and other offering expenses.
Proceeds from the transaction were received by Allaire in October 1999.
4. ACQUISITIONS
ACQUISITION OF BRADBURY SOFTWARE L.L.C. In March 1997, Allaire acquired the
business and substantially all of the assets of Bradbury Software L.L.C.
("Bradbury"), including all rights to Bradbury's HomeSite software product, in
exchange for $252,000 in cash and 13,000 shares of Allaire's Series A
convertible preferred stock valued at $78,000. The Bradbury acquisition was
accounted for under the purchase method of accounting. Accordingly, the purchase
price was allocated based upon the fair value of assets acquired and liabilities
assumed. The excess of the purchase price over the fair value of the net assets
acquired totaled $315,000. This amount has been included in other assets and is
being amortized using the straight-line method over a three-year period.
Amortization expense relating to this excess purchase price totaled $88,000,
$105,000 and $105,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. The operating results of Bradbury have been included in the
financial statements since the date of the acquisition. Pro forma presentations
have not been included, as the acquisition was not material to the results of
operations of Allaire.
The former owner of Bradbury was entitled to additional cash payments of up to
$165,000, depending on the length of time he remains employed by Allaire. During
the years ended December 31, 1997 and 1998, a total of $82,000 and $83,000,
respectively, was earned and recorded as compensation expense under this
arrangement.
In order to finance the Bradbury acquisition, Allaire issued 10%
convertible notes payable totaling $252,000 and warrants to purchase 12,600
shares of Allaire's common stock at a price of $2.00 per share to two
stockholders (Note 9). 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.
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<PAGE> 37
ACQUISITIONS OF BRIGHT TIGER AND LIVE SOFTWARE On April 12, 1999, Allaire
completed its acquisition of Bright Tiger Technologies, Inc. ("Bright Tiger"), a
Massachusetts company that develops and markets Web site resource management
software. In connection with the transaction, Allaire issued 577,166 shares of
its common stock for all of the issued and outstanding shares of Bright Tiger.
On June 25, 1999, Allaire completed its acquisition of Live Software, Inc.
("Live Software"), a California company that develops, markets and supports
server-side Java development and deployment technology. In connection with the
transaction, Allaire issued 1,056,752 shares of its common stock for all the
issued and outstanding shares of Live Software. These mergers were accounted for
as poolings of interests. Accordingly, Allaire's consolidated financial
statements have been restated to include the accounts and operations of Bright
Tiger and Live Software for all periods presented.
Revenues and net income of the combined entities for the three-month period
prior to these mergers are presented in the following table. Prior to these
mergers during the quarter ended March 31, 1999, the companies had intercompany
sales of $40,000. The intercompany sales have been eliminated and certain
amounts in the merged companies' financial statements were reclassified to
conform to Allaire's presentations.
Pro Forma Results
Three Months Ended March 31, 1999
-----------
Revenue: (unaudited)
Allaire $ 7,836,000
Bright Tiger 168,000
Live Software 693,000
-----------
Combined $ 8,697,000
===========
Net Income (Loss):
Allaire $(1,684,000)
Bright Tiger (1,199,000)
Live Software 267,000
-----------
Combined $(2,616,000)
===========
The following table represents a reconciliation of net revenues and net loss
previously reported by the combining companies to those presented in the
accompanying consolidated financial statements. Prior to the merger, during
1998, the companies had intercompany sales of $140,000. The intercompany sales
have been eliminated.
Years ended December 31, 1997 1998
------------ ------------
Revenue:
Allaire $ 7,650,000 $ 20,512,000
Bright Tiger 18,000 352,000
Live Software 120,000 498,000
------------ ------------
Combined $ 7,788,000 $ 21,362,000
============ ============
Net Income (Loss):
Allaire $ (7,425,000) $(10,770,000)
Bright Tiger (4,123,000) (6,342,000)
Live Software 12,000 (27,000)
------------ ------------
Combined $(11,536,000) $(17,139,000)
============ ============
ACQUISITION OF VALTO SYSTEMS On December 23, 1999, Allaire completed its
acquisition of Valto Systems, a Massachusetts company that develops and markets
Enterprise JavaBeans (EJB) server technology. In connection with the
transaction, Allaire issued 450,000 shares of its common stock for all the
issued and outstanding shares of Valto Systems. This merger was accounted as a
pooling of interests. Acquired net liabilities of approximately $37,000 have
been recorded at historical amounts. Prior periods were not restated due to
immateriality, and accordingly, results of operations have been included since
the date of acquisition.
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<PAGE> 38
5. INVESTMENT IN ALIVE.COM, INC.
In July 1998, Allaire entered into an agreement under which it contributed
certain non-core technology and agreed to provide certain services to Alive.com,
Inc. ("Alive.com" formerly known as Yesler Software, Inc.) in exchange for
907,591 shares of Alive.com's voting common stock, representing approximately
34% of the outstanding capital stock of Alive.com at that time. Subsequently,
Allaire transferred 76,903 shares of Alive.com 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
Alive.com. In December 1999, Alive.com merged with Loudeye Tecnologies, Inc. At
the time of the merger, Allaire owned approximately 16% of the outstanding
capital stock of Alive.com. Allaire will account for its investment in Loudeye
Tecnologies, Inc. under the cost method.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, 1998 1999
----------- -----------
Furniture and fixtures $ 1,194,000 $ 1,690,000
Furniture and fixtures under capital lease 78,000 78,000
Equipment 3,382,000 5,491,000
Equipment under capital lease 843,000 843,000
Software 599,000 799,000
Leasehold improvements 401,000 840,000
Construction in progress -- 214,000
----------- -----------
6,497,000 9,955,000
Less: Accumulated depreciation and amortization (2,197,000) (5,007,000)
----------- -----------
$ 4,300,000 $ 4,948,000
=========== ===========
Depreciation and amortization expense for the years ended December 31, 1997,
1998 and 1999 was $582,000, $1,607,000 and $2,874,000, respectively.
CAPITAL LEASE During 1997, Allaire sold and immediately leased back certain
equipment under the Capital 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, $297,000, and $307,000 for the years ended December 31, 1997, 1998 and
1999, respectively. Accumulated amortization on property and equipment under
capital lease totaled $478,000 at December 31, 1998 and $785,000 at December 31,
1999. Interest expense relating to capital lease obligations totaled $38,000,
$51,000 and $26,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
7. LINES OF CREDIT
WORKING CAPITAL LINE At December 31, 1999, Allaire was party to a line of credit
agreement which provided for borrowings of up to $12,500,000 for working capital
purposes and for the issuance of letters of credit. Amounts available under the
line were determined based upon eligible accounts receivable. All borrowings and
letters of credit were collateralized by substantially all of Allaire's assets
and all borrowings bore interest at the bank's prime rate (8.50% as of December
31, 1999). As of December 31, 1999, letters of credit totaling $4,725,500 had
been issued against the line and $7,774,500 was available for additional
borrowings. The line of credit requires the maintenance of certain minimum
financial ratios and conditions. The line of credit expires in November 2000.
-37-
<PAGE> 39
EQUIPMENT CREDIT LINE In December of 1996, Bright Tiger entered into, and in
July 1997 amended and restated, an equipment loan line agreement with a bank,
under which Bright Tiger may borrow up to $875,000 for purchases of equipment,
subject to certain limitations. In June 1998, Bright Tiger entered into a second
agreement with the bank for an additional equipment loan line of $500,000
subject to the same limitations. All borrowings under these lines of credit are
collateralized by substantially all of Bright Tiger's assets and bear interest
at the bank's prime rate plus 3/4% (8.50% at December 31, 1998). The terms of
the lines of credit include certain covenants requiring the maintenance of
specified financial ratios and restrictions on Bright Tiger's ability to sell or
transfer fixed assets and to declare or pay dividends to its stockholders. As of
December 31, 1998, Bright Tiger was not in compliance with the covenants
relating to the maintenance of certain financial ratios. Accordingly, the
outstanding balance under the lines of credit was immediately callable by the
bank and has been classified as a current liability in its entirety. At December
31, 1998, $1,145,900 was outstanding under the aforementioned lines of credit.
The credit line was paid in full in April 1999.
EQUIPMENT LOAN LINE In May 1998, Allaire entered into an equipment loan line
agreement (the "Equipment Loan Line") under which Allaire was able to borrow up
to $2,000,000 to finance fixed asset purchases through December 1998. The
initial term of each loan is 36 months from the borrowing date. Monthly payments
are equal to 3.155% of the original amount borrowed, for an effective interest
rate of approximately 15%. At the end of term, Allaire may choose to make one
additional payment of 15% of the original amount funded or, if no default has
occurred, the term may be extended for an additional 6 months at the original
monthly payment rate. The Equipment Loan Line contains no financial covenants
and there are no cross-default provisions in connection with the equipment and
working capital line described above. All borrowings are collateralized by the
purchased assets. Allaire borrowed $1,406,000 in June 1998 and $214,000 in
November 1998 under the Equipment Loan Line, which was collateralized by
previously purchased equipment. The Equipment Loan Line expired in December
1998. At December 31, 1999, annual cash payments on the borrowings under the
Equipment Loan Line are as follows:
2000 $ 613,000
2001 583,000
----------
Total cash payments 1,196,000
Less-amount representing interest 161,000
----------
Present value of notes payable $1,035,000
==========
PROMISSORY NOTES In November 1998, Bright Tiger issued promissory notes to
existing investors of Bright Tiger in exchange for $1,500,000 in cash proceeds.
These notes bear interest at 8% per year, and the principal and accrued interest
of the notes are payable upon demand by their holders. These notes contain
conversion rights whereby the holders of the notes may apply the unpaid
principal and interest under the notes to the purchase of equity securities of
Bright Tiger. The promissory notes were paid in full in April 1999.
8. 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 had the following rights and privileges:
VOTING RIGHTS The Preferred Stockholders generally vote together with all other
classes and series of stock as a single class on all matters and are entitled to
a number of votes equal to the number of shares of common stock into which each
share of such stock is convertible. With respect to the number of directors,
only the Redeemable Preferred Stockholders, voting as a single class, may vote
on any increase of the maximum number of directors constituting the Board of
Directors to a number in excess of five. With respect to the election of
directors, the Redeemable Preferred Stockholders, voting as a single class, may
elect one director and the common stockholders and Preferred Stockholders,
voting as a single class, may elect two directors. The remaining two directors
shall be elected by a combined vote of both the common stockholders and the
Series A preferred stockholders, voting as a single class, and the Redeemable
Preferred Stockholders, voting as a single class.
-38-
<PAGE> 40
CONVERSION Each share of Series A, Series B and Series C preferred stock is
convertible, at the option of the holder, into four shares of common stock,
except for 31,906 shares of Series A preferred stock, each of which converts
into two shares 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 two shares of common stock, subject to certain anti-dilution
adjustments. All shares of Preferred Stock automatically converted into
7,697,882 shares of common stock upon the closing of Allaire's initial public
offering in January 1999.
DIVIDEND RIGHTS The Preferred Stockholders are not entitled to receive any
dividends unless declared by Allaire's Board of Directors. In the event that
dividends are paid on the common stock, the Preferred Stockholders are entitled
to receive dividends at the same rate and at the same time as the common
stockholders, with each share of preferred stock being treated as equal to the
number of shares of common stock into which each share of such stock is
convertible.
LIQUIDATION PREFERENCES In the event of any liquidation, dissolution or winding
up of Allaire, the Preferred Stockholders are entitled to receive, in preference
to the holders of the common stock, an amount equal to the greater of the
original purchase price per share, respectively, subject to certain
anti-dilution adjustments, or such amount as would have been payable had such
shares been converted to common stock just prior to liquidation. The original
purchase price per share of the Series B, Series C and Series D preferred stock
was $4.52, $5.91 and $4.00, respectively. The original purchase price per share
of the Series A preferred stock was $4.07, except for 656 and 31,250 shares
which had an original purchase price per share of $8.00 and $16.00,
respectively. Any assets remaining following the initial distribution to the
Preferred Stockholders shall be available for distribution ratably among the
common stockholders only.
REDEMPTION At the request of at least 50% of the holders of the Redeemable
Preferred Stock at any time beginning in June 2002, Allaire shall redeem
one-third of the then outstanding shares of each series of Redeemable Preferred
Stock. Subsequently, on the first and third anniversaries of the initial
redemption date, Allaire shall redeem 50% and 100%, respectively, of the
remaining outstanding shares of each series. Upon redemption, each holder of the
Series B, Series C and Series D preferred stock will be entitled to receive a
cash payment equal to $4.52 per share, $5.91 per share and $4.00 per share,
respectively, plus any declared but unpaid dividends.
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 6), 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. These warrants converted to warrants to purchase 70,796 shares of
common stock upon the closing of Allaire's initial public offering in January
1999. These warrants were fully exercised during the year ended December 31,
1999.
UNDESIGNATED PREFERRED STOCK At December 31, 1998 and 1999, 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.
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<PAGE> 41
9. COMMON STOCK
AUTHORIZED SHARES On March 13, 2000, Allaire's stockholders approved an increase
in the authorized shares of common stock, $.01 par value, to 100,000,000.
STOCK SPLIT In March 2000, Allaire completed a two-for-one split of its
outstanding shares of common stock. The stock split was effected in the form of
a stock dividend and entitled each stockholder of record at the close of
business on February 15, 2000 to receive one share for every outstanding share
of common stock held on the record date. Accordingly, the accompanying financial
statements and notes have been restated for all periods.
TREASURY SHARES Of the common stock issued, an aggregate of 6,834 and
33,220 shares with a cost of $2,000 and $14,000 were held by Allaire
as treasury shares and were included as a reduction to additional paid-in
capital at December 31, 1998 and 1999.
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 had the right to repurchase, at a price of
$1.13 per share, any unvested common shares in the event of the founder's
voluntary resignation. All other restriction agreements gave Allaire the right
to repurchase, for an amount equal to the original consideration paid, any
unvested common shares in the event of voluntary resignation or termination of
employment with Allaire for cause. Allaire's repurchase rights lapsed at various
dates through November 30, 1999 or, in the case of the founder, upon the closing
of an initial public offering of Allaire's common stock, which occurred in
January 1999. At December 31, 1999, no shares of Allaire's outstanding common
stock were subject to repurchase under the stock restriction agreements.
All employees who have been granted options by Allaire are generally eligible to
elect immediate exercise of all such options. However, shares obtained by
employees who elect to exercise prior to the original option vesting schedule
are subject to Allaire's right of repurchase, at the option exercise price, in
the event of termination. Allaire's repurchase rights lapse at the same rate as
the shares would have become exercisable under the original vesting schedule. At
December 31, 1999, Allaire had the right to repurchase 320,992 shares of common
stock.
STOCK SUBSCRIPTIONS RECEIVABLE Allaire held recourse notes receivable from a
stockholder at December 31, 1999 in consideration for the purchase of Allaire
common stock. This loan is secured by the underlying common stock and,
consequently, is reflected as an offset to stockholders' equity.
COMMON STOCK WARRANTS Pursuant to the issuance of convertible notes payable in
1996, Allaire issued warrants to purchase 17,198 shares of its common stock at a
price of $1.02 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. At December 31, 1999, 2,456 warrants were outstanding.
Pursuant to the issuance of convertible notes payable in 1997 (Note 4), Allaire
issued warrants to purchase 12,600 shares of its common stock at a price of
$2.00 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. At December 31, 1999, 12,600 warrants were outstanding.
RESERVED SHARES At December 31, 1999, Allaire had 6,395,510 shares of common
stock reserved for issuance upon the exercise of common stock warrants and
options.
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<PAGE> 42
10. STOCK OPTIONS
All options issued by Allaire during the year ended December 31, 1996 were
non-qualified, non-plan stock options issued to employees, advisors and
consultants of Allaire. All options granted by Allaire during this period of
time were issued at fair market value at the date of grant, vest either
immediately or over a four-year period and expire ten years from the date of
grant.
1997 STOCK INCENTIVE PLAN The 1997 Incentive Stock Plan (the "1997 Stock Plan")
provides for the granting of incentive and non-qualified stock options and stock
bonus awards to officers, directors, employees and consultants of Allaire. The
maximum number of common shares that may be issued pursuant to the 1997 Stock
Plan, as amended, is 3,452,000.
The exercise price of each stock option issued under the 1997 Stock Plan shall
be specified by the Board of Directors at the time of grant. However, incentive
stock options may not be granted at less than the fair market value of Allaire's
common stock as determined by the Board of Directors at the date of grant or for
a term in excess of ten years. All options granted under the 1997 Stock Plan
through December 31, 1999 vest either immediately or over a four-year period for
employees or over the service period for non-employees and expire ten years from
the date of grant.
1998 STOCK INCENTIVE PLAN The 1998 Incentive Stock Plan (the "1998 Stock Plan"),
as amended and approved by stockholders on March 13, 2000, provides for the
issuance of up to 8,800,000 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 and
incentive stock option shall be specified by the Compensation Committee. Grants
of stock appreciation rights, performance shares, restricted stock and
unrestricted stock may be made at the discretion of the Compensation Committee
with terms to be defined therein.
During the years ended December 31, 1996 and 1997 compensation expense
recognized for stock option grants made by Allaire under APB Opinion No. 25 was
not significant. For the year ended December 31, 1998 and 1999, respectively,
compensation expense recognized for stock option grants totaled $412,000 and
$263,000. Had compensation cost for Allaire's option grants been determined
based on the fair value at the date of grant consistent with the method
prescribed by SFAS No. 123, Allaire's net loss and net loss per share would have
been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Net loss:
As reported $(11,536,000) $(17,139,000) $ (5,539,000)
Pro forma $(11,597,000) $(17,278,000) $(13,229,000)
Basic and diluted net loss per share:
As reported $ (2.67) $ (2.39) $ (0.24)
Pro forma $ (2.69) $ (2.41) $ (0.58)
</TABLE>
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, 1997, 1998 and 1999: no dividend
yield for all years; risk free interest rates of 6.1%, 5.1% and 5.8%,
respectively; a volatility of 0%, 0% and 95%, respectively, and an expected
option term of 5 years in 1997 and 1998, and 4 years in 1999.
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<PAGE> 43
Stock option activity during the years ended December 31, 1996, 1997, 1998 and
1999 was as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
----------- ---------
<S> <C> <C>
Outstanding - December 31, 1995 -- $ --
Granted (weighted average fair value of $0.06) 2,271,904 0.22
Exercised (5,000) 0.25
Canceled (15,000) 0.25
----------
Outstanding - December 31, 1996 2,251,904 0.22
Granted (weighted average fair value of $0.09) 2,976,818 0.29
Exercised (10,760) 0.71
Canceled (443,198) 0.26
----------
Outstanding - December 31, 1997 4,774,764 0.26
Granted (weighted average fair value of $1.48) 1,146,322 3.47
Exercised (2,294,768) 0.24
Canceled (249,126) 1.01
----------
Outstanding - December 31, 1998 3,377,192 1.30
Granted (weighted average fair value of $24.22) 3,932,452 34.61
Exercised (945,048) 1.09
Canceled (388,090) 16.15
----------
Outstanding - December 31, 1999 5,976,506 $22.16
==========
</TABLE>
As of December 31, 1999, 29,442 and 131,100 shares were available for grant
under the 1997 Stock Plan and the 1998 Stock Plan, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
VESTED AND EXERCISABLE
----------------------------
WEIGHTED-AVERAGE WEIGHTED-
REMAINING NUMBER AVERAGE
EXERCISE NUMBER CONTRACTUAL OF EXERCISE
PRICE OUTSTANDING LIFE (IN YEARS) SHARES PRICE
------------ ----------- ---------------- --------- ---------
<S> <C> <C> <C> <C>
$ 0.13- 4.50 1,923,610 7.26 974,884 $ 0.40
5.53- 9.44 476,196 8.80 56,878 6.19
20.82-25.00 1,282,800 9.59 -- 24.10
25.03-36.47 1,456,400 9.47 -- 29.60
55.75-75.57 837,500 9.94 -- 65.30
--------- ---------
$ 0.13-75.57 5,976,506 8.80 1,031,762 $22.16
========= =========
</TABLE>
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<PAGE> 44
DEFERRED COMPENSATION During 1998, Allaire granted stock options to purchase
955,900 shares of its common stock with exercise prices ranging from $.01 to
$6.80. Through December 31, 1999, Allaire recorded compensation expense and
deferred compensation relating to these options totaling $675,000 and $1.1
million, respectively, representing the difference between the estimated fair
market value of the common stock on the date of grant and the exercise price.
Compensation relating to options which vested immediately upon grant was
expensed in full at the date of grant, while compensation related to options
which vest over time was recorded as a component of stockholders' deficit and is
being amortized over the vesting periods of the related options.
1998 EMPLOYEE STOCK PURCHASE PLAN The 1998 Employee Stock Purchase Plan (the
"Purchase Plan") provides for the issuance of up to 600,000 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's
first offering period under the Purchase Plan commenced on July 1, 1999 and
ended on December 31, 1999. During this offering period, employees purchased
9,858 shares of common stock, which were issued in January 2000.
11. INCOME TAXES
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
December 31, 1998 1999
Deferred tax assets: ------------- -------------
<S> <C> <C>
Net operating loss carryforwards $ 11,771,000 $ 10,778,000
Reserves not currently deductible 249,000 381,000
Tax credit carryforwards 689,000 1,389,000
Capitalized research and development expense -- 1,050,000
Compensation related -- 488,000
Deferred revenue -- 286,000
Other 402,000 517,000
------------ ------------
Total deferred tax assets 13,111,000 14,889,000
Deferred tax asset valuation allowance (13,111,000) (14,889,000)
------------ ------------
$ -- $ --
============ ============
</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.
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<PAGE> 45
Income taxes computed using the federal statutory income tax rate differs from
Allaire's effective tax rate primarily due to the following:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Income tax benefit at U.S. federal statutory tax rate $(4,038,000) $(5,999,000) $(1,939,000)
State taxes, net of federal tax impact (711,000) (1,054,000) (342,000)
Nondeductible acquisition related expenses -- -- 921,000
Tax credit carryforwards (91,000) (195,000) (345,000)
Other (249,000) 81,000 (73,000)
Change in valuation allowance. 5,089,000 7,167,000 1,778,000
----------- ----------- -----------
Provision for income taxes $ -- $ -- $ --
=========== =========== ===========
</TABLE>
At December 31, 1999, Allaire had federal and state net operating losses of
approximately $61 million and $59.8 million, respectively, and federal and state
tax credit carryforwards of approximately $599,000 and $670,000, respectively,
available to reduce future taxable income and future tax liabilities. If not
utilized, these carryforwards will expire at various dates ranging from 2001 to
2019. Of the total net operating losses, $31.6 million relates to the exercise
of stock options. The tax benefit of this amount will result in an increase in
additional paid-in capital upon realization. Under the provisions of the
Internal Revenue Code, certain substantial changes in Allaire's ownership may be
limited, or may limit in the future, the amount of net operating loss and
research and development tax credit carryforwards which could be utilized
annually to offset future taxable income and income tax liability. The amount of
any annual limitation is determined based upon Allaire's value prior to an
ownership change.
12. SEGMENT INFORMATION
Operating in one industry segment, Allaire develops, markets and supports
software for a wide range of Web development.
Revenue was distributed geographically as follows:
Year ended December 31, 1997 1998 1999
---------- ----------- -----------
North America $6,289,000 $18,659,000 $47,679,000
Europe 824,000 1,802,000 4,958,000
Other international 675,000 901,000 2,526,000
---------- ----------- -----------
$7,788,000 $21,362,000 $55,163,000
========== =========== ===========
Allaire's sales to Europe and other international geographies are primarily
export sales from the United States. Substantially all of Allaire's services
revenue for the years ended December 31, 1997, 1998 and 1999 was generated in
North America. All long-lived assets were located in North America at December
31, 1998 and 1999.
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<PAGE> 46
13. EMPLOYEE SAVINGS PLAN
During 1997, Allaire adopted an employee retirement savings plan under Section
401(k) of the Internal Revenue Code which covers substantially all employees.
Under the terms of the 401(k) Plan, employees may contribute a percentage of
their salary, up to a maximum of 15%. Allaire did not make any contributions to
the 401(k) Plan on behalf of its employees for the years ended December 31,
1997, 1998 or 1999.
14. 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, 1997, 1998 and 1999, totaled $515,000, $1,420,000 and $1,834,000,
respectively. During 2000, Allaire will move into a new facility under an
operating lease. In addition, Allaire also leases certain fixed assets under
capital leases, which expire at various dates through October 2000.
Future minimum commitments under noncancelable operating and capital leases at
December 31, 1999 are as follows:
OPERATING CAPITAL
LEASES LEASES
------------ --------
2000 $ 7,412,000 $163,000
2001 15,959,000 --
2002 16,889,000 --
2003 15,610,000 --
2004 and thereafter 105,351,000 --
------------ --------
Total lease payments $161,221,000 163,000
============
Less - amount representing interest 4,000
--------
Present value of capital lease obligations $159,000
========
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<PAGE> 47
LETTER OF CREDIT In connection with two facility leases Allaire is required to
maintain, on behalf of the landlord, an irrevocable letter of credit with a bank
over the term of each lease. As of December 31, 1999, letters of credit totaling
$4,725,500 had been issued against the line of credit (Note 7).
LEGAL PROCEEDINGS In 1996, a wrongful termination action was brought against
Allaire and its founder by a former employee under which the plaintiff sought
severance pay and the right to 800,000 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.
15. SUBSEQUENT EVENT
In March 1999, Allaire acquired certain technology from Bowne Internet Solutions
and Bowne Personalization Services for $5 million in cash. This acquisition will
be accounted for as a purchase. Pro forma financial statements have not been
disclosed due to immateriality.
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<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Allaire Corporation
In our opinion, the financial statements listed in the accompanying table of
contents present fairly, in all material respects, the financial position of
Allaire Corporation and sudsidiaries at December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 13, 2000
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<PAGE> 49
<TABLE>
<S> <C> <C>
BOARD OF DIRECTORS CORPORATE OFFICERS CORPORATE COUNSEL
David J. Orfao David J. Orfao
President and Chief Executive Officer President and Chief Executive Officer Foley, Hoag & Eliot
Director since 1997 LLP Boston, Massachusetts
Joseph J. Allaire
Joseph J. Allaire Founder, Chairman of the Board and INDEPENDENT ACCOUNTANTS
Founder, Chairman of the Board and Executive Vice President
Executive Vice President PricewaterhouseCoopers LLP
Director since 1996 Jeremy Allaire Boston, Massachusetts
Chief Technology Officer
Jonathan A. Flint REGISTRAR AND
Founder and General Partner David A. Gerth TRANSFER AGENT
Polaris Venture Partners Chief Financial Officer
Director since 1996 EquiServe Shareholder Services
Larry E. Rowland Canton, Massachusetts
John J. Gannon Chief Information Officer
General Partner Stockholder Information
Polaris Venture Partners Amy E. Lewis
Director since 1996 Vice President, Worldwide Sales The Annual Meeting of Stockholders of
the Company will be held at 10:00 a.m.
Thomas A. Herring Patrick M. Morley on May 17, 2000 at the offices of Foley,
General Partner Vice President, North American Sales Hoag & Eliot LLP, One Post Office
Polaris Venture Partners Square, Boston, Massachusetts.
Director since 1997 Vikki Kolbe
Vice President, Worldwide Services and Support A copy of the Company's Annual Report on
Ronnie G. Ward Form 10-K filed with the Securities and
Private Investor George Favaloro Exchange Commission and additional
Director since 2000 Vice President, Business Development copies of this Report may be obtained
without charge upon written request to:
Stephen F. Clark
Vice President, Marketing Allaire Corporation
Investor Relations Department
Jack P. Lull One Alewife Center
Vice President, Engineering and Development Cambridge, MA 02140
T 617 761 2020
Kathy Wilde F 617 761 2007
Vice President, Enterprise Development
Victoria Sullivan
Vice President, Human Resources
Market Price of Common Stock
ColdFusion and Bright Tiger are The Company's Common Stock has been trading on the Nasdaq National Market under
U.S. registered trademarks, and the symbol "ALLR" since the Company's initial public offering on January 22,
Allaire, Allaire Spectra, 1999. The Company had 189 stockholders of record at March 15, 2000. This number
HomeSite and JRun are trademarks does not reflect persons or entities who hold their stock in nominee or "street
of Allaire Corporation. All name" through various brokerage firms. The Company has never declared or paid
other company names, brand names any cash dividends on its capital stock and does not anticipate paying cash
and product names are the dividends in the forseeable future. The following table sets forth for the
property of their respective fiscal periods indicated the high and low sales prices per share of Common Stock
holder(s). as reported on the Nasdaq National Market. Sales prices per share have been
restated to reflect the two-for-one stock split in March 2000.
1999 HIGH LOW
------ ------
First Quarter (from 1/22/99) $35.63 $17.00
Second Quarter $39.13 $19.94
Third Quarter $38.16 $21.06
Fourth Quarter $94.13 $26.25
</TABLE>
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<PAGE> 50
[ALLAIRE LOGO]
Allaire Corporation
One Alewife Center Cambridge, MA 02140
617 761 2020 T 617 761 2007 F www.allaire.com
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