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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-25265
------------------------
ALLAIRE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 41-1830792
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
275 GROVE STREET, NEWTON, MASSACHUSETTS 02466
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(617) 219-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
TITLE OF CLASS SHARES OUTSTANDING AT NOVEMBER 13, 2000
-------------- ---------------------------------------
<S> <C>
Common Stock, $.01 par value.............................. 27,411,078
</TABLE>
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ALLAIRE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2000 and
December 31, 1999........................................... 3
Consolidated Statement of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999.................... 4
Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999........................... 5
Notes to Unaudited Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signatures..................................................................... 17
Exhibit Index.................................................................. 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLAIRE CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 45,091 $106,624
Short-term investments.................................... 77,572 12,405
Investment in marketable securities....................... 2,785 --
Accounts receivable, net of allowance for doubtful
accounts and returns of $1,055 and $701 at September
30, 2000 and December 31, 1999, respectively........... 16,395 7,926
Prepaid expenses and other current assets................. 2,469 1,028
-------- --------
Total current assets.............................. 144,312 127,983
Property and equipment, net............................... 17,600 4,948
Goodwill and other intangibles, net....................... 4,731 584
Other assets.............................................. 2,018 25
-------- --------
TOTAL ASSETS...................................... $168,661 $133,540
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............. $ -- $ 159
Current portion of notes payable.......................... 631 488
Accounts payable.......................................... 8,597 3,358
Accrued expenses.......................................... 16,306 8,536
Accrued employee compensation and benefits................ 7,499 6,591
Deferred revenue.......................................... 28,963 11,937
-------- --------
Total current liabilities......................... 61,996 31,069
Notes payable............................................... 45 547
-------- --------
TOTAL LIABILITIES................................. 62,041 31,616
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; Authorized: 5,000,000
shares at September 30, 2000 and December 31, 1999..... -- --
Common stock, $.01 par value; Authorized: 100,000,000
shares at September 30, 2000 and 35,000,000 shares at
December 31, 1999
Issued and outstanding: 27,433,376 shares issued and
27,400,156 shares outstanding at September 30, 2000 and
26,849,532 issued and 26,816,312 outstanding at
December 31, 1999...................................... 274 268
Additional paid-in capital................................ 142,659 139,050
Accumulated deficit....................................... (38,647) (36,746)
Unrealized gain on marketable securities.................. 2,784 --
Deferred compensation..................................... (440) (638)
Stock subscriptions receivable............................ (10) (10)
-------- --------
Total stockholders' equity........................ 106,620 101,924
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $168,661 $133,540
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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ALLAIRE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE:
Software license fees.......................... $23,038 $12,252 $73,844 $29,976
Services....................................... 6,279 2,813 15,398 6,861
------- ------- ------- -------
Total revenue............................. 29,317 15,065 89,242 36,837
------- ------- ------- -------
COST OF REVENUE:
Software license fees.......................... 1,199 668 3,719 1,771
Services....................................... 6,041 2,040 15,398 5,340
------- ------- ------- -------
Total cost of revenue..................... 7,240 2,708 19,117 7,111
------- ------- ------- -------
GROSS PROFIT........................................ 22,077 12,357 70,125 29,726
------- ------- ------- -------
OPERATING EXPENSES:
Research and development....................... 7,296 3,367 17,180 8,731
Sales and marketing............................ 17,255 8,078 47,240 20,539
General and administrative..................... 4,560 1,685 11,821 4,728
Stock-based compensation....................... 62 66 185 199
Amortization of goodwill and other
intangibles.................................. 319 -- 744 --
Merger costs................................... -- -- -- 2,700
------- ------- ------- -------
Total operating expenses.................. 29,492 13,196 77,170 36,897
------- ------- ------- -------
LOSS FROM OPERATIONS.............................. (7,415) (839) (7,045) (7,171)
Interest income, net........................... 1,902 581 5,233 1,384
------- ------- ------- -------
LOSS BEFORE INCOME TAXES.......................... (5,513) (258) (1,812) (5,787)
Income tax provision (benefit)................. (836) -- 89 --
------- ------- ------- -------
NET LOSS.......................................... $(4,677) $ (258) $(1,901) $(5,787)
------- ------- ------- -------
NET LOSS PER SHARE:
Basic and diluted net loss per share........... $ (0.17) $ (0.01) $ (0.07) $ (0.27)
Pro forma basic and diluted net loss per
share........................................ (0.26)
WEIGHTED AVERAGE SHARES:
Shares used in computing basic and diluted net
loss per share............................... 27,287 23,291 27,094 21,705
Shares used in computing pro forma basic and
diluted net loss per share................... 22,324
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
ALLAIRE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
--------- -------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net loss.................................................. $ (1,901) $(5,787)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 4,691 1,806
Compensation expense relating to the issuance of equity
instruments........................................... 185 199
Tax benefit from stock options exercised............... 31 --
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable.................................. (8,469) (3,194)
Prepaid expenses and other current assets............ (1,441) (495)
Other assets......................................... (214) (418)
Accounts payable..................................... 5,239 (788)
Accrued expenses..................................... 8,678 7,085
Deferred revenue..................................... 17,026 5,554
--------- -------
Total adjustments.................................... 25,726 9,749
--------- -------
Net cash provided by operating activities............ 23,825 3,962
--------- -------
Cash flows from investing activities:
Purchases of short-term investments....................... (255,796) (55,554)
Sales of short-term investments........................... 190,617 30,305
Purchase of Open Sesame................................... (5,125) --
Purchases of property and equipment....................... (16,133) (2,399)
Investment in partners.................................... (2,000) --
--------- -------
Net cash used for investing activities............... (88,437) (27,648)
--------- -------
Cash flows from financing activities:
Principal payments on capital lease obligations........... (159) (252)
Principal payments on promissory notes.................... -- (1,500)
Principal payments on notes payable....................... (359) (1,453)
Proceeds from sale of common stock, net of issuance
costs.................................................. 3,597 54,659
Payment received on stock subscription receivable......... -- 16
--------- -------
Net cash provided by financing activities............ 3,079 51,470
--------- -------
Net increase (decrease) in cash and cash equivalents........ (61,533) 27,784
Cash and cash equivalents, beginning of period.............. 106,624 3,247
--------- -------
Cash and cash equivalents, end of period.................... $ 45,091 $31,031
--------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for income taxes................................ $ 89 $ --
Cash paid for interest.................................... $ 105 $ 278
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Unrealized gain on marketable securities.................. $ 2,784 $ --
Conversion of Series A convertible preferred stock to
common stock........................................... -- 751
Conversion of redeemable convertible preferred stock to
common stock........................................... -- 12,673
Issuance of common stock through public offering, net of
issuance costs......................................... -- 58,090
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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ALLAIRE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Allaire
Corporation and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Allaire Corporation and its
subsidiaries are collectively referred to as the "Company" or "Allaire." Certain
1999 amounts have been reclassified to conform to the 2000 method of
presentation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all financial information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of operations for the interim
periods reported and of the financial condition of the Company as of the date of
the interim balance sheet. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999 and the
Company's Registration Statement on Form S-1 filed on September 30, 1999
(Registration No. 333-86563).
Net Income (Loss) Per Share
Net income (loss) per share is computed under SFAS No. 128, "Earnings Per
Share." Basic net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding, excluding shares of common stock
subject to repurchase. Diluted net income (loss) per share is computed using the
weighted average number of shares of common stock outstanding, including
potential common shares from conversion of stock options and warrants. Pro forma
basic and diluted net income (loss) per share have been calculated assuming the
conversion of all outstanding shares of preferred stock into common stock, as if
the shares had converted immediately upon their issuance. As of September 30,
2000, options to purchase 8.2 million shares were outstanding but were not
included in the computations of diluted EPS because they are antidilutive.
2. COMPREHENSIVE INCOME
The components of comprehensive income (loss) are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- -----------------
2000 1999 2000 1999
------- ----- ------- -------
<S> <C> <C> <C> <C>
Net loss................................................... $(4,677) $(258) $(1,901) $(5,787)
Unrealized gain (loss) on marketable securities............ (4,341) -- 2,784 --
------- ----- ------- -------
COMPREHENSIVE NET INCOME (LOSS)............................ $(9,018) $(258) $ 883 $(5,787)
======= ===== ======= =======
</TABLE>
3. ACQUISITIONS
In March 2000, Allaire acquired Open Sesame from Bowne Internet Solutions
for a total purchase price of $5.1 million. Open Sesame is profiling and
personalization technology that delivers personalized customer interaction
capabilities. Allaire accounted for this acquisition as a purchase. The excess
of the purchase price over identified tangible and intangible assets was
considered goodwill. Goodwill and other intangibles are amortized over four
years. Pro forma financial statements have not been disclosed due to
immateriality.
6
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ALLAIRE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCOUNTS RECEIVABLE
In September 2000, Allaire entered into a one year non-recourse receivables
purchase agreement with a bank. The agreement allows for the sale of domestic
and foreign receivables, in an amount not to exceed $10.0 million at any one
time. At September 30, 2000, accounts receivable in the consolidated balance
sheet is net of $3.0 million received by Allaire under this agreement. The $3.0
million received was associated with distribution channel accounts receivable
for which revenue had not been recognized as of September 30, 2000. Allaire's
days sales outstanding was 50 days at September 30, 2000. If the receivables
sold to the bank were included in the calculation, the days sales outstanding
would have been 59 days. As of November 13, 2000, all of the accounts receivable
sold to the bank have been paid.
5. SUBSEQUENT EVENT
In October 2000, Allaire acquired the Kawa product from Tek-Tools, Inc. for
a cash purchase price of $9.0 million. Kawa is an integrated development
environment (IDE) for Java programming that delivers support for Enterprise
JavaBeans development and remote debugging. Allaire will account for this
acquisition as a purchase. Pro forma financial statements have not been
disclosed due to immateriality.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. The
forward-looking statements involve known and unknown risks, uncertainties and
other factors, including the factors set forth below in "Certain Factors that
may Affect Future Results," that may cause the actual results, performance and
achievements of Allaire to differ materially from those indicated by the
forward-looking statements.
ColdFusion is a U.S. registered trademark, and Allaire, Allaire Spectra,
HomeSite and JRun are trademarks of Allaire Corporation. All other company
names, brand names and product names are the property of their respective
holder(s).
OVERVIEW
Allaire develops, markets and supports Web application servers, packaged
applications and visual tools that enable the development and deployment of
sophisticated e-business Web sites and applications. Allaire derives a majority
of its revenue from its four primary products, Allaire Spectra, ColdFusion, JRun
and HomeSite.
Allaire's revenue is derived principally from license fees for software
products and, to a lesser extent, fees for a range of services complementing
these products, primarily training, consulting and technical support. Software
license fees include sales of licenses for the then-current version of Allaire's
products, product upgrades and subscriptions. Subscriptions entitle the customer
to all new releases for a specific product during the subscription period,
generally 12 to 24 months.
Revenue from sales of licenses to use Allaire's software products and
product upgrades is recognized upon delivery to customers, provided no
significant post-delivery obligations or uncertainties remain and collection of
the related receivable is probable. Revenue under arrangements where multiple
products or services are sold together under one contract is allocated to each
element based on their relative fair values, with these fair values being
determined using the price charged when that element is sold separately. For
agreements with specified upgrade rights, the revenue related to such upgrade
rights is deferred until such time as the specified upgrade is delivered.
Allaire provides most of its distributors with rights of return. An allowance
for estimated future returns is recorded at the time revenue is recognized based
on Allaire's historical experience. Revenue from subscription sales is
recognized ratably over the term of the subscription period. Services revenue is
recognized as services are rendered or ratably over the term of the service
agreement.
Allaire generates its software license revenue through direct sales of
licenses to end users and through its indirect distribution channel. Direct
revenue is generated by Allaire's direct sales force and via its Web site. The
indirect distribution channel includes distributors, direct and original
equipment manufacturer resellers, system integrators and Allaire Alliance
members. Revenue generated by the indirect distribution channel accounted for
61% and 54% of total revenue for the three months ended September 30, 2000 and
September 30, 1999, respectively. Revenue generated by the indirect distribution
channel accounted for 62% and 51% of total revenue for the nine months ended
September 30, 2000 and September 30, 1999, respectively. Allaire anticipates
that revenue derived from the indirect distribution channel will continue to
represent a significant percentage of total revenue. Allaire primarily derives
its international revenue through its indirect distribution channel.
International revenue outside of North America accounted for 20% and 15% of
total revenue for the three months ended September 30, 2000 and September 30,
1999, respectively, and 19% and 14% of total revenue for the nine months ended
September 30, 2000 and September 30, 1999, respectively.
8
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RESULTS OF OPERATIONS
REVENUE
Total revenue increased 95% from $15.1 million for the three months ended
September 30, 1999 to $29.3 million for the three months ended September 30,
2000. Total revenue increased 142% from $36.8 million for the nine months ended
September 30, 1999 to $89.2 million for the nine months ended September 30,
2000.
Software License Fees. Revenue from software license fees increased 88%
from $12.3 million for the three months ended September 30, 1999 to $23.0
million for the three months ended September 30, 2000. Revenue from software
license fees increased 146% from $30.0 million for the nine months ended
September 30, 1999 to $73.8 million for the nine months ended September 30,
2000. The increase was primarily due to an increase in the number of licenses
sold to use our Allaire Spectra, ColdFusion and JRun products. Allaire's first
shipment of Allaire Spectra occurred in the fourth quarter of 1999. Increases in
product prices associated with the release of new versions of Allaire's products
in March 2000 also contributed to the growth in revenue.
Services. Revenue from services increased 123% from $2.8 million for the
three months ended September 30, 1999 to $6.3 million for the three months ended
September 30, 2000. Revenue from services increased 124% from $6.9 million for
the nine months ended September 30, 1999 to $15.4 million for the nine months
ended September 30, 2000. The increase was primarily attributable to growth in
consulting and 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 79% from $668,000 for the three months ended
September 30, 1999 to $1.2 million for the three months ended September 30,
2000. Cost of software license fees increased 110% from $1.8 million for the
nine months ended September 30, 1999 to $3.7 million for the nine months ended
September 30, 2000. The increase in absolute dollars was due to higher unit
sales volume. Software license fees gross margins remained constant at 95% from
the three months ended September 30, 1999 to the three months ended September
30, 2000. The improvement in software license fees gross margins from 94% for
the nine months ended September 30, 1999 to 95% for the nine months ended
September 30, 2000, was primarily attributable to economies of scale achieved
with higher sales volume in 2000.
Cost of Services. Cost of services consists primarily of personnel costs.
Cost of services increased 196% from $2.0 million for the three months ended
September 30, 1999 to $6.0 million for the three months ended September 30,
2000. The increase in absolute dollars resulted primarily from the hiring of
additional employees and the use of independent contractors as trainers to
support increased customer demand for training classes, consulting and technical
support. The decline in services gross margins from 27% for the three months
ended September 30, 1999 to 4% for the three months ended September 30, 2000 and
from 22% for the nine months ended September 30, 1999 to 0% for the nine months
ended September 30, 2000 was primarily attributable to the investment in
additional consulting and technical support resources to support Allaire
Spectra, Allaire's 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.
9
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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 117% from $3.4 million for the three months ended
September 30, 1999 to $7.3 million for the three months ended September 30,
2000. Research and development expenses increased 97% from $8.7 million for the
nine months ended September 30, 1999 to $17.2 million for the nine months ended
September 30, 2000. The increase primarily resulted from salaries associated
with newly hired development personnel, consulting fees and costs related to the
localization of Allaire's products. Allaire anticipates that research and
development expenses will continue to increase in absolute dollars.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, commissions, and costs associated with marketing programs
such as advertising, seminars, trade shows and new product launch activities.
Sales and marketing expenses increased 114% from $8.1 million for the three
months ended September 30, 1999 to $17.3 million for the three months ended
September 30, 2000. Sales and marketing expenses increased 130% from $20.5
million for the nine months ended September 30, 1999 to $47.2 million for the
nine months ended September 30, 2000. The increase was primarily attributable to
costs associated with additional direct sales, pre-sales support and marketing
personnel, and an increase in marketing programs, including advertising and
promotions. 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, recruiting and insurance
costs. General and administrative expenses increased 171% from $1.7 million for
the three months ended September 30, 1999 to $4.6 million for the three months
ended September 30, 2000. General and administrative expenses increased 150%
from $4.7 million for the nine months ended September 30, 1999 to $11.8 million
for the nine months ended September 30, 2000. The increase was primarily
attributable to salaries associated with newly hired personnel and related costs
required to manage Allaire's growth and facilities expansion.
Stock-based Compensation. The amount that the estimated fair market value
of Allaire's common stock exceeds the exercise price of stock options on the
date of grant is recorded as deferred compensation and amortized to stock-based
compensation expense as the options vest. Allaire recognized $66,000 of
stock-based compensation for the three months ended September 30, 1999 compared
to $62,000 of stock based compensation for the three months ended September 30,
2000. Allaire recognized $199,000 of stock-based compensation for the nine
months ended September 30, 1999 compared to $185,000 of stock based compensation
for the nine months ended September 30, 2000.
Amortization of Goodwill and Other Intangibles. The amortization of
goodwill and other intangibles of $319,000 for the three months ended September
30, 2000 and $744,000 for the nine months ended September 30, 2000 related to
the amortization of costs associated with the purchase of the Open Sesame
technology from Bowne Internet Solutions in March 2000.
Merger Costs. The merger costs of $2.7 million for the nine months ended
September 30, 1999 relate to the mergers with Bright Tiger and Live Software.
The costs include professional fees, facility closings, severance packages and
related costs associated with these acquisitions.
INTEREST INCOME, NET
Interest income, net of interest expense, increased from $581,000 for the
three months ended September 30, 1999 to $1.9 million for the three months ended
September 30, 2000. Interest income, net of interest expense, increased from
$1.4 million for the nine months ended September 30, 1999 to $5.2 million for
the nine months ended September 30, 2000. The increase was due to interest
income earned from the investment
10
<PAGE> 11
of the net cash proceeds from Allaire's initial public offering in January 1999
and follow-on public offering in September 1999.
PROVISION FOR INCOME TAXES
Allaire's provision for income taxes resulted in a tax benefit of $836,000
for the three months ended September 30, 2000. This represents the reversal of a
portion of the tax provision from previous quarters in 2000 due to the loss in
the third quarter and expected pre-tax loss for fiscal year 2000. The decline in
the effective tax rate is due to the loss incurred in the third quarter. The
remaining tax provision of $89,000 for the nine months ended September 30, 2000
consists of state and foreign taxes. Consistent with prior quarters, the Company
maintains a full valuation allowance against its deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, Allaire had cash, cash equivalents and short-term
investments of $122.7 million, up from $119.0 million at December 31, 1999.
Cash provided by operating activities for the nine months ended September
30, 2000 was $23.8 million, primarily related to increases in accrued expenses
and deferred revenue, offset by an increase in accounts receivable and a net
loss of $1.9 million. Cash provided by operating activities for the nine months
ended September 30, 1999 was $4.0 million, primarily related to increases in
deferred revenue and accrued expenses, partially offset by a net loss of $5.8
million.
Cash used for investing activities for the nine months ended September 30,
2000 was $88.4 million, primarily related to net purchases of short-term
investments and property and equipment. Cash used by investing activities for
the nine months ended September 30, 1999 was $27.6 million primarily related to
the purchase of short term investments.
Cash provided by financing activities for the nine months ended September
30, 2000 was $3.0 million, primarily due to common stock issuances. Cash
provided by financing activities for the nine months ended September 30, 1999
was $51.5 million, primarily related to net proceeds from Allaire's initial
public offering.
As of September 30, 2000, Allaire's primary commitments consisted of
obligations related to operating leases and $676,000 of notes payable.
In March 2000, Allaire acquired Open Sesame from Bowne Internet Solutions
for a total purchase price of $5.1 million.
Allaire is party to a line of credit agreement which provides for
borrowings of up to $12.5 million for working capital purposes and for the
issuance of letters of credit. Amounts available under the line are determined
based upon eligible accounts receivable. All borrowings and letters of credit
are collateralized by substantially all of Allaire's assets and all borrowings
bear interest at the bank's prime rate (9.50% as of September 30, 2000). As of
September 30, 2000, letters of credit totaling $11.4 million had been issued
against the line and $1.1 million was available for additional borrowings. The
original terms of the line of credit require the maintenance of certain minimum
financial ratios and conditions. The line of credit expires in November 2000.
In September 2000, Allaire entered into a one year non-recourse receivables
purchase agreement with a bank. The agreement allows for the sale of domestic
and foreign receivables, in an amount not to exceed $10.0 million at any one
time. The accounts receivable are sold at a discount to reflect a minimum period
of 30 days at the bank's prime rate plus 1.25% (10.75%). At September 30, 2000,
accounts receivable in the consolidated balance sheet is net of $3.0 million
received by Allaire under this agreement. The $3.0 million received was
associated with distribution channel accounts receivable for which revenue had
not been recognized as of September 30, 2000. Allaire's days sales outstanding
was 50 days at September 30, 2000. If the receivables sold to the bank were
included in the calculation, the days sales outstanding would have been 59 days.
As of November 13, 2000, all of the accounts receivable sold to the bank have
been paid. Allaire may utilize this agreement, from time to time, to effectively
manage its liquidity, cash and cash equivalents and short-term investment
positions, and accounts receivable.
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Allaire expects to experience significant growth in its operating expenses
for the foreseeable future in order to execute its business plan, particularly
research and development and sales and marketing expenses. As a result, Allaire
anticipates that such operating expenses, as well as planned capital
expenditures, will constitute a material use of its cash resources. In addition,
Allaire may utilize cash resources to fund acquisitions or investments in
complementary businesses, technologies or product lines. Allaire believes that
its current cash and cash equivalents and short-term investments will be
sufficient to meet its anticipated cash requirements for working capital and
capital expenditures for the foreseeable future.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Allaire does not
expect SFAS No. 133 to have a material affect on its financial position or
results of operations.
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 September 30, 2000, had an accumulated deficit of
$38.6 million. These net losses and accumulated deficit resulted primarily from
the significant costs incurred in the development of Allaire's products and in
the preliminary establishment of its infrastructure. Although Allaire recorded a
small profit for the quarters ended December 31, 1999, March 31, 2000 and June
30, 2000, it experienced a net loss for the quarter ended September 30, 2000.
Allaire can give no assurances that it will be profitable in the future.
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, it expects the sales cycle to lengthen. As a
result, Allaire may have difficulty determining whether and when it will
receive license revenue from a particular customer. In particular,
Allaire has experienced a longer than expected sales cycle for Allaire
Spectra.
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 Allaire's common stock could
fall substantially. For example, the price of Allaire's common stock dropped
substantially after it announced revenues and operating results for the quarter
ended September 30, 2000 that were lower than expected.
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. Because Allaire has adopted a mass-enterprise strategy
with respect to its products, it competes with several different types of
companies. Allaire competes with large web and database platform companies that
offer a variety of software products, as well as a number of medium-sized and
start-up companies that
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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.
Allaire must continue to enhance its existing products and develop new
products. In order to remain competitive, Allaire must continue to develop and
introduce product enhancements and new products that increase its customers'
ability to develop and deploy Web applications. If Allaire fails to develop and
introduce new products and product enhancements successfully and on a timely
basis, Allaire's revenues could decrease and it could fail to meet revenue
projections.
Future success will depend on Allaire's ability to market and sell Allaire
Spectra successfully. Allaire expects that its future financial performance will
depend in part on sales of Allaire Spectra. Allaire began commercial shipments
of Allaire Spectra in December 1999. Market success 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 nine months ended September 30, 2000,
revenue from Allaire's indirect distribution channel accounted for 62% of total
revenue and one distributor, Ingram Micro, accounted for 33% of total revenue.
For the year ended December 31, 1999, revenue from the indirect distribution
channel accounted for 53% of Allaire's total revenue, and Ingram Micro accounted
for 37% of total revenue. The loss of, or a reduction in orders from, Ingram
Micro or any other significant distributor could have a material adverse effect
on Allaire's business, operating results and financial condition.
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.
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<PAGE> 14
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 business could be harmed if the Java programming language loses
market acceptance or if Allaire is not able to continue using Java or
Java-related technologies. Allaire's JRun Java application server is a clean
room implementation designed to comply with Sun's Java 2 Platform, Enterprise
Edition, or J2EE, Specifications. Using the JRun application server, Allaire's
customers can build Java applications on the J2EE platform. Many of Allaire's
next generation products are also expected to be based on Java. While a number
of companies have introduced Web applications based on Java, Java could fall out
of favor with computer programmers and software developers, and support of the
Java programming language by Sun Microsystems or other companies could decline.
Moreover, there can be no assurance that the J2EE standards will be widely
adopted or that Allaire can continue to comply with Sun's J2EE specifications
established from time to time. If support for Java or J2EE decreases or Allaire
cannot continue to use Java or related Java technologies, or if Allaire is not
able to comply with J2EE standards, Allaire could lose revenue opportunities and
its business could be harmed.
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 142% for the nine months ended September
30, 2000 from the same period in 1999. The number of Allaire's employees
increased from 93 at January 1, 1998 to 564 at September 30, 2000. To manage
future growth effectively Allaire must maintain and enhance its financial and
accounting systems and controls, integrate new personnel and manage expanded
operations.
Allaire's business could be adversely affected if its products fail to
perform properly. Software products as complex as Allaire's may contain
undetected errors or "bugs," which result in product failures or security
breaches or otherwise fail to perform in accordance with customer expectations.
Errors in certain Allaire products have been detected after the release of the
product. The occurrence of errors could result in loss of or delay in revenue,
loss of market share, failure to achieve market acceptance, diversion of
development resources, injury to Allaire's reputation, or damage to its efforts
to build brand awareness, any of which could have a material adverse effect on
its business, operating results and financial condition. In addition, any
failure in a customer's web application developed and deployed with Allaire's
products could result in a claim for substantial damages against Allaire,
regardless of Allaire's responsibility for the failure. Although Allaire
maintains general liability insurance, including coverage for errors and
omissions, there can be no assurance that its existing coverage will continue to
be available on reasonable terms or will be available in amounts sufficient to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim.
Claims by other companies that Allaire infringes their copyrights or
patents could adversely affect Allaire's financial condition. If any of
Allaire's products violate third party proprietary rights, Allaire may be
required to reengineer these products or seek to obtain licenses from third
parties to continue to offer them. Any efforts to reengineer Allaire's products
or obtain licenses on commercially reasonable terms may not be successful, and,
in any case, would substantially increase costs and have a material adverse
effect on Allaire's business, operating results and financial condition. Allaire
does not conduct comprehensive patent searches to determine whether the
technology used in its products infringes patents held by third parties. In
addition, product development is inherently uncertain in a rapidly evolving
technological environment in which there may be numerous patent applications
pending, many of which are confidential when filed, with regard to similar
technologies.
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Although Allaire is generally indemnified against claims that third party
technology that it licenses infringes the proprietary rights of others, this
indemnification is not always available for all types of intellectual property
rights (for example, patents may be excluded) and in some cases the scope of
such indemnification is limited. Even if Allaire receives broad indemnification,
third party indemnitors are not always well-capitalized and may not be able to
indemnify Allaire in the event of infringement, resulting in substantial
exposure to Allaire. There can be no assurance that infringement or invalidity
claims arising from the incorporation of third party technology in Allaire's
products, and claims for indemnification from customers resulting from these
claims, will not be asserted or prosecuted against Allaire. These claims, even
if not meritorious, could result in the expenditure of significant financial and
managerial resources in addition to potential product redevelopment costs and
delays, all of which could materially adversely affect Allaire's business,
operating results and financial condition.
In addition, any claim of infringement could cause Allaire to incur
substantial costs defending against the claim, even if the claim is invalid, and
could distract Allaire's management from their business. A party making a claim
also could secure a judgment that requires Allaire to pay substantial damages. A
judgment could also include an injunction or other court order that could
prevent Allaire from selling its products. Any of these events could have a
material adverse effect on Allaire's business, operating results and financial
condition.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2000, Allaire was exposed to market risks which
primarily include changes in U.S. interest rates. Allaire maintains a
significant portion of its cash and cash equivalents and short-term investments
in financial instruments with purchased maturities of 12 months or less. Allaire
does not hold derivative financial instruments or equity securities in its
investment portfolio. Allaire 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or after September 25, 2000, the Company and certain of its officers or
directors were named as defendants in nine virtually identical lawsuits filed in
the United States District Court for the District of Massachusetts: (i) Krakauer
v. Allaire Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth and
David J. Orfao, Civil Action No. 00-11972-WGY; (ii) Dargenzio v. Allaire
Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-11973-WGY; (iii) Gordon v. Allaire Corporation,
Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao, Civil
Action No. 00-11974-WGY; (iv) Large v. Allaire Corporation, Joseph J. Allaire,
Jeremy Allaire, David A. Gerth and David J. Orfao, Civil Action No.
00-11986-WGY; (v) DiMaggio v. Allaire Corporation, Joseph J. Allaire, Jeremy
Allaire, David A. Gerth and David J. Orfao, Civil Action No. 00-11996-WGY; (vi)
Knorr v. Allaire Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth
and David J. Orfao, Civil Action No. 00-12014-WGY; (vii) Jarvis v. Allaire
Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-12016-WGY; (viii) Cordeiro v. Allaire Corporation,
Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao, Civil
Action No. 00-12158-WGY; and (ix) Fisher v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao, Civil Action No. 00-
12182-WGY. The parties have agreed that: all of the cases should be
consolidated; the defendants need not respond to the pending complaints; and
that lead counsel to be approved by the Court shall file an amended complaint
applicable to the consolidated actions. Each of the plaintiffs in each of the
actions purport to bring their complaint on behalf of all purchasers of the
Company's stock during an alleged class period (July 20, 2000 and September 18,
2000). The plaintiffs claim that the defendants violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, and SEC Rule 10b-5, by virtue of
statements plaintiffs claim are materially false or misleading. Plaintiffs seek
damages, interest, costs, and attorneys' fees. The defendants intend to defend
these claims vigorously.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
<TABLE>
<S> <C>
Exhibit 10.1 Non-Recourse Receivables Purchase Agreement with Silicon
Valley Bank, dated September 26, 2000 (filed herewith)
Exhibit 11 Statement re: Computation of Unaudited Net Loss Per Share
and Pro Forma Net Loss Per Share (filed herewith)
Exhibit 27 Financial Data Schedule (filed herewith)
</TABLE>
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended September
30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLAIRE CORPORATION
By: /s/ DAVID A. GERTH
------------------------------------
DAVID A. GERTH
VICE PRESIDENT, FINANCE AND
OPERATIONS, TREASURER AND
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL
AND ACCOUNTING OFFICER)
Dated: November 13, 2000
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EXHIBIT INDEX
<TABLE>
<S> <C>
Exhibit 10.1 Non-recourse Receivables Purchase Agreement with Silicon
Valley Bank, dated September 26, 2000 (filed herewith)
Exhibit 11 Statement re: Computation of Unaudited Net Loss Per Share
and Pro Forma Net Loss Per Share (filed herewith)
Exhibit 27 Financial Data Schedule (filed herewith)
</TABLE>
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