As filed with the Securities and Exchange Commission on December 9, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ALLAIRE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 7372 41-1830792
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
One Alewife Center
Cambridge, Massachusetts 02140
(617) 761-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
David J. Orfao
President and Chief Executive Officer
Allaire Corporation
One Alewife Center
Cambridge, Massachusetts 02140
(617) 761-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Robert L. Birnbaum, Esq. William J. Schnoor, Jr., Esq.
William R. Kolb, Esq. Testa, Hurwitz & Thibeault, LLP
Foley, Hoag & Eliot LLP 125 High Street
One Post Office Square Boston, Massachusetts 02110
Boston, Massachusetts 02109 (617) 248-7000
(617) 832-1000
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ___________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ] __________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed
Title of Each Class of Securities Amount to Offering Price Maximum Aggregate Amount of
to be Registered be Registered (1) Per Share (2) Offering Price (2) Registration Fee
- ----------------------------------- ------------------- ------------------ -------------------- -----------------
Common Stock, $.01 par value 2,530,000 shares $17.00 $43,010,000 $11,957
- -------------------------------------------------------------------------------------------------------------------
(1) Includes 330,000 shares which the Underwriters have the option to purchase
solely to cover over-allotments, if any. See "Underwriting."
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
SUBJECT TO COMPLETION, DATED DECEMBER 9, 1998
[RED_HERRING]
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
[/RED_HERRING]
2,200,000 Shares
[LOGO] allaire
Common Stock
------------
All of the shares of Common Stock being sold are being offered by Allaire. Prior
to this offering, there has been no public market for the Common Stock. The
initial public offering price is expected to be between $15.00 and $17.00 per
share. Application has been made to list the Common Stock on The Nasdaq Stock
Market's National Market under the symbol "ALLR."
Investing in the Common Stock involves certain risks. See "Risk Factors"
beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Underwriting
Price to Discounts and Proceeds to
Public Commissions Allaire
---------- --------------- ------------
Per Share ......... $ $ $
Total (1) ......... $ $ $
(1) Allaire has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 330,000
additional shares of Common Stock to cover over-allotments of shares.
Delivery of the shares of Common Stock will be made on or about ,
1999, against payment in immediately available funds.
Credit Suisse First Boston
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
NationsBanc Montgomery Securities LLC
Prospectus dated , 1999.
TABLE OF CONTENTS
------------
Page
-----
PROSPECTUS SUMMARY ....................................................... 3
RISK FACTORS ............................................................. 5
USE OF PROCEEDS .......................................................... 19
DIVIDEND POLICY .......................................................... 19
CAPITALIZATION ........................................................... 20
DILUTION ................................................................. 21
SELECTED FINANCIAL DATA .................................................. 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ................................................... 23
BUSINESS ................................................................. 33
MANAGEMENT ............................................................... 47
CERTAIN TRANSACTIONS ..................................................... 53
PRINCIPAL STOCKHOLDERS ................................................... 55
DESCRIPTION OF CAPITAL STOCK ............................................. 57
SHARES ELIGIBLE FOR FUTURE SALE .......................................... 61
UNDERWRITING ............................................................. 63
NOTICE TO CANADIAN RESIDENTS ............................................. 65
LEGAL MATTERS ............................................................ 66
EXPERTS .................................................................. 66
ADDITIONAL INFORMATION ................................................... 66
INDEX TO FINANCIAL STATEMENTS ............................................ F-1
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
------------
Until , 1999 (25 days after the commencement of this offering),
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the obligation of dealers to deliver a prospectus when acting
as Underwriters and with respect to their unsold allotments or subscriptions.
------------
"Cold Fusion" is a federally registered trademark of the Company. The
Company has applied for federal registration of the trademark "HomeSite."
"Allaire" and the Allaire logo are trademarks of the Company. Other trademarks
or service marks appearing in this Prospectus are the property of their
respective holders.
[Left side of Fold-out]
Advanced Development Configuration
[Graphical depiction of how ColdFusion Studio and ColdFusion application
servers interoperate within a development environment. Three bi-directional
arrows connect a depiction of three computer terminals (each labeled "Studio")
to a rectangle above depicting a ColdFusion server. This left section of the
diagram is labeled "Develop." An arrow points from this ColdFusion server to a
second server in the center of the diagram. The second server is connected by a
bi-directional arrow to a computer terminal below it with the word "Testing" on
its screen. This center section of the diagram is labeled "Stage." An arrow
points from the center section's ColdFusion server to a set of three ColdFusion
servers on the right side of the diagram, each connected by bi-directional
arrows. This set of three servers is connected by a bi-directional arrow to a
circle labeled "The Internet" below it. This right section of the diagram is
labeled "Deliver."]
ColdFusion Studio and ColdFusion Server enable the creation, testing and
deployment of high-volume, interactive Web applications.
[Right side of Fold-out]
How ColdFusion Works
[Graphical depiction of how ColdFusion application server processes
requests for information through a series of interconnecting arrows, rectangles
and circles, labeled clockwise from the left side of the diagram: "Web
Browser," "HTTP Request," "Internet or Intranet," "Web Server," "CF Page,"
"ColdFusion application server," "Databases," "E-mail," "Directories," "File
System," "COM/CORBA," "Other Enterprise Systems," "Web Page," "Web Server,"
"Internet or Intranet" and "Web Page." The sections of the diagram are labeled,
from left to right, "Client," "Network" and "Server." Various locations on the
diagram bear numbers 1-5.]
1. When a user clicks a "Submit" button on a form or a hypertext link on a
page, the user's Web browser sends an HTTP request to the Web server via
the Internet or an intranet.
2. The Web server passes the data submitted by the client and the appropriate
page to ColdFusion Server through a server API.
3. ColdFusion reads the data from the client and processes the CFML in the
page. Based on the CFML, the server interacts with database servers, the
file system, SMTP servers, and potentially other applications and
extensions through the ColdFusion API or through COM/DCOM.
4. ColdFusion dynamically generates an HTML Web page that is returned to the
Web server.
5. The Web server returns the HTML page to the user's browser.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
Prospectus. The summary is not complete and does not contain all of the
information that you should consider before investing in the Common Stock. You
should read the entire Prospectus carefully. Unless otherwise specified, all
information in this Prospectus (i) assumes no exercise of the Underwriters'
over-allotment option and (ii) reflects the mandatory conversion into Common
Stock of all outstanding shares of Preferred Stock upon the closing of this
offering. This Prospectus contains forward-looking statements which involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
The Company
We develop, market and support application development and server software
for a wide range of Web development, from building static Web pages to
developing high-volume, interactive Web applications. Our products and services
enable organizations to expand the reach of their information systems to the
Web, as well as to develop new Web-based business applications in areas such as
electronic commerce, content management and personalization. Our products
integrate key emerging Web client and Web server software platforms and
technologies and interoperate with key enterprise and client-server
technologies. Our flagship ColdFusion product line employs a comprehensive,
easy to learn software development language that allows Web developers to
quickly and efficiently create Web applications. More than 30,000 ColdFusion
application server licenses and more than 100,000 licenses for our HomeSite Web
design tool have been sold to date.
Most Web developers are proficient with Hypertext Markup Language, or
HTML, and many are familiar with extensible Markup Language, or XML, which are
both core technologies specifically designed for creating applications for the
Web. The ease of using markup languages such as HTML and XML, which use
declarative, English-like tags, has enabled a large number of nontraditional
programmers to develop complex Web sites and Web applications. We designed
ColdFusion to use the same easy to learn syntax as HTML and XML. By using
ColdFusion, Web developers avoid having to code simultaneously in scripting
languages and in tag-based markup languages. In addition, because ColdFusion
includes high-level building blocks that encapsulate complex programming
interfaces, developers are able to integrate a variety of information
technologies, such as databases and servers.
Our customers include:
o autobytel.com inc.
o The Boeing Company
o Booz, Allen & Hamilton Inc.
o Credit Suisse First Boston Corporation
o Hewlett-Packard Company
o Intel Corp.
o Internal Revenue Service
o JC Penney Company, Inc.
o Lockheed Martin Corporation
o Lucent Technologies Inc.
o MCI Worldcom, Inc.
o Microsoft Corporation
o SBC Communications Inc.
o United Parcel Service of America, Inc.
Allaire was incorporated in Minnesota on February 1, 1996 as the successor
to a Minnesota limited liability company and was reincorporated in Delaware on
April 25, 1997. Our principal executive offices are located at One Alewife
Center, Cambridge, Massachusetts 02140, and our telephone number at that
location is (617) 761-2000.
3
The Offering
Common Stock offered ................................ 2,200,000 shares
Common Stock to be outstanding after the Offering(1) 10,158,260 shares
Use of proceeds ..................................... For general corporate purposes, including working
capital
Nasdaq National Market symbol ....................... ALLR
- ------------
(1) Based on the number of shares outstanding as of September 30, 1998.
Excludes: (i) 1,676,864 shares of Common Stock issuable upon exercise of
stock options outstanding as of September 30, 1998 at a weighted average
exercise price of $1.86 per share, (ii) 131,667 shares of Common Stock
reserved for issuance as of September 30, 1998 under the Company's 1997
Stock Incentive Plan, and 1,733,150 shares of Common Stock reserved for
issuance as of September 30, 1998 under the Company's 1998 Stock Incentive
Plan, (iii) 50,297 shares of Common Stock issuable under exercise of
warrants outstanding at September 30, 1998 at a weighted average exercise
price of $2.44, (iv) 300,000 shares of Common Stock issuable under the
1998 Employee Stock Purchase Plan and (v) 31,250 shares of Common Stock
issuable upon conversion of Series A Preferred Stock sold after September
30, 1998. See "Capitalization," "Management -- Benefit Plans,"
"Description of Capital Stock" and Notes 7, 8, 9 and 14 of Notes to
Financial Statements.
Summary Financial Data
(In thousands, except per share data)
Period from
Inception Year Ended Nine Months Ended
(May 5, 1995) December 31, September 30,
through ------------------ ----------------------
December 31, 1995 1996 1997 1997 1998
----------------- -------- -------- ----------- ----------
(unaudited)
Statement of Operations Data:
Total revenue ..................................... $ -- $ 2,358 $ 7,650 $ 4,595 $ 13,903
Total cost of revenue ............................. -- 234 2,414 1,385 4,117
Gross profit ...................................... -- 2,124 5,236 3,210 9,786
Total operating expenses .......................... 188 3,836 12,848 7,883 17,803
Loss from operations .............................. (188) (1,712) (7,612) (4,673) (8,017)
Net loss .......................................... (188) (1,698) (7,425) (4,548) (7,988)
Basic and diluted net loss per share .............. $(0.09) $ (0.97) $ (4.40) $ (2.87) $ (2.84)
Shares used in computing basic and diluted
net loss per share ............................... 2,200 1,743 1,687 1,584 2,813
Unaudited pro forma basic and diluted net
loss per share(1) ................................ $ (1.38) $ (1.13)
Shares used in computing unaudited pro forma
basic and diluted net loss per share (1) ......... 5,378 7,054
December 31, September 30, 1998
------------------- ---------------------------
Pro Forma
1996 1997 Actual As Adjusted (2)
-------- -------- --------- ----------------
(unaudited)
Balance Sheet Data:
Cash and cash equivalents ............................ $ 526 $ 5,521 $ 1,879 $33,615
Working capital (deficit) ............................ 224 1,492 (5,941) 25,795
Total assets ......................................... 2,038 9,697 8,330 40,066
Total long-term debt, net of current portion ......... -- 499 1,220 1,220
Total redeemable convertible preferred stock ......... 2,800 12,673 12,673 --
Total stockholders' equity (deficit) ................. (1,768) (9,153) (16,381) 28,028
- ------------
(1) For an explanation of unaudited pro forma basic and diluted net loss per
share and the weighted average shares used in computing unaudited pro
forma basic and diluted net loss per share, see Note 2 of Notes to
Financial Statements.
(2) Pro forma to give effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock upon the closing of the Offering. As
adjusted to give effect to the sale by the Company of 2,200,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$16.00 per share, after deducting estimated underwriting discounts and
commissions and offering expenses.
4
RISK FACTORS
This offering of Common Stock (the "Offering") involves a high degree of
risk. You should carefully consider the risks described below and the other
information in this Prospectus before you purchase any Common Stock. The risks
and uncertainties described below are not the only ones facing our Company.
Additional risks and uncertainties, including those not presently known to us or
that we currently deem immaterial, may also impair our business operations.
If any of the following risks actually occur, our business, financial
condition or future operating results could be materially adversely affected.
In such case, the trading price of the Common Stock could decline, and you may
lose all or part of your investment.
This Prospectus also contains certain forward-looking statements that
involve risks, uncertainties and assumptions. These statements relate to our
beliefs, intentions, plans and strategies regarding the future. These
statements may be identified by the use of words such as "intends," "plans,"
"anticipates," "expects" and similar expressions. Our actual results could
differ materially from those discussed in these forward-looking statements.
Important factors that could cause or contribute to these differences include
those discussed below and elsewhere in this Prospectus.
Limited Operating History; We commenced operations in May 1995 and we
Uncertain Future Profitability recorded our first revenue upon delivery of
ColdFusion 1.5 to customers in February
1996. Accordingly, we have only a limited
operating history on which you can base your
evaluation of our business and prospects. In
addition, our prospects must be considered
in light of the risks and uncertainties
encountered by companies in an early stage
of development in new and rapidly evolving
markets. Since we began operations, we have
incurred substantial net losses in every
fiscal period. For the nine months ended
September 30, 1998, we had a net loss of
$8.0 million. As a result of accumulated
operating losses, at September 30, 1998, we
had an accumulated deficit of $17.4 million.
We have generated relatively small amounts
of revenue until recent fiscal quarters,
while increasing expenditures in all areas,
particularly in research and development and
sales and marketing, in order to execute our
business plan. Although we have experienced
revenue growth in recent periods, the growth
has been off of a small base, and it is
unlikely that such growth rates are
sustainable. In order to increase revenue
and achieve profitability, we must, among
other things:
o increase market acceptance of ColdFusion
and HomeSite;
o develop new products and technologies
more rapidly than our competitors;
o offer high quality customer service and
support;
o attract, integrate, motivate and retain
qualified personnel;
o successfully implement our distribution
strategy;
o continue to build our financial and
operational infrastructure; and
o develop and maintain awareness of our
brands.
Our ability to increase revenue and achieve
profitability also depends on a number of
risks outside of our control, including the
extent to which:
o our competitors develop competing
products; and
o our distributors and other marketing
partners dedicate resources or otherwise
give priority to selling our products.
As a result, we may not be able to increase
revenue or achieve profitability on a
quarterly or an annual basis. For more
information, see "Management's Discussion
and Analysis of Financial Condition and
Results of Operations."
5
Significant Fluctuations Our quarterly revenue and operating results
Quarterly Performance are difficult to predict and may in
fluctuate significantly from quarter to
quarter. If our quarterly revenue or
operating results fall below the
expectations of investors or public market
analysts, the price of the Common Stock
could fall substantially.
Our quarterly revenue is difficult to
forecast for several reasons, including the
following:
o the market for Web development products
is in an early stage of development and
it is therefore difficult to accurately
predict customer demand; and
o the sales cycle for our products and
services varies substantially from
customer to customer and, if our average
sales price increases as we expect, we
expect the sales cycle to lengthen. As a
result, we have difficulty determining
whether and when we will receive revenue
from a particular customer.
As a result of these and other factors, our
license revenue is difficult to predict
accurately. In addition, because our revenue
from training services is largely correlated
with our license revenue, a decline in
license revenue could also cause a decline
in our services revenue in the same quarter
or in subsequent quarters.
Other factors, many of which are outside our
control, could also cause variations in our
quarterly revenue and operating results.
Some of these other factors are:
o demand for our products and our
competitors' products;
o introductions of new products by us or
our competitors;
o customers' order deferrals in
anticipation of new products or
enhancements by us or our competitors;
o customers' budgeting and purchasing
cycles;
o changes in pricing and mix of license
revenue and services revenue;
o timing of hiring new employees and the
rate at which such employees become
productive;
o development and performance of our
distribution channels;
o timing of any acquisitions and related
costs; and
o identification of software quality
problems.
Most of our expenses, such as employee
compensation and rent, are relatively fixed.
Moreover, our expense levels are based, in
part, on our expectations regarding future
revenue increases. As a result, any
shortfall in revenue in relation to our
expectations could cause significant changes
in our operating results from quarter to
quarter and could result in quarterly
losses.
As a result of these factors, we believe
that period-to-period comparisons of our
revenue levels and operating results are not
necessarily meaningful. You should not rely
on our quarterly revenue and operating
results to predict our future performance.
For more information, see "Management's
Discussion and Analysis of Financial
Condition and Results of Operations."
Early Stage of Market Our products and services aid organizations
Development in building high-volume, interactive Web
sites and Web applications, including
applications for electronic commerce,
content management and personalization over
the Internet, private networks, and private
networks extended over the Internet. Web
technology has been used widely for only a
short time, and the market for Web
development products is new and rapidly
evolving. As is typical for
6
new and rapidly evolving industries,
demand for recently introduced products is
highly uncertain. If the market for Web
development products does not continue to
grow at a significant rate, our business,
operating results and financial condition
will be materially adversely affected.
Dependence on the Growth and Our future success will depend substantially
Commercial Acceptance of the upon the widespread adoption of the Internet
Internet as a primary medium for commerce and
business applications. The Internet has
experienced, and is expected to continue to
experience, significant user and traffic
growth, which has, at times, caused user
frustration with slow access and download
times. The Internet infrastructure may not
be able to support the demands placed on it
by continued growth. Moreover, critical
issues concerning the commercial use of the
Internet (including security, reliability,
cost, accessibility and quality of service)
remain unresolved and may negatively affect
the growth of Internet use or the
attractiveness of commerce and business
communication on the Internet. In addition,
the Internet could lose its viability due to
delays in the development or adoption of new
standards and protocols to handle increased
activity or due to increased government
regulation and taxation of Internet
commerce. If, for these reasons or others,
the Internet does not become a viable and
substantial commercial medium, our business,
operating results and financial condition
will be materially adversely affected. For
more information, see "Business -- Industry
Background."
Relationship with Microsoft We currently compete with Microsoft
Corporation ("Microsoft") in the market for
Web development products. However, we
believe that we also must maintain a working
relationship with Microsoft in order to
achieve success. We currently utilize in our
products certain visual editing technology
that we license from Microsoft. In addition,
most of our customers use Microsoft-based
operating platforms. Therefore, it is
critical to our success that our products be
closely integrated with certain Microsoft
technologies and products.
We expect that Microsoft's commitment to and
presence in the Web development products
market will substantially increase
competitive pressure in the market. Such
pressures may result in price reductions in
our products and may also materially reduce
our market share. We believe that Microsoft
will continue to incorporate Web application
server technology into its operating system
software and certain of its server software
offerings, possibly at no additional cost to
its users. Notwithstanding our historical
and current support of the Microsoft
platform, Microsoft may in the future
promote technologies and standards more
directly competitive with or not compatible
with our technology.
Microsoft has a longer operating history, a
larger installed base of customers and
substantially greater financial,
distribution, marketing and technical
resources than Allaire. As a result, we may
not be able to compete effectively with
Microsoft now or in the future, and our
business, operating results and financial
condition may be materially adversely
affected by any of the foregoing factors.
For more information, see "-- Dependence on
Third Party Technology" and "Business --
Competition."
Competition The Web development products market is
intensely competitive, subject to rapid
change and significantly affected by new
product introductions and other activities
of market participants. In addition to
Microsoft, we compete with other large Web
and database platform companies that offer a
variety of software products, such as:
o International Business Machines
Corporation ("IBM");
7
o Netscape Communications Corporation;
o Sun Microsystems, Inc.;
o Oracle Corporation;
o Sybase, Inc.;
o Symantec Corporation;
o Informix Software; and
o Inprise Corporation (formerly
Borland International, Inc.).
We also compete with a number of
medium-sized and start-up companies that
have introduced or that are developing Web
development products, such as:
o NetDynamics, Inc., which was recently
acquired by Sun Microsystems, Inc.;
o Vignette Corporation;
o HAHT Software, Inc.;
o GoLive Systems Inc.;
o WebLogic, Inc., which was recently
acquired by BEA Systems, Inc.;
o BroadVision, Inc.; and
o SilverStream Software, Inc.
In addition, we have strategic relationships
with NetObjects, Inc., a majority-owned
subsidiary of IBM, and Macromedia
Corporation. In some cases, these vendors
compete with us, and there can be no
assurance that these strategic relationships
will continue.
We expect that additional competitors will
enter the market with competing products as
the size and visibility of the market
opportunity increases. Increased competition
could result in pricing pressures, reduced
margins or the failure of our products to
achieve or maintain market acceptance. Many
of our current and potential competitors
have longer operating histories and
substantially greater financial, technical,
marketing and other resources than we do and
therefore may be able to respond more
quickly than we can to new or changing
opportunities, technologies, standards or
customer requirements. 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, in the future, a competitor
chooses to bundle a competing Web
development product with other products, the
demand for our products might be
substantially reduced.
New technologies and the expansion of
existing technologies will likely increase
the competitive pressures that we face. The
development of competing technologies by
market participants or the emergence of new
industry standards may adversely affect our
competitive position or render our products
or technologies noncompetitive or obsolete.
As a result of these and other factors, we
may not be able to compete effectively with
current or future competitors, which would
have a material adverse effect on our
business, operating results and financial
condition.
Need to Expand Sales Force and In order to increase our revenue, we must
Channels increase the size of our sales force and the
number of our indirect channel partners,
including original equipment manufacturers,
value-added resellers and systems
integrators. There is intense competition
for sales personnel in our business, and
there can be no assurance that we will be
successful in attracting, integrating,
8
motivating and retaining new sales
personnel. Moreover, even if we are able to
recruit sufficient numbers of sales persons,
there will be a delay between the time
persons are hired and the time they become
effective and fully productive, if at all,
as they become familiar with our products,
customers and markets. Likewise, we may not
be able to market our products effectively
and our existing or future channel partners
may choose to devote greater resources to
marketing and supporting the products of
other companies. In addition, we will need
to resolve potential conflicts among our
sales force and channel partners. Any of
these factors could have a material adverse
effect on our business, operating results
and financial condition. For more
information, see "-- Dependence on Limited
Number of Distributors," "Business --
Allaire Strategy" and "-- Sales, Marketing
and Distribution."
Dependence on Limited Number We derive a substantial portion of our
of Distributors revenue from our indirect distribution
channel. For the nine months ended September
30, 1998, revenue from our indirect
distribution channel accounted for
approximately 41% of our total revenue. We
rely upon a limited number of distributors
for much of this revenue. For example, for
the nine months ended September 30, 1998,
Ingram Micro, Inc. accounted for
approximately 22% of our total revenue. The
loss of, or a reduction in orders from,
Ingram Micro, Inc. or any other significant
distributor could have a material adverse
effect on our business, operating results
and financial condition. In addition, our
revenue per unit from sales of licenses
through distributors is generally less than
our revenue per unit from direct sales of
licenses to end users. Because we do not
deal directly with end users when selling
through distributors, we are dependent upon
the ability of distributors to accurately
forecast demand and maintain appropriate
levels of inventory. If a distributor
purchases excess product, we may be
obligated to accept the return of some
products. Any of these factors could have a
material adverse effect on our business,
operating results and financial condition.
For more information, see "Business --
Allaire Strategy" and "-- Sales, Marketing
and Distribution."
Lengthening Sales Cycle As we increase our marketing focus on larger
purchases by larger customers, we expect
that larger purchases will require increased
executive-level involvement of information
technology officers and other senior
managers of our customers. Potential large
sales may be delayed, or lost altogether,
because we will have to provide a more
comprehensive education to prospective
customers regarding the use and benefits of
our products. Accordingly, we expect the
sales cycle associated with larger purchases
of our products to lengthen, and that
customers' purchase decisions will be
subject to delays over which we may have
little or no control, including budgeting
constraints, internal purchase approval
review procedures and the inclusion or
exclusion of our products on customers'
approved standards list. Any delay in sales
of our products could have a material
adverse effect on our business, operating
results and financial condition, and could
cause our operating results to vary
significantly from quarter to quarter. For
more information, see "-- Significant
Fluctuations in Quarterly Performance,"
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations," "Business -- Allaire Strategy"
and "-- Sales, Marketing and Distribution."
Risks Associated with Revenue from customers outside North America
International Operations accounted for approximately 14% of our total
revenue for the nine months ended September
30, 1998. We anticipate that revenue from
customers outside
9
North America will continue to account for a
significant portion of our total revenue for
the foreseeable future. Expansion of our
international operations has required and
will continue to require significant
management attention and resources. Future
expansion may require that we develop
localized versions of our products for a
particular market, and, to date, we have
limited experience in developing localized
products. In addition, we remain heavily
dependent on distributors to market, sell
and support our products internationally.
Our international operations are subject to
additional risks, including the following:
o difficulties in staffing and managing
foreign operations;
o legal uncertainties regarding liability,
export and import restrictions, tariffs
and other trade barriers;
o longer customer payment cycles and
greater difficulties in collecting
accounts receivable;
o unexpected changes in trading policies,
regulatory requirements, exchange rates,
tariffs and other barriers;
o uncertainties of laws and enforcement
relating to the protection of
intellectual property;
o language barriers;
o seasonal reductions in business activity;
o potentially adverse tax consequences; and
o political and economic instability.
In addition, we are unable to determine the
effect that recent economic downturns in
Asia, particularly Japan, or the adoption
and use of the euro, the single European
currency expected to be introduced in
January 1999, will have on our business. Any
of these factors could have a material
adverse effect on our business, operating
results and financial condition.
Similarly, we cannot accurately predict the
impact that future fluctuations in foreign
currency exchange rates may have on our
operating results and financial condition.
Although we have historically conducted
transactions with customers outside the
United States in U.S. dollars, to the extent
future revenue is denominated in foreign
currencies, we would be subject to increased
risks relating to foreign currency exchange
rate fluctuations. To date, we have not
engaged in any hedging transactions in
connection with our international
operations. Although we may attempt to hedge
currency rate exposure in the future, any
hedging policies that we might implement
could be unsuccessful.
No Assurance of Continued We believe that a significant contributing
Market Acceptance of Products factor to our initial growth has been our
ability to create and maintain strong
relationships with the community of Web
developers that initially adopted our
products. This community of early adopters
demands rapid improvements in the
performance, features and reliability of our
products, as well as a high level of
customer service. If our products do not
continue to satisfy the Web developer
community or otherwise fail to sustain
sufficient market acceptance, our business,
operating results and financial condition
would be materially adversely affected. Due
in part to the emerging nature of the Web
development products market and the
substantial resources available to many
market participants, we believe there is a
time-limited opportunity to achieve and
maintain market share in the Web development
products market. For more information, see
"Business -- Industry Background," "--
Allaire Strategy" and "-- Competition."
10
Risks Associated with Uncertain We believe that developing and maintaining
Brand Development awareness of the "Allaire," "ColdFusion" and
"HomeSite" brand names is critical to
achieving widespread acceptance of our
products. The importance of brand
recognition will increase as competition in
the market for Web development products
increases. In order to promote our brands,
we may find it necessary to increase our
marketing budget or otherwise increase our
financial commitment to creating and
maintaining brand awareness among potential
customers. Although we have obtained a
United States registration of the trademark
"Cold Fusion," we are aware of other
companies, including competitors, that use
the word "Fusion" in their marks alone or in
combination with other words, and we do not
expect to be able to prevent third party
uses of the word "Fusion" for competing
goods and services. For example, NetObjects,
Inc. markets its principal products for
designing, building and updating Web sites
under the names "NetObjects Fusion" and
"NetObjects Team Fusion." Competitors or
others that use marks that are similar to
our brand names may cause confusion among
actual and potential customers, which could
prevent us from achieving significant brand
recognition. If we fail to promote and
maintain our brands or incur significant
related expenses, our business, operating
results and financial condition could be
materially adversely affected.
Dependence on Principal We derive almost all of our revenue from
Product licenses of our ColdFusion and HomeSite
software and related services. As a result,
any competitive pressures or other factors
that adversely affect the Web development
products market in general, or inhibit sales
of ColdFusion or HomeSite software in
particular, would have a material adverse
effect on our business, operating results
and financial condition. For more
information, see "Business -- Products."
New Product Development In addition to developing new versions of
current products, we intend to devote
substantial resources to develop and
introduce new products which enhance our
customers' ability to build and deploy Web
applications. The success of new product
offerings is dependent on several factors,
including our awareness of, and response to,
new industry standards and customer needs,
timely completion and introduction of new
products and enhancements, differentiation
of new offerings from those of our
competitors and, ultimately, market
acceptance of our new offerings. The
emerging nature of the Web development
products market and its rapid evolution will
require that we continually improve the
performance, features and reliability of our
products, particularly in response to
competitive offerings and evolving customer
needs, and that we introduce enhancements to
existing products as quickly as possible and
prior to the introduction of competing
products. Our failure to develop and
introduce new products and enhancements
successfully on a timely basis could have a
material adverse effect on our business,
operating results and financial condition.
For more information, see "Business --
Allaire Strategy," "-- Products" and "--
Research and Development."
Dependence on Third Party We license technology that is incorporated
Technology into our products from certain third
parties. Examples include licenses from
Microsoft for certain visual editing
technology, from Bright Tiger Technologies,
Inc. for certain load balancing and failover
technology, from Netegrity, Inc. for certain
security technology and from Verity, Inc.
for full-text indexing and searching
technology. In light of the rapidly evolving
nature of Web technology and our strategy to
pursue industry partnerships, we will
increasingly need to rely on technology from
other vendors. Microsoft and other
technology partners
11
are also significant competitors in the Web
development products market. There can be no
assurance that technology from others will
continue to be available to us on
commercially reasonable terms, if at all.
The loss or inability to access such
technology could result in delays in our
development and introduction of new products
or enhancements until equivalent or
replacement technology could be accessed, if
available, or developed internally, if
feasible, which could have a material
adverse effect on our business, operating
results and financial condition. For more
information, see "Business -- Allaire
Strategy" and "-- Intellectual Property."
Management of Growth We have been experiencing a period of rapid
growth that has been placing a significant
strain on all of our resources. Our revenue
more than doubled in the quarter ended
September 30, 1998 from the same period the
year earlier. From October 1, 1997 to
September 30, 1998, the number of our
employees increased from 85 to 153. Our
future success will depend, in part, upon
the ability of our senior management to
manage growth effectively, which will
require that we successfully implement and
maintain our administrative operations and
financial and accounting systems and
controls and coordinate our accounting,
finance, sales and marketing, and research
and development organizations.
Any failure on our part to integrate new
personnel, manage expanded operations,
maintain and improve our information systems
or otherwise manage any future growth
successfully could have a material adverse
effect on the quality of our products, our
ability to retain key personnel and our
business, operating results and financial
condition. For more information, see
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations."
Dependence on Key Executive Our future success depends to a significant
Officers degree on the skills, experience and efforts
of our key executive officers and employees.
We depend heavily on Joseph J. Allaire, our
founder, Chairman of the Board, Chief
Technology Officer and Executive Vice
President, and David J. Orfao, our President
and Chief Executive Officer. We also depend
on a number of other executive officers and
members of our senior management team. Our
future success will depend on the ability of
our executive officers and other members of
senior management to work effectively as a
team.
We do not have employment agreements with
any of our executive officers, and we do not
have any key person life insurance other
than for Messrs. Allaire and Orfao. In
addition, our right to repurchase Mr.
Allaire's unvested Common Stock will
terminate upon consummation of the Offering.
The loss of the services of any executive
officer could have a material adverse effect
on our business, operating results and
financial condition. For more information,
see "Management."
Attraction and Retention of Our success depends in large part upon our
Skilled Personnel ability to attract, train, motivate and
retain highly skilled employees,
particularly sales and marketing personnel,
software engineers and other senior
personnel. Qualified personnel are in great
demand throughout the software industry. Our
failure to attract and retain the highly
trained technical personnel that are
integral to our direct sales, product
development, service and support teams may
limit the rate at which we can generate
sales and develop new products or product
enhancements. Our failure to attract, train,
motivate
12
or retain personnel could have a material
adverse effect on our business, operating
results and financial condition. For more
information, see "Business -- Employees" and
"Management."
Limited Protection of Our success depends to a significant degree
Proprietary Technology; upon the development and protection of our
Potential Litigation software and other proprietary technology.
The software industry has experienced
widespread unauthorized reproduction of
software products. The unauthorized
reproduction or other misappropriation of
our proprietary technology could enable
third parties to benefit from our technology
without paying us for it.
We attempt to protect our proprietary
technology primarily through:
o trade secret, copyright and trademark
laws;
o license agreements;
o employee and third party non-disclosure
agreements; and
o limiting access to and distribution of
our documentation and other proprietary
information.
The steps we have taken to protect our
proprietary technology may be inadequate.
Existing trade secret, copyright and
trademark laws offer only limited
protection. In addition, we rely in part on
"shrinkwrap" and "clickwrap" licenses that
are not signed by the end user and,
therefore, may be unenforceable under the
laws of certain jurisdictions. Moreover, the
laws of other countries in which we market
our products may afford little or no
effective protection of our intellectual
property. Other companies could
independently develop similar or superior
technology without violating our proprietary
rights. Any misappropriation of our
technology or the development of competitive
technology could have a material adverse
effect on our business, operating results
and financial condition. If we resort to
legal proceedings to enforce our
intellectual property rights, the
proceedings could be burdensome and
expensive and could involve a high degree of
risk.
We attempt to avoid infringing known
proprietary rights of third parties in our
product development efforts. However, we do
not conduct comprehensive patent searches to
determine whether the technology used in our
products infringes patents held by third
parties. In addition, it is difficult to
proceed with certainty 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. If we
were to discover that one of our products
violated third party proprietary rights,
there can be no assurance that we would be
able to obtain licenses on commercially
reasonable terms to continue offering the
product without substantial reengineering or
that any effort to undertake such
reengineering would be successful.
From time to time, third parties may claim
that our products or technology infringe
their patents or other proprietary rights.
Any such claim could cause us to incur
substantial costs defending against the
claim, even if the claim is invalid, and
could distract our management from our
business. Furthermore, a party making such a
claim could secure a judgment that requires
us to pay substantial damages. A judgment
could also include an injunction or other
court order that could prevent us from
selling our products.
13
Any of these events could have a material
adverse effect on our business, operating
results and financial condition. For more
information, see "Business -- Intellectual
Property."
Risk of Product Defects and Software products as complex as ours may
Product Liability contain undetected errors or result in
failures when first introduced or when new
versions are released. These errors are
frequently discovered shortly after
introduction of a new product or a new
release of an existing product, but could be
discovered at any point in a product's life
cycle. Despite testing by Allaire and our
customers, errors may occur in our product
offerings after commencement of commercial
shipments. The occurrence of these errors
could result in loss of or delay in revenue,
loss of market share, failure to achieve
market acceptance, diversion of development
resources, injury to our reputation, or
damage to our efforts to build brand
awareness, any of which could have a
material adverse effect on our business,
operating results and financial condition.
The occurrence of errors might also result
in potential liability to customers. Many of
the applications developed and deployed with
our products are critical to the operations
of customers' businesses and provide
benefits that may be difficult to quantify.
Any failure in a customer's application
could result in a claim for substantial
damages against us, regardless of our
responsibility for such failure. Although we
maintain general liability insurance,
including coverage for errors and omissions,
there can be no assurance that such coverage
will continue to be available on reasonable
terms or will be available in amounts
sufficient to cover one or more large
claims, or that the insurer will not
disclaim coverage as to any future claim.
The successful assertion of claims against
us that exceed available insurance coverage
or changes in our insurance policies,
including premium increases or the
imposition of large deductible or
coinsurance requirements, could materially
adversely affect our business, operating
results and financial condition.
Risks Associated with Possible In the future, we may pursue strategic
Acquisitions acquisitions to obtain complementary
products, services and technologies. At
present, we have no agreements or other
arrangements with respect to any
acquisition. If we pursue any acquisition,
our management could spend a significant
amount of time and effort in identifying and
completing the acquisition. If we complete
an acquisition, we would probably have to
devote a significant amount of management
resources to integrating the acquired
business with our existing business. Our
acquisition efforts may not succeed, and an
acquisition that failed to meet our
expectations could have a material adverse
effect on our business, operating results
and financial condition. From an accounting
perspective, an acquisition might involve
non-recurring charges that could adversely
affect our operating results.
Acquisitions also pose additional risks,
including:
o failure to retain or assimilate acquired
personnel;
o inability to incorporate acquired
technologies successfully into our
products and services;
o interruptions of the sales efforts of
the acquired business;
o failure to successfully integrate
financial and accounting systems;
o significant acquisition and integration
expenses;
o amortization of goodwill and other
acquired intangible assets; and
14
o potential impairment of our
relationships with employees, customers
and distribution partners.
An acquisition may not produce the revenues,
earnings or business synergies that we
anticipated, and an acquired product,
service or technology might not perform as
we expected. Any such poor performance could
cause customer dissatisfaction and damage
our reputation. Any of these factors could
have a material adverse effect on our
business, operating results and financial
condition.
To pay for an acquisition, we might use
capital stock or cash, including proceeds of
the Offering. Alternatively, we might borrow
money from a bank or other lender. If we use
capital stock, our stockholders would
experience dilution of their ownership
interests. If we use cash or debt financing,
our financial liquidity will be reduced. For
more information, see "-- Management of
Growth," "-- Broad Management Discretion in
Use of Proceeds" and "Business -- Allaire
Strategy."
Year 2000 Compliance Many existing computer systems and software
products do not properly recognize dates
after December 31, 1999. This "Year 2000"
problem could result in miscalculations,
data corruption, system failures or
disruptions of operations. These disruptions
could include an inability to process
transactions, send invoices or engage in
similar normal business activities. The Year
2000 problem could also affect embedded
systems such as building security systems,
machine controllers, telephone switches and
other equipment. As a result, many companies
may need to upgrade or replace their
computer systems, software and other
equipment.
Because ColdFusion does not involve data
storage, the ability of a Web application
built with ColdFusion to comply with Year
2000 requirements is largely dependent on
whether the database underlying the
application is Year 2000 compliant. If
ColdFusion is connected to a database that
is not Year 2000 compliant, the information
received by a ColdFusion application may be
incorrect. Therefore, although we believe
our products are Year 2000 compliant, there
can be no assurance that Web applications
developed using our products will comply
with Year 2000 requirements.
Furthermore, the purchasing patterns of
customers or potential customers may be
affected by Year 2000 issues as companies
expend significant resources to correct
their current systems for Year 2000
compliance. These expenditures may result in
reduced funds available for Web development
activities, which could have a material
adverse effect on our business, operating
results and financial condition. Year 2000
complications also may disrupt the
operations, viability or commercial
acceptance of the Internet. For more
information, see "-- Dependence on the
Growth and Commercial Acceptance of the
Internet."
In connection with our installation of new
internal software systems in October 1998,
we received verbal confirmations from our
vendors that the installed software is Year
2000 compliant, and we are in the process of
obtaining written certifications from such
vendors to the same effect. Based on the
foregoing, we believe that our internal
software systems are Year 2000 compliant. To
date, we have not incurred significant
incremental costs in order to comply with
Year 2000 requirements, and we do not expect
to do so in the future. However, there can
be no assurance that Year 2000 errors or
defects will not be discovered in our
internal software systems and, if such
errors or defects are discovered,
15
there can be no assurance that the costs of
making such systems Year 2000 compliant will
not have a material adverse effect on our
business, operating results and financial
condition.
We also rely on third party vendors, which
may not be Year 2000 compliant, for certain
equipment and services. In addition, many of
our distributors are dependent on
commercially available operating systems,
which may be impacted by Year 2000
complications. To date, we have not
conducted a Year 2000 review of our vendors
or distributors. Failure of systems
maintained by vendors or distributors to
operate properly with regard to the Year
2000 and thereafter could require us to
incur significant unanticipated expenses to
remedy any problems or replace affected
vendors, could reduce our revenue from our
indirect distribution channel and could have
a material adverse effect on our business,
operating results and financial condition.
For more information, see "-- Dependence on
Limited Number of Distributors," "--
Dependence on Third Party Technology" and
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations."
Control by Existing After the Offering, Allaire's officers,
Stockholders directors and existing stockholders will
together control approximately 78% of the
outstanding Common Stock. As a result, these
stockholders, if they act together, will be
able to influence the management and affairs
of Allaire and all matters requiring
stockholder approval, including the election
of directors and approval of significant
corporate transactions. This concentration
of ownership may have the effect of delaying
or preventing a change in control of Allaire
and might affect the market price of the
Common Stock.
Future Capital Needs We may require additional capital to finance
our growth or to fund acquisitions or
investments in complementary businesses,
technologies or product lines. Our capital
requirements will depend on many factors
such as:
o demand for our products;
o the timing of and extent to which we
invest in new technology;
o the level and timing of revenue;
o the expenses of sales and marketing and
new product development;
o the success and related expense of
increasing our brand awareness;
o the extent to which competitors are
successful in developing their own
products and increasing their own market
share; and
o the costs involved in maintaining and
enforcing intellectual property rights.
To the extent that our resources are
insufficient to fund our future activities,
we may need to raise additional funds
through public or private financing.
However, additional funding, if needed, may
not be available on terms attractive to us,
or at all. Our inability to raise capital
when needed could have a material adverse
effect on our business, operating results
and financial condition. If additional funds
are raised through the issuance of equity
securities, the percentage ownership of
Allaire by our stockholders would be
diluted. For more information, see
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations -- Liquidity and Capital
Resources."
Certain Anti-Takeover Our basic corporate documents and Delaware
Provisions law contain provisions that might enable our
management to resist a takeover of Allaire.
These
16
provisions might discourage, delay or
prevent a change in the control of Allaire
or a change in our management. These
provisions could also discourage proxy
contests and make it more difficult for you
and other stockholders to elect directors
and take other corporate actions. The
existence of these provisions could limit
the price that investors might be willing to
pay in the future for shares of the Common
Stock. For more information, see
"Description of Capital Stock."
Potential Price Decline upon Immediately after the Offering, the public
Sales of Outstanding Shares of market for the Common Stock will include
Common Stock only the 2,200,000 shares that we are
selling in the Offering. At that time, there
will be an additional 7,958,260 shares of
Common Stock outstanding. As described
below, the persons that hold these shares
will be able to sell some of them in the
public market following the Offering. If
these stockholders sell a large number of
shares, the market price of the Common Stock
could decline dramatically. Moreover, the
perception in the public market that these
stockholders might sell shares of Common
Stock could depress the market price of the
Common Stock.
Of the 7,958,260 additional shares held by
our existing stockholders, 7,859,868 shares
are subject to "lock-up" agreements with the
representatives of the Underwriters. These
agreements prohibit sales of shares of
Common Stock in the public market until 180
days after the date of this Prospectus (or
earlier with the consent of Credit Suisse
First Boston Corporation, which may grant
such consent in its sole discretion and at
any time without notice). When this 180-day
"lock-up" period expires and under
Securities and Exchange Commission Rules
144, 144(k) and 701, our existing
stockholders will be able to sell
approximately 7,736,870 shares of Common
Stock in the public market.
Some of our existing stockholders have the
right to force us to register their shares
of Common Stock with the Securities and
Exchange Commission. If we register their
shares of Common Stock, they can sell those
shares in the public market. For more
information, see "Description of Capital
Stock -- Registration Rights."
After the Offering, we intend to register
approximately 3,840,000 shares of Common
Stock that we may issue under our stock
plans. Once we register these shares, they
can be sold in the public market as soon as
we issue them.
Sales of large numbers of shares of Common
Stock could cause the price of the Common
Stock to decline. For more information, see
"Management -- Benefit Plans," "Shares
Eligible for Future Sale" and
"Underwriting."
Broad Management Discretion We expect to use the net proceeds from the
in Use of Proceeds Offering for general corporate purposes,
including working capital, product
development and expansion of our
international operations and sales and
marketing capabilities. We also may use a
portion of the proceeds to acquire or invest
in complementary businesses, technologies
and product lines. We will have broad
discretion in how we use the net proceeds
from the Offering. You will not have the
opportunity to evaluate the economic,
financial or other information on which we
base our decisions on how to use the net
proceeds.
17
Absence of Public Market; Prior to the Offering, there has been no
Possible Volatility of Stock Price public market for the Common Stock. After
the Offering, an active trading market might
not develop or continue. If you purchase
shares of Common Stock in the Offering, you
will pay a price that was not established in
a competitive market. Rather, you will pay a
price that we negotiated with the
representatives of the Underwriters. The
price of the Common Stock that will prevail
in the market after the Offering may be
higher or lower than the price you pay. For
a description of the factors we will
consider in negotiating the public offering
price, see "Underwriting."
Many factors could cause the market price of
the Common Stock to rise and fall. Some of
these factors are:
o variations in our quarterly operating
results;
o announcements of technological
innovations;
o introduction of new products or new
pricing policies by us or competitors;
o acquisitions or strategic alliances by
us or competitors;
o hiring or departure of key personnel;
o changes in accounting principles;
o changes in estimates of our performance
or changes in recommendations by
securities analysts; and
o market conditions in the industry and
the economy as a whole.
The stock market in general has recently
experienced extreme price and volume
fluctuations. In addition, the market prices
of securities of technology companies,
particularly Internet-related companies,
have been extremely volatile, and have
experienced fluctuations that have often
been unrelated or disproportionate to the
operating performance of such companies.
These broad market fluctuations could
adversely affect the market price of the
Common Stock.
Recently, when the market price of a stock
has been volatile, holders of that stock
have often instituted securities class
action litigation against the company that
issued the stock. If any of our stockholders
brought such a lawsuit against us, we could
incur substantial costs defending the
lawsuit. The lawsuit could also divert the
time and attention of our management.
Any of these events could have a material
adverse effect on our business, operating
results and financial condition.
Immediate and Substantial If you purchase shares of the Common Stock
Dilution in the Offering, you will experience
immediate and substantial dilution, in that
the price you pay will be substantially
greater than the net tangible book value per
share of the shares you acquire. This
dilution is due in large part to the fact
that earlier investors in Allaire paid
substantially less than the public offering
price when they purchased their shares of
Common Stock. You will experience additional
dilution upon the exercise of outstanding
stock options or warrants to purchase Common
Stock. For more information, see "Dilution"
and "Management -- Benefit Plans."
18
USE OF PROCEEDS
The net proceeds to the Company from the issuance and sale of the
2,200,000 shares of Common Stock offered hereby are estimated to be
approximately $31.7 million (approximately $36.6 million if the Underwriters'
over-allotment option is exercised in full), at an assumed initial public
offering price of $16.00 per share, after deducting estimated underwriting
discounts and commissions and offering expenses. The Company intends to use the
net proceeds for general corporate purposes, including working capital, product
development and expansion of its international operations and sales and
marketing capabilities. A portion of the net proceeds may also be used to
acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies. The Company has no specific
understandings, commitments or agreements with respect to any such acquisition
or investment. Pending such uses, the net proceeds of the Offering will be
invested in short-term, interest-bearing, investment-grade securities,
certificates of deposit or direct or guaranteed obligations of the United
States.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends in the foreseeable future.
The Company currently intends to retain future earnings, if any, to fund the
expansion and growth of its business. Payment of future dividends, if any, will
be at the discretion of the Company's Board of Directors after taking into
account various factors, including the Company's financial condition, operating
results, current and anticipated cash needs and plans for expansion. Under the
terms of the Company's line of credit, there are certain restrictions on the
Company's ability to declare and pay dividends. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and Note 6 of Notes to Financial Statements.
19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998 (i) on an actual basis; (ii) on a pro forma basis giving
effect to the conversion of all outstanding shares of Preferred Stock into
Common Stock upon the closing of the Offering and the amendment of the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock to 35,000,000; and (iii) on a pro forma as adjusted basis to
reflect the sale by the Company of 2,200,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $16.00 per share, and
after deducting estimated underwriting discounts and commissions and offering
expenses. This information should be read in conjunction with the Company's
Financial Statements and Notes thereto appearing elsewhere in this Prospectus:
September 30, 1998
----------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted(1)
------------ ------------- ---------------
(In thousands, except share and per share data)
(unaudited) (unaudited)
Capital lease obligations, net of current portion ........... $ 247 $ 247 $ 247
Notes payable, net of current portion ....................... 973 973 973
-------- -------- --------
Total long term debt ........................................ 1,220 1,220 1,220
-------- -------- --------
Redeemable convertible preferred stock, $.01 par value:
Series B--514,306 shares authorized, issued and
outstanding actual; none issued and outstanding
pro forma and pro forma as adjusted ...................... 2,325 -- --
Series C--169,200 shares authorized, issued and
outstanding actual; none issued and outstanding
pro forma and pro forma as adjusted ...................... 1,000 -- --
Series D--2,500,000 shares authorized, 2,336,909 shares
issued and outstanding actual; none issued and outstanding
pro forma and pro forma as adjusted ...................... 9,348 -- --
-------- -------- --------
Total redeemable convertible preferred stock ................ 12,673 -- --
-------- -------- --------
Stockholders' equity (deficit):
Series A convertible preferred stock, $.01 par value;
200,000 shares authorized, 57,213 shares issued and
outstanding actual; none issued and outstanding
pro forma and pro forma as adjusted ...................... 260 -- --
Common stock, $.01 par value; 10,000,000 shares
authorized actual and 35,000,000 shares authorized pro
forma and pro forma as adjusted; 4,143,986 shares
issued and 4,140,569 outstanding actual; 7,961,677
shares issued and 7,958,260 outstanding pro forma;
10,161,677 shares issued and 10,158,260 outstanding
pro forma as adjusted .................................... 41 79 101
Additional paid-in capital ................................. 1,140 14,035 45,749
Accumulated deficit ........................................ (17,423) (17,423) (17,423)
Deferred compensation ...................................... (383) (383) (383)
Stock subscriptions receivable ............................. (16) (16) (16)
-------- -------- --------
Total stockholders' equity (deficit) ........................ (16,381) (3,708) 28,028
-------- -------- --------
Total capitalization ........................................ $ (2,488) $ (2,488) $ 29,248
======== ======== ========
- ------------
(1) Excludes: (i) 1,676,864 shares of Common Stock issuable upon exercise of
stock options outstanding as of September 30, 1998 at a weighted average
exercise price of $1.86 per share, (ii) 131,667 shares of Common Stock
reserved for issuance as of September 30, 1998 under the Company's 1997
Stock Incentive Plan, and 1,733,150 shares of Common Stock reserved for
issuance under the Company's 1998 Stock Incentive Plan, (iii) 50,297
shares of Common Stock issuable under exercise of warrants outstanding at
September 30, 1998 at a weighted average exercise price of $2.44, (iv)
300,000 shares of Common Stock issuable under the 1998 Employee Stock
Purchase Plan and (v) 31,250 shares of Common Stock issuable upon
conversion of Series A Preferred Stock sold after September 30, 1998. See
"Management -- Benefit Plans," "Description of Capital Stock" and Notes 7,
8, 9 and 14 of Notes to Financial Statements.
20
DILUTION
The pro forma net tangible book value of the Company at September 30, 1998
was $(3,856,000), or $(0.48) per share of Common Stock. Pro forma net tangible
book value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding after
giving effect to the conversion of all shares of Preferred Stock. After giving
effect to the sale of 2,200,000 shares of Common Stock offered hereby by the
Company at an assumed initial public offering price of $16.00 per share and
after deducting estimated underwriting discounts and commissions and offering
expenses, the Company's pro forma net tangible book value as of September 30,
1998 would have been approximately $27,880,000, or $2.74 per share. This
represents an immediate increase in pro forma net tangible book value of $3.22
per share to existing stockholders and an immediate dilution of $13.26 per
share to new investors purchasing shares of Common Stock in the Offering. The
following table illustrates this dilution:
Assumed initial public offering price per share ................................. $16.00
Pro forma net tangible book value per share at September 30, 1998 .............. $(0.48)
Increase attributable to the Offering .......................................... 3.22
------
Pro forma net tangible book value per share after the Offering .................. 2.74
------
Net tangible book value dilution per share to new investors in the Offering ..... $13.26
======
The following table summarizes, as of September 30, 1998, on the pro forma
basis described above, the total number of shares and consideration paid to the
Company and the average price per share paid by the existing stockholders and
by new investors purchasing shares of Common Stock in the Offering at an
assumed initial public offering price of $16.00 per share (before deducting the
estimated underwriting discounts and commissions and offering expenses):
Shares Purchased (1) Total Consideration
--------------------- ----------------------
Average Price
Number Percent Amount Percent Per Share
---------- --------- ----------- -------- --------------
Existing stockholders ......... 7,958,260 78.3% $14,114,000 28.6% $ 1.77
New investors ................. 2,200,000 21.7% 35,200,000 71.4% 16.00
--------- ----- ----------- -----
Totals ...................... 10,158,260 100.0% $49,314,000 100.0%
========== ===== =========== =====
- ------------
(1) The foregoing computations are based on the number of shares of Common
Stock outstanding as of September 30, 1998 and exclude: (i) 1,676,864
shares of Common Stock issuable upon exercise of stock options outstanding
as of September 30, 1998 at a weighted average exercise price of $1.86 per
share, (ii) 131,667 shares of Common Stock reserved for issuance as of
September 30, 1998 under the Company's 1997 Stock Incentive Plan, and
1,733,150 shares of Common Stock reserved for issuance under the Company's
1998 Stock Incentive Plan, (iii) 50,297 shares of Common Stock issuable
under exercise of warrants outstanding at September 30, 1998 at a weighted
average exercise price of $2.44, (iv) 300,000 shares of Common Stock
issuable under the 1998 Employee Stock Purchase Plan and (v) 31,250 shares
of Common Stock issuable upon conversion of Series A Preferred Stock sold
after September 30, 1998. See "Capitalization," "Management -- Benefit
Plans," "Description of Capital Stock" and Notes 7, 8, 9 and 14 of Notes
to Financial Statements.
21
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the Company's Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
appearing elsewhere in this Prospectus. The statement of operations data for
the period from the Company's inception (May 5, 1995) through December 31,
1995, for the years ended December 31, 1996 and 1997 and for the nine months
ended September 30, 1998, and the balance sheet data as of December 31, 1996
and 1997 and as of September 30, 1998, are derived from, and are qualified by
reference to, audited financial statements included elsewhere in this
Prospectus. The balance sheet data as of December 31, 1995 are derived from
audited financial statements of the Company that do not appear in this
Prospectus. The statement of operations data for the nine months ended
September 30, 1997 are derived from unaudited financial statements of the
Company appearing elsewhere in this Prospectus. The unaudited financial
statements have been prepared on the same basis as the audited financial
statements and, in the opinion of the Company's management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information set forth therein. The historical results
are not necessarily indicative of the operating results to be expected in the
future.
Year Ended Nine Months Ended
Period from Inception December 31, September 30,
(May 5, 1995) through ------------------ -----------------
December 31, 1995 1996 1997 1997 1998
--------------------- -------- -------- ------- --------
(In thousands, except per share data)
unaudited)
Statement of Operations Data:
Revenue:
Software license fees ............................ $ -- $ 2,358 $ 7,116 $ 4,335 $11,716
Services ......................................... -- -- 534 260 2,187
------- ------- ------- ------- -------
Total revenue .................................. -- 2,358 7,650 4,595 13,903
------- ------- ------- ------- -------
Cost of revenue:
Software license fees ............................ -- 234 961 540 1,262
Services ......................................... -- -- 1,453 845 2,855
------- ------- ------- ------- -------
Total cost of revenue .......................... -- 234 2,414 1,385 4,117
------- ------- ------- ------- -------
Gross profit ...................................... -- 2,124 5,236 3,210 9,786
------- ------- ------- ------- -------
Operating expenses:
Research and development ......................... 65 873 2,702 1,801 3,371
Sales and marketing .............................. 49 1,576 7,272 4,216 11,561
General and administrative ....................... 74 1,387 2,874 1,866 2,871
------- ------- ------- ------- -------
Total operating expenses .................... 188 3,836 12,848 7,883 17,803
------- ------- ------- ------- -------
Loss from operations .............................. (188) (1,712) (7,612) (4,673) (8,017)
Interest income, net .............................. -- 14 187 125 29
------- ------- ------- ------- -------
Net loss .......................................... $ (188) $(1,698) $(7,425) $(4,548) $(7,988)
======= ======= ======= ======= =======
Basic and diluted net loss per share .............. $ (0.09) $ (0.97) $ (4.40) $ (2.87) $ (2.84)
Shares used in computing basic and diluted net loss
per share ........................................ 2,200 1,743 1,687 1,584 2,813
Unaudited pro forma basic and diluted net loss per
share(1) ......................................... $ (1.38) $ (1.13)
Shares used in computing unaudited pro forma
basic and diluted net loss per share(1) .......... 5,378 7,054
December 31, September 30, 1998
------------------------- -------------------------
Pro Forma
1995 1996 1997 Actual As Adjusted(2)
------- -------- ------- -------- -------------
(unaudited)
Balance Sheet Data:
Cash and cash equivalents ............................ $ 17 $ 526 $ 5,521 $ 1,879 $33,615
Working capital (deficit) ............................ (231) 224 1,492 (5,941) 25,795
Total assets ......................................... 119 2,038 9,697 8,330 40,066
Total long-term debt, net of current portion ......... -- -- 499 1,220 1,220
Total redeemable convertible preferred stock ......... -- 2,800 12,673 12,673 --
Total stockholders' equity (deficit) ................. (181) (1,768) (9,153) (16,381) 28,028
- ------------
(1) For an explanation of unaudited pro forma basic and diluted net loss per
share and the weighted average shares used in computing unaudited pro
forma basic and diluted net loss per share, see Note 2 of Notes to
Financial Statements.
(2) Pro forma to give effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock upon the closing of the Offering. As
adjusted to give effect to the sale by the Company of 2,200,000 shares of
Common Stock offered hereby at an initial public offering price of $16.00
per share after deducting estimated underwriting discounts and commissions
and offering expenses.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto appearing elsewhere in this Prospectus. This discussion and analysis
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under "Risk Factors" and elsewhere in this
Prospectus.
Overview
The Company develops, markets and supports application development and
server software for a wide range of Web development, from building static Web
pages to developing high-volume, interactive Web applications. The Company was
established in May 1995 and recorded its first revenue upon delivery of
ColdFusion 1.5 to its customers in February 1996. Also in 1996, the Company
moved its headquarters from Minnesota to Cambridge, Massachusetts. In March
1997, the Company expanded its product offerings by acquiring the HomeSite HTML
design tool through the purchase of substantially all of the assets of Bradbury
Software L.L.C. ("Bradbury"). In November 1998, the Company introduced versions
4.0 of its ColdFusion and HomeSite software products.
The Company's revenue is derived principally from license fees for
software products and, to a lesser extent, fees for a range of services
complementing these products, primarily training and technical support.
Software license fees include sales of licenses for the then-current version of
the Company's products, product upgrades and subscriptions. Subscriptions
entitle the customer to all new releases for a specific product during the
subscription period, generally 12 months.
Revenue from sales of licenses to use the Company'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. The Company
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
the Company's historical experience. Revenue from subscription sales is
recognized ratably over the term of the subscription period. Services revenue is
recognized as services are rendered or ratably over the term of the service
agreement.
In October 1997, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SoP") 97-2, Software Revenue Recognition, which provides
guidance on the timing and amount of revenue recognition when licensing,
selling, leasing or otherwise marketing computer software and related services.
The Company adopted SoP 97-2 for all transactions entered into after December
31, 1997. Subsequently, in March 1998, the Financial Accounting Standards Board
("FASB") approved SoP 98-4, Deferral of the Effective Date of a Provision of SoP
97-2, Software Revenue Recognition. SoP 98-4 provides for the one-year deferral
of certain provisions of SoP 97-2 pertaining to its requirements for what
constitutes vendor specific objective evidence of the fair value of multiple
elements included in an arrangement. In November 1998, the FASB cleared for
issuance SoP 98-9, Modification of SoP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions, which will retain the limitations of SoP 97-2
on what constitutes vendor specific objective evidence of fair value. SoP 98-9
will be effective for transactions entered into in fiscal years beginning after
March 15, 1999. Based upon its interpretation of SoP 97-2, 98-4 and 98-9, the
Company believes that its current revenue recognition policies and practices are
consistent with the provisions of the new guidance. Adoption of SoP 97-2 and SoP
98-4 did not have a material impact on the Company's financial condition or
results of operation.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed, costs associated with the development of computer software
are expensed prior to the establishment of technological feasibility and
capitalized thereafter when material. No software development costs have been
capitalized since costs eligible for capitalization have not been material to
the Company's financial condition or results of operations.
23
The Company generates its revenue through direct sales of licenses to end
users and through its indirect distribution channel. Direct revenue is
generated by the Company's direct sales force and via the Company's Web site.
The indirect distribution channel includes distributors, direct and OEM
resellers, system integrators and Allaire Alliance members. During the second
half of 1997, the Company established relationships with its primary
distribution partners in North America, Europe and Asia Pacific. Revenue
generated by the indirect distribution channel accounted for 13%, 28% and 41%
of total revenue for 1996, 1997 and the nine months ended September 30, 1998,
respectively. The Company anticipates that revenue derived from the indirect
distribution channel will continue to represent a significant percentage of
total revenue.
The Company primarily derives its international revenue through its
indirect distribution channel. International revenue accounted for 17%, 20% and
14% of total revenue for 1996, 1997 and the nine months ended September 30,
1998, respectively.
The Company has only a limited operating history on which to base an
evaluation of its business and prospects. The Company's prospects must be
considered in light of the risks and uncertainties encountered by companies in
an early stage of development in new and rapidly evolving markets. To address
these risks, the Company must, among other things, develop new products and
technologies more rapidly than its competitors; attract, integrate, motivate
and retain qualified personnel; successfully implement its distribution
strategy; continue to build its financial and operational infrastructure; and
develop and maintain awareness of its brands. There can be no assurance that
the Company will succeed in addressing any or all of these risks, and the
failure to do so would have a material adverse effect on the Company's
business, operating results and financial condition.
The Company has experienced substantial net losses in each fiscal period
since its inception and, as of September 30, 1998, had an accumulated deficit
of $17.4 million. Such net losses and accumulated deficit resulted from the
Company's lack of substantial revenue and the significant costs incurred in the
development of the Company's products and in the preliminary establishment of
the Company's infrastructure. The Company expects to increase its expenditures
in all areas in order to execute its business plan, particularly in research
and development and sales and marketing. The planned increase in sales and
marketing expense will primarily result from the hiring of additional sales
force personnel to focus on major account sales, and marketing programs to
increase brand awareness.
Although the Company has experienced revenue growth in recent periods,
there can be no assurance that such growth rates are sustainable, and therefore
such growth rates should not be considered indicative of future operating
results. There can also be no assurance that the Company will be able to
continue to increase its revenue or attain profitability or, if increases in
revenue and profitability are achieved, that they can be sustained. The Company
believes that period-to-period comparisons of its historical operating results
are not meaningful and should not be relied upon as an indication of future
performance.
24
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenue of certain line items included in the Company's statement of
operations. The Company generated no revenue and incurred operating expenses
totaling $188,000 during the period from inception (May 5, 1995) through
December 31, 1995. Consequently, operating results for that period have been
omitted from the table below.
Year Ended Nine Months Ended
December 31, September 30,
------------------- ------------------
1996 1997 1997 1998
-------- -------- -------- -------
Revenue:
Software license fees ................. 100.0% 93.0% 94.3% 84.3%
Services .............................. 0.0 7.0 5.7 15.7
----- ----- ------ -----
Total revenue .................... 100.0 100.0 100.0 100.0
----- ----- ------ -----
Cost of revenue:
Cost of software license fees ......... 9.9 12.6 11.8 9.1
Cost of services ...................... 0.0 19.0 18.4 20.5
----- ----- ------ -----
Total cost of revenue ............ 9.9 31.6 30.2 29.6
----- ----- ------ -----
Gross profit ........................... 90.1 68.4 69.8 70.4
----- ----- ------ -----
Operating expenses:
Research and development .............. 37.1 35.3 39.2 24.2
Sales and marketing ................... 66.8 95.1 91.7 83.2
General and administrative ............ 58.8 37.5 40.6 20.7
----- ----- ------ -----
Total operating expenses ......... 162.7 167.9 171.5 128.1
----- ----- ------ -----
Loss from operations ................... (72.6) (99.5) (101.7) (57.7)
Interest income, net ................... 0.6 2.4 2.7 0.2
----- ----- ------ -----
Net loss ............................... (72.0)% (97.1)% ( 99.0)% (57.5)%
===== ===== ====== =====
Nine Months Ended September 30, 1997 and 1998
Revenue
Total revenue increased 203% from $4.6 million for the nine months ended
September 30, 1997 to $13.9 million for the nine months ended September 30,
1998.
Software License Fees. Revenue from software license fees increased 170%
from $4.3 million for the nine months ended September 30, 1997 to $11.7 million
for the nine months ended September 30, 1998. This increase was primarily due
to an increase in the number of licenses sold to use the Company's software
products including HomeSite, which the Company 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 the Company's products during the second half of 1997.
Services. Revenue from services increased 741% from $260,000 for the nine
months ended September 30, 1997 to $2.2 million for the nine months ended
September 30, 1998. The increase was primarily attributable to growth in
training revenue resulting from an increase in the Company's installed customer
base.
Cost of Revenue
Cost of Software License Fees. Cost of software license fees includes
costs of product media duplication, manuals, packaging materials, licensed
technology and fees paid to third-party vendors and agents for order
fulfillment. Cost of software license fees increased 134% from $540,000 for the
nine months ended September 30, 1997 to $1.3 million for the nine months ended
September 30, 1998. The increase in absolute dollars was due to higher unit
sales volume. The improvement in software license fees gross margins from 88%
for the nine months ended September 30, 1997 to 89% for the nine months ended
September 30, 1998 was primarily attributable to economies of scale achieved
with the Company's higher sales volume. In the future, the Company expects that
additional economies of scale may be offset by increased licensed technology
costs related to new versions of ColdFusion.
Cost of Services. Cost of services consists primarily of personnel costs.
Cost of services increased 238% from $845,000 for the nine months ended
September 30, 1997 to $2.9 million for the nine months ended September 30,
25
1998. The increase in absolute dollars resulted primarily from the hiring of
additional employees and the use of contract trainers to support increased
customer demand for training classes and technical support. The improvement in
services gross margins from (225)% for the nine months ended September 30, 1997
to (31)% for the nine months ended September 30, 1998 was primarily
attributable to the substantial growth in training revenue. The continued
improvement in services gross margins is contingent upon the future demand for
the services offered by the Company.
Overall gross margins are primarily affected by the mix of products
licensed, sales through direct versus indirect distribution channels, software
license fees revenue versus services revenue, and international versus domestic
revenue. The Company 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, the Company's gross margins may be adversely affected.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of employee salaries, fees for outside consultants and related costs
associated with the development of new products, the enhancement and
localization of existing products, quality assurance and testing. Research and
development expenses increased 87% from $1.8 million for the nine months ended
September 30, 1997 to $3.4 million for the nine months ended September 30,
1998. The increase primarily resulted from salaries associated with newly hired
development personnel and consulting costs related to product localization. The
Company anticipates that research and development expenses will continue to
increase in absolute dollars.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, commissions, and costs associated with marketing programs
such as trade shows, seminars, advertising and new product launch activities.
Sales and marketing expenses increased 174% from $4.2 million for the nine
months ended September 30, 1997 to $11.6 million for the nine months ended
September 30, 1998. The increase was primarily attributable to costs associated
with additional direct sales, pre-sales support and marketing personnel, and,
to a lesser extent, an increase in marketing programs, including trade shows,
seminars and product launch activities. The Company anticipates that sales and
marketing expenses will continue to increase in absolute dollars as it
continues to expand its marketing programs and sales force to support its brand
awareness, product launches, international expansion and increased focus on
major account sales.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and other personnel related costs for executive
and financial personnel, as well as legal, accounting and insurance costs.
General and administrative expenses increased 54% from $1.9 million for the
nine months ended September 30, 1997 to $2.9 million for the nine months ended
September 30, 1998. Substantially all of the increase was due to salaries
associated with newly hired personnel and related costs required to manage the
Company's growth and facilities expansion. The Company expects that its general
and administrative expenses will increase in absolute dollars as it continues
to expand its staffing to support expanded operations and facilities, and
incurs expenses relating to its new responsibilities as a public company.
Interest Income, Net. Interest income, net of interest expense, decreased
77% from $125,000 for the nine months ended September 30, 1997 to $29,000 for
the nine months ended September 30, 1998. The decrease was primarily due to an
increase in interest expense attributable to the Company's capital lease and
notes payable obligations.
Provision for Income Taxes. The Company incurred significant operating
losses for all periods from inception through September 30, 1998. The Company
has recorded a valuation allowance for the full amount of its net deferred tax
assets as the future realization of the tax benefit is not sufficiently
assured.
Years Ended December 31, 1996 and 1997
Revenue
The Company's total revenue increased 224% from $2.4 million for 1996 to
$7.7 million for 1997.
Software License Fees. Revenue from software license fees increased 202%
from $2.4 million for 1996 to $7.1 million for 1997. This increase was
primarily due to an increase in the number of licenses sold to use the
Company's software products including HomeSite, which the Company began selling
in March 1997. The growth in unit sales was also attributable to the
establishment of relationships with key domestic and international
26
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 the Company's
products during the second half of 1997 and the introduction of subscription
sales in the fourth quarter of 1996.
Services. Prior to 1997, the Company provided minimal technical support to
its customers and recognized no revenue from such services during 1996. During
1997, the Company introduced training and fee-based technical support to its
customers.
Cost of Revenue
Cost of Software License Fees. Cost of software license fees increased
311% from $234,000 for 1996 to $961,000 for 1997. The increase in absolute
dollars was due to higher unit sales volume. The decrease in software license
fee gross margins from 90% for 1996 to 86% for 1997 was primarily attributable
to an increase in licensed technology costs and fees paid to third-party agents
for order fulfillment.
Cost of Services. The Company recognized no revenue from services during
1996. The cost of services incurred during 1997 related to the establishment of
the Company's training organization and the hiring of additional technical
support personnel.
Operating Expenses
Research and Development. Research and development expenses increased 210%
from $873,000 for 1996 to $2.7 million for 1997. The increase primarily
resulted from salaries associated with newly hired development personnel and
consulting costs related to product localization.
Sales and Marketing. Sales and marketing expenses increased 361% from $1.6
million for 1996 to $7.3 million for 1997. The increase was primarily
attributable to costs associated with additional direct sales, pre-sales
support and marketing personnel, and, to a lesser extent, an increase in
marketing programs, including trade shows, seminars and product launch and
brand awareness activities.
General and Administrative. General and administrative expenses increased
107% from $1.4 million for 1996 to $2.9 million for 1997. The increase was
primarily due to employee salaries associated with the hiring of executive and
financial personnel to help manage the Company's growth. The Company also
settled a wrongful termination action with a former employee and agreed to pay
the plaintiff a one-time cash settlement of $285,000.
Interest Income, Net. Interest income, net of interest expense, increased
from $14,000 for 1996 to $187,000 for 1997. The increase was primarily
attributable to interest earned on cash received from financing activities
during 1997, partially offset by interest expense attributable to the Company's
capital lease obligations.
Period from Inception (May 5, 1995) through December 31, 1995
During the period from inception (May 5, 1995) through December 31, 1995,
the Company was in the development stage and its operating activities consisted
primarily of recruiting of personnel, research and development of the Company's
ColdFusion product line, and distribution of the Company's initial version of
ColdFusion. The Company generated no revenue and incurred operating expenses
totaling $188,000 during this period. Accordingly, a comparison of the
operating results for that period and 1996 is not meaningful and has been
omitted.
27
Quarterly Results of Operations
The following tables set forth a summary of the Company's unaudited
quarterly operating results for each of the seven quarters in the period ended
September 30, 1998. This information has been derived from unaudited interim
financial statements that, in the opinion of management, have been prepared on
a basis consistent with the financial statements contained elsewhere in this
Prospectus and include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair statement of such information when read in
conjunction with the Company's Financial Statements and Notes thereto. The
operating results for any quarter are not necessarily indicative of results for
any future period.
Quarter Ended
---------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30
1997 1997 1997 1997 1998 1998 1998
-------- ----------- ----------- ------------ ---------- --------- ---------
(In thousands)
Statement of Operations Data:
Revenue:
Software license fees ................. $1,143 $ 1,304 $ 1,888 $ 2,781 $ 3,568 $ 4,017 $ 4,131
Services .............................. 68 76 116 274 464 582 1,141
------ ------- ------- ------- ------- ------- -------
Total revenue .................... 1,211 1,380 2,004 3,055 4,032 4,599 5,272
------ ------- ------- ------- ------- ------- -------
Cost of revenue:
Cost of software license fees ......... 157 186 197 421 421 399 442
Cost of services ...................... 146 303 396 608 701 909 1,245
------ ------- ------- ------- ------- ------- -------
Total cost of revenue ............ 303 489 593 1,029 1,122 1,308 1,687
------ ------- ------- ------- ------- ------- -------
Gross profit ........................... 908 891 1,411 2,026 2,910 3,291 3,585
------ ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development .............. 352 581 868 901 1,025 1,003 1,343
Sales and marketing ................... 1,006 1,184 2,026 3,056 3,120 3,824 4,617
General and administrative ............ 377 499 990 1,008 1,021 888 962
------ ------- ------- ------- ------- ------- -------
Total operating expenses ......... 1,735 2,264 3,884 4,965 5,166 5,715 6,922
------ ------- ------- ------- ------- ------- -------
Loss from operations ................... (827) (1,373) (2,473) (2,939) (2,256) (2,424) (3,337)
Interest income (expense), net ......... (9) 40 94 62 45 20 (36)
--------- ------- ------- ------- ------- ------- -------
Net loss ............................... $ (836) $(1,333) $(2,379) $(2,877) $(2,211) $(2,404) $(3,373)
======== ======= ======= ======= ======= ======= =======
As a Percentage of Total Revenue:
Revenue:
Software license fees ................. 94.4% 94.5% 94.2% 91.0% 88.5% 87.3% 78.4%
Services .............................. 5.6 5.5 5.8 9.0 11.5 12.7 21.6
-------- ------- ------- ------- ------- ------- -------
Total revenue .................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
-------- ------- ------- ------- ------- ------- -------
Cost of revenue:
Cost of software license fees ......... 13.0 13.5 9.8 13.8 10.4 8.7 8.4
Cost of services ...................... 12.0 21.9 19.8 19.9 17.4 19.7 23.6
-------- ------- ------- ------- ------- ------- -------
Total cost of revenue ............ 25.0 35.4 29.6 33.7 27.8 28.4 32.0
-------- ------- ------- ------- ------- ------- -------
Gross profit ........................... 75.0 64.6 70.4 66.3 72.2 71.6 68.0
-------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development .............. 29.1 42.1 43.3 29.5 25.4 21.9 25.5
Sales and marketing ................... 83.1 85.8 101.1 100.0 77.4 83.1 87.6
General and administrative ............ 31.1 36.2 49.4 33.0 25.3 19.3 18.2
-------- ------- ------- ------- ------- ------- -------
Total operating expenses ......... 143.3 164.1 193.8 162.5 128.1 124.3 131.3
-------- ------- ------- ------- ------- ------- -------
Loss from operations ................... (68.3) (99.5) (123.4) (96.2) (55.9) (52.7) (63.3)
Interest income (expense), net ......... ( 0.7) 2.9 4.7 2.0 1.1 0.4 ( 0.7)
-------- ------- ------- ------- ------- ------- -------
Net loss ............................... (69.0)% (96.6)% (118.7)% (94.2)% (54.8)% (52.3)% (64.0)%
======== ======= ======= ======= ======= ======= =======
The Company's total revenue has increased each consecutive quarter during
the seven fiscal quarters ending September 30, 1998, as a result of market
acceptance of the Company's products and diversification of the Company's sales
channels, including expansion of the Company's direct sales force and
relationships with domestic
28
and international distributors. Services revenue has generally increased along
with increases in the Company's installed customer base. Cost of revenue from
software license fees has fluctuated as a percentage of revenue from software
license fees primarily due to growth in the indirect distribution channel, use
of licensed technology and economies of scale gained from increased license
volume. Cost of services revenue increased quarter to quarter in absolute
dollars primarily due to increases in personnel and related costs for customer
support and training.
Operating expenses increased in each quarter, reflecting increased
spending on developing, selling, marketing and supporting the Company's
products, as well as building the Company's market presence. Research and
development costs have increased as a result of higher personnel and consulting
costs associated with enhancing existing products and developing new products.
Sales and marketing expenses increased as a result of hiring additional sales
and marketing personnel and an increase in marketing program costs. General and
administrative expenses increased throughout 1997 primarily due to the hiring
of the Company's executive and financial staff and support personnel, increased
use of outside services during the second half of 1997 and a legal settlement.
The decrease in the second quarter of 1998 primarily was the result of a
decline in the use of outside services and a reduction in bad debt expense.
The Company's operating results have varied on a quarterly basis during
its short operating history and are expected to fluctuate significantly in the
future. A variety of factors, many of which are outside of the Company's
control, may affect the Company's quarterly operating results. These factors
include, among others, the following: the evolution of the market for Web
development products; market acceptance of the Company's products; the
Company's success and timing in developing and introducing new products and
enhancements to existing products; market acceptance of products developed by
competitors; changes in pricing policies by the Company or its competitors; an
increase in the length of the Company's sales cycle; changes in customer buying
patterns; customer order deferrals in anticipation of new products or
enhancements by the Company or competitors; market entry by new competitors;
development and performance of the Company's distribution channels; general
economic conditions and economic conditions specific to Internet-related
industries. Any one of these factors could cause the Company's revenue and
operating results to vary significantly in the future.
The Company's limited operating history and the undeveloped nature of the
market for Web development products make predicting future revenue difficult.
The Company's expense levels are based, in part, on its expectations regarding
future revenue increases, and to a large extent such expenses are fixed,
particularly in the short term. There can be no assurance that the Company's
expectations regarding future revenue are accurate. Moreover, the Company may
be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. Accordingly, any significant shortfall of revenue
in relation to the Company's expectations would likely cause significant
declines in the Company's quarterly operating results.
The Company is also increasing its sales and marketing efforts focused on
larger purchases by larger customers. Such transactions are generally more
complex and may increase the length of the Company's average sales cycle. The
Company anticipates that an increasing portion of its revenue could be derived
from larger orders, in which case the timing of receipt and fulfillment of any
such orders could cause fluctuations in the Company's operating results,
particularly on a quarterly basis.
Due to the foregoing factors, the Company's operating results are
difficult to forecast. The Company believes that period-to-period comparisons
of its historical operating results are not meaningful and should not be relied
upon as an indication of future performance. Also, the Company's operating
results may fall below the expectations of the Company, securities analysts or
investors in some future quarter. In such event, the market price of the
Company's Common Stock would likely be materially adversely affected.
Liquidity and Capital Resources
Since its inception, the Company has funded operations primarily through
net cash proceeds from private placements of preferred stock totaling $12.3
million through September 30, 1998. At September 30, 1998, the Company had cash
and cash equivalents totaling $1.9 million. In December 1998, the Company
received gross proceeds of $500,000 from the sale of 31,250 shares of Series A
Preferred Stock.
Cash used for operating activities for 1997 was $3.3 million, primarily
due to a net loss of $7.4 million, partially offset by increases in accounts
payable, accrued expenses and deferred revenue. Cash used for operating
activities for the nine months ended September 30, 1998 was $3.6 million,
primarily due to a net loss of $8.0 million, partially offset by increases in
accrued expenses and deferred revenue.
29
Cash used for investing activities for 1997 and the nine months ended
September 30, 1998 was $1.8 million and $1.7 million, respectively. Investing
activities for the periods were primarily purchases of equipment, consisting
largely of computer servers, workstations and networking equipment.
Cash provided by financing activities for 1997 was $10.0 million,
primarily due to the issuance of preferred stock for net proceeds totaling $9.6
million. Cash provided by financing activities for the nine months ended
September 30, 1998 was $1.6 million, primarily due to the issuance of notes
payable of $1.4 million and the proceeds from the exercise of common stock
options of $537,000.
During 1997, the Company had established a high level of allowance for
doubtful accounts and sales returns as a percentage of accounts receivable. The
high reserve levels were established in 1997 due to a large balance of
delinquent accounts and a lack of sufficient controls and financial systems. The
Company implemented controls and improved systems in 1997 and 1998 which
resulted in substantial improvements in accounts receivable collections. The
Company expects the level of the allowance for doubtful accounts and sales
returns will decrease as a percentage of accounts receivable.
In March 1997, the Company acquired substantially all of the assets of
Bradbury, including all rights to the HomeSite HTML design tool in exchange for
$252,000 in cash and 13,000 shares of the Company's Series A Convertible
Preferred Stock. In order to finance the acquisition, the Company issued 10%
convertible notes payable totaling $252,000 and warrants to purchase 6,300
shares of the Company's Common Stock at a price of $4.00 per share to two
stockholders of the Company. In addition, as part of the acquisition agreement,
the Company paid Bradbury's former owner $165,000 in October 1998, based on the
length of time he has been employed by the Company.
In March 1998, the Company entered into a new line of credit with a bank
which allows the Company to borrow up to $2.0 million for working capital
purposes and for the issuance of letters of credit. The line of credit expires
on the earlier of the closing of an initial public offering or March 26, 1999.
Amounts available under the line of credit are a function of eligible accounts
receivable and bear interest at the bank's prime rate (8.25% at September 30,
1998) plus 1%. At September 30, 1998, there were letters of credit outstanding
under the line of $487,000 and an additional $1.5 million was available for
borrowing. In August 1998, the Company received a covenant waiver from the bank
for the months of May and June 1998, and the bank amended the terms of the line
of credit to waive certain financial covenants through October 1998. In December
1998, the bank extended the terms of the arrangement to waive certain financial
covenants from November 1998 through the earlier of the closing of an initial
public offering or March 26, 1999.
In May 1998, the Company entered into an equipment loan line agreement
that allows the Company to borrow up to $2.0 million for the purchase of fixed
assets through December 1998. The initial term of each loan is 36 months from
the borrowing date. Monthly payments are equal to 3.155% of the original amount
borrowed, for an effective interest rate of approximately 15%. At the end of
the term, the Company may choose to make one additional payment of 15% of the
original amount funded or, if no default has occurred, the term may be extended
for an additional six months at the original monthly payment rate. At September
30, 1998, the Company had $1.3 million outstanding under the line, which was
collateralized by previous purchases of furniture and equipment. In December
1998, the Company borrowed an additional $214,000.
As of September 30, 1998, the Company's primary commitments consisted of
obligations outstanding under operating leases, $581,000 of capital lease
obligations and $1.3 million of notes payable under the equipment loan line.
As of September 30, 1998, the Company had net operating loss ("NOL")
carryforwards of approximately $15.0 million available for federal purposes to
reduce future taxable income expiring at various dates through 2018. Under the
provisions of the Internal Revenue Code, certain substantial changes in the
Company's ownership may have limited, or may limit in the future, the amount of
NOL carryforwards which could be utilized annually to offset future taxable
income.
The Company 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, the Company anticipates that such operating expenses, as well as planned
capital expenditures, will constitute a material use of its cash resources. In
addition, the Company may utilize cash resources to fund acquisitions or
investments in complementary businesses, technologies or product lines. The
Company believes
30
that the net proceeds from the Offering, together with its current cash and cash
equivalents will be sufficient to meet its anticipated cash requirements for
working capital and capital expenditures for at least 12 months. However, in the
event that the Offering is not completed on a timely basis, the Company would
seek additional funding through a private financing. There can be no assurance
that such additional funding would be available on terms attractive to the
Company, or at all. In the event that the Company has not completed the Offering
or obtained other financing in excess of $3.0 million by February 28, 1999, the
Company has a commitment from existing investors to provide a $3.0 million
working capital line of credit. Any borrowings under this arrangement would be
payable at the earlier of the closing of an initial public offering or February
28, 2000. Thereafter, if cash generated from operations is insufficient to
satisfy the Company's liquidity requirements, the Company may seek to sell
additional equity or debt securities, or obtain additional credit facilities.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. The use of software and computer systems that are not Year
2000 compliant could result in system failures or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. As a result, many companies' software and computer systems may need
to be upgraded or replaced in order to comply with Year 2000 requirements.
Because ColdFusion does not involve data storage, the ability of a Web
application built with ColdFusion to comply with Year 2000 requirements is
largely dependent on whether the database underlying the application is Year
2000 compliant. If ColdFusion is connected to a database that is not Year 2000
compliant, the information received by a ColdFusion application may be
incorrect. Therefore, although the Company believes its products are Year 2000
compliant, there can be no assurance that Web applications developed using its
products will comply with Year 2000 requirements. Furthermore, the purchasing
patterns of customers or potential customers may be affected by Year 2000
issues as companies expend significant resources to correct their current
systems for Year 2000 compliance. These expenditures may result in reduced
funds available for Web development activities, which could have a material
adverse effect on the Company's business, operating results and financial
condition. Year 2000 complications may disrupt the operations, viability or
commercial acceptance of the Internet, which could have a material adverse
impact on the Company's business, operating results and financial condition.
In connection with the Company's installation of new internal software
systems in October 1998, the Company has received verbal confirmations from
software vendors that the software the Company has purchased and is installing
is Year 2000 compliant, and it is in the process of obtaining written
certifications from such vendors to the same effect. Based on the foregoing,
the Company currently has no reason to believe that its internal software
systems are not Year 2000 compliant. To date, the Company 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 the Company'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 the Company's business, operating results and financial
condition.
The Company relies on third party vendors which may not be Year 2000
compliant for certain equipment and services. In addition, many of the
Company's distributors are dependent on commercially available operating
systems, which may be impacted by Year 2000 complications. To date, the Company
has not conducted a Year 2000 review of its vendors or distributors. Failure of
systems maintained by the Company's vendors or distributors to operate properly
with regard to the Year 2000 and thereafter could require the Company to incur
significant unanticipated expenses to remedy any problems or replace affected
vendors, could reduce the Company's revenue from its indirect distribution
channel and could have a material adverse effect on the Company's business,
operating results and financial condition.
31
Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for the reporting and display of
comprehensive income and its components. SFAS No. 130 is effective beginning in
1998. Adoption of SFAS No. 130 is for presentation only and did not affect the
Company's financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. This statement changes the way
that public business enterprises report segment information, including
financial and descriptive information about their selected segment information.
Under SFAS No. 131, operating segments are defined as revenue-producing
components of the enterprise which are generally used internally for evaluating
segment performance. SFAS No. 131 is effective for the Company's fiscal year
ending December 31, 1998 and is not expected to have a material impact on the
Company's existing disclosures.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits and is
effective for the Company's fiscal year ending December 31, 1998. SFAS No. 132
relates to disclosure only and will not affect the Company's financial
condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company does
not expect SFAS No. 133 to have a material effect on its financial condition or
results of operations.
In February 1998, the AcSEC issued SoP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SoP 98-1 establishes
the accounting for costs of software products developed or purchased for
internal use, including when such costs should be capitalized. The Company does
not expect SOP 98-1, which is effective for the Company beginning January 1,
1999, to have a material effect on the Company's financial condition or results
of operations.
In April 1998, the AcSEC issued SoP 98-5, Reporting on the Costs of
Start-Up Activities. Start-up activities are defined broadly as those one-time
activities relating to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for the Company's fiscal 1999 financial statements and
the Company does not expect its adoption to have a material effect on the
Company's financial condition or results of operations.
32
BUSINESS
The Company
Allaire develops, markets and supports application development and server
software for a wide range of Web development, from building static Web pages to
developing high-volume, interactive Web applications. The Company's products
and services enable organizations to expand the reach of their information
systems to the Web, as well as to develop new Web-based business applications
in areas such as electronic commerce, content management and personalization.
The Company specifically designs its products to integrate key emerging Web
client and Web server software platforms and technologies and to interoperate
with key enterprise and client-server technologies. The Company's flagship
ColdFusion product line employs a comprehensive, easy to learn, tag-based
markup language that allows Web developers to quickly and efficiently create
Web applications. More than 30,000 ColdFusion application server licenses and
more than 100,000 licenses for the Company's HomeSite HTML design tool have
been sold to date.
Industry Background
The Internet has experienced dramatic growth, both in terms of the number
of users and as a means of conducting commercial transactions, and is expected
to continue to grow rapidly. According to a report prepared by International
Data Corporation, or IDC, the number of Internet users has increased from
approximately 14 million in 1995 to approximately 97 million in 1998, and is
expected to more than double over the next three years. The software technology
that has engendered the openness, ubiquity and usability of the Internet and
the World Wide Web provides a powerful business software platform. Web
technology provides an alternative to existing mainstream computing platforms,
creates new opportunities for commerce and information exchange, and represents
potential replacement technology to existing forms of media and communications.
Businesses are adopting Web technology rapidly to upgrade enterprise and
client-server applications. An IDC report estimates that, by mid-1997, 12% of
U.S. companies had implemented an Internet-based online transaction processing
application and 37% had an Internet-based online transaction processing project
in some stage of planning or evaluation. There are a number of reasons for
businesses to adopt Web technology. Among them, Web browsers provide a uniform
and intuitive graphical user interface, which significantly reduces remote
access and training costs. Web application server architecture is compatible
with legacy mainframe and client-server architectures, and server deployment
permits immediate availability of applications and upgrades throughout the
organization, reducing deployment and maintenance costs.
In addition to providing a means to upgrade legacy applications, Web
technology has enabled new online business models and the development and
deployment of software to facilitate an assortment of business interactions
that were not practical to address with traditional enterprise computing
systems. The Internet has created a public infrastructure for delivering
information and applications. This infrastructure has enabled businesses to
conduct transactions over secure extranets and has allowed businesses to reach
customers through electronic commerce applications. An IDC report estimates
that the volume of commerce over the Internet will increase from approximately
$12 billion in 1997 to over $230 billion by 2001.
Web technology also represents a potential replacement technology for
traditional print and broadcast media and telephone, mail delivery and other
communications services. The target hardware platforms for Web applications
extend beyond personal computers to encompass a variety of devices such as
televisions, telephones, hand-held computers and pagers. Communications service
providers, media vendors and other major participants in industries facing
encroachment by Web technology have made substantial investments in Web
technology and service providers. Recent examples include National Broadcasting
Co., Inc.'s MSNBC joint venture with Microsoft Corporation, MCI WorldCom,
Inc.'s strategic relationship with Earthlink Network, Inc., and The Walt Disney
Company's investment in Infoseek Corporation.
Demand from existing businesses and new Web-based enterprises for Web
application software has created a sizable market experiencing strong growth.
According to an IDC report, the total business application software market
accounted for $50.7 billion in revenue in 1997. According to a Gartner Group
survey of selected U.S. corporate information technology users, approximately
92% of all respondents plan to increase spending on intranet and Internet
applications in 1998, as corporations migrate applications from legacy
platforms to Web technology. An IDC report estimates that Internet-centric
software specifically designed for Web technology, which accounted
33
for less than $1 billion in revenue in 1996, will approach $10 billion in
revenue by 2000 due to aggressive corporate adoption of Web technology.
In response to this growth, the number of Web developers is growing
quickly. An IDC report estimates that there were 7 million software developers
worldwide at the end of 1996. Of these, 3 million were rapid application
development ("RAD"), 4GL and analysis modeling and design developers, who used
tools such as Visual Basic and PowerBuilder. The Company believes that many of
these developers are converting from enterprise and client-server application
development products to Internet-centric products. In addition to the migration
of these traditional developers, many other Web developers have emerged from
non-traditional application development backgrounds such as page layout,
graphic design, and desktop database and spreadsheet programming. IDC estimates
that professional Web development tools, including Web page design and Web
application development tools, will account for $548 million in license and
associated services revenue in 1998 and will grow to more than $1.5 billion in
license and associated services revenue by 2002.
The Company believes that most existing Web-enabled RAD tools fail to
address the unique requirements and challenges faced by Web application
developers. Most Web developers are proficient with Hypertext Markup Language,
or HTML, and many are familiar with eXtensible Markup Language, or XML, core
technologies that are specifically designed for the Web platform. The ease of
using markup languages such as HTML and XML, which use declarative,
English-like tags consisting of a bracketed word with attributes, has enabled a
large number of non-traditional programmers to develop complex Web sites. These
technologies enable Web applications to unite rich content, traditional
business transactions, interactivity and personalization. Because the Web
platform is a hybrid between a communications medium and a traditional
application environment, the background of many developers drawn to Web
development is different from the background of traditional programmers. Web
developers rely more heavily on declarative, tag-based development languages
than on traditional scripting languages.
A number of the programming languages that have migrated from
client-server development or have emerged for developing Web applications, such
as Perl and JavaScript, however, use a non-declarative scripting syntax. As a
result, Web application developers are faced with the prospect of having to
code simultaneously in unfamiliar scripting languages and declarative,
tag-based languages. At the same time, developers creating Web applications are
often required to integrate a variety of enterprise technologies, such as
databases, directories, messaging servers, transaction monitors and object
middleware. Many of these technologies require the use of complex programming
interfaces that are difficult to learn.
Adding to the technological challenges facing Web developers is the time
challenge created by business demands for compressed development schedules.
Cutter Information Corporation estimates that 72% of Web application
development projects have a schedule of six months or less, and 14% have a
schedule of less than a month. Faced with a shortage of programmers familiar
with scripting languages, businesses are increasingly turning to HTML
developers who do not have a traditional programming background in order to
meet these compressed schedules, producing a new breed of Web application
developers and development teams.
The Company believes that in order to successfully address Web development
requirements, a Web application development environment must provide Web
developers with a familiar, easy to use tag-based programming language similar
to HTML and XML. Such a language, when used in conjunction with HTML and XML,
should allow developers to develop Web applications without requiring them to
change programming syntax. The language should also include high-level building
blocks that encapsulate complex programming interfaces, reducing the amount of
code and development time required for links to enterprise technologies.
The Company believes that the successful deployment of Web applications
requires a scalable platform, or Web application server. A Web application
server is a software program that hosts applications to be accessed by Web
browsers and other client devices and that enables applications to access
enterprise servers and legacy systems. To meet the demands of customers that
applications handle increasing transaction volumes 24 hours a day, the
application server should also provide advanced load-balancing and fail-over
capabilities.
Furthermore, the Company believes that application frameworks which
provide pre-built components for electronic commerce, content management and
personalization will be in demand as organizations look to develop new
Web-based business applications.
34
The Allaire Solution
Allaire is a leading provider of application development and server
software for a wide range of Web development, from building static Web pages to
developing high-volume, interactive Web applications. The Company designed
ColdFusion Markup Language, or CFML, to use the same easy to learn tag and
attribute syntax used in HTML and XML. When used in conjunction with HTML and
XML, CFML allows developers to develop Web applications without requiring them
to change programming syntax. Using the Company's ColdFusion and HomeSite
products and services, Web developers can:
o Rapidly create complex Web sites and sophisticated Web applications
through the use of CFML;
o Efficiently build high-volume, interactive Web applications, including
applications for electronic commerce, content management and
personalization;
o Readily integrate leading Internet and enterprise technologies;
o Securely deploy scalable, platform-independent applications over the
Internet, across extranets and within intranets; and
o Obtain high-quality education, training and support from the Company
and its partners.
Allaire Strategy
The Company's goal is to be the leading provider of Web development tools,
application servers and application frameworks for organizations seeking to
develop new online business operations. Key elements of the Company's strategy
to attain this goal are:
Maximize Market Share. The Company has established significant market
presence for its Web development and application server products by providing
high-quality products and services at competitive prices and by working to
ensure the continuing adoption of its products and the ongoing success of its
developer community. The Company plans to continue to seed its HomeSite product
broadly throughout the market of Web developers through the Company's "HomeSite
Everywhere" marketing program. This program consists of wide electronic
distribution of a non-expiring evaluation version of HomeSite and the active
pursuit of original equipment manufacturer, or OEM, partnerships. By providing
ready access to HomeSite, the Company seeks to establish broad association of
the Allaire brand with high quality and highly productive Web development
products. As Web developers upgrade from static pages and Web sites to
interactive Web sites and applications, the Company will continue to migrate
them from HomeSite to ColdFusion, which uses the same productive development
environment and a similar tag-based development approach as HomeSite. To help
ensure rapid adoption of its products and ongoing successful use by developers
at all skill levels, the Company plans to continue to enhance its Allaire
Alliance partner program and to continue to provide rich online information
resources, an online gallery of readily available third-party custom CFML tags,
and education and training.
Support an Open Web Application Architecture. The Company specifically
architected its products to be open by supporting development for key Web
client and Web server platforms, technologies and protocols, as well as key
enterprise and client-server standards. The Company intends to continue to
support emerging Web technologies and additional enterprise and client-server
technologies, and to continue to provide products with an open and extensible
architecture. By enabling the Company's customers to choose among the platforms
and technologies that best meet their needs without compromising functionality
or performance, the Company believes its products are well positioned as large
enterprises and other organizations upgrade legacy mainframe and client-server
applications to Web applications. In addition, by enabling customers to
preserve investments in legacy technologies, the Company expects to be able to
remove many of the potential technological barriers to purchase as it moves
from purchases by individual developers to larger standards-based purchases by
major corporate customers.
Focus on Major Account Sales. The Company believes that successful
department-level installations of its products will provide the foundation for
more complex and business-critical projects to be deployed across an
organization. As major accounts increase their investment in application
development technologies, the purchasing decision more often includes input
from senior managers who base their decisions on business criteria and
enterprise standards as well as by developers principally using technical
criteria. In order to win larger sales within major accounts, the Company
intends to expand the support and coverage of such accounts within its domestic
sales force, and to work with systems integrators and other high-profile Web
development organizations to more effectively present the business advantages
of adopting the Company's Web development and application server technology. As
part of the Company's
35
HomeSite Everywhere marketing program, the Company seeks to convert broad
adoption within organizations of the non-expiring evaluation version into
standards-based volume licenses and site licenses.
Expand Channel Distribution. In order to better capitalize on
opportunities created by domestic and international markets, the Company
intends to expand its channel distribution through distributors, direct and OEM
resellers and systems integrators. The Company believes that selling its
products through these channel partners gives the Company an opportunity to
gain a greater share of emerging markets, enabling more rapid entry and a
larger effective presence in such markets, while containing its sales,
marketing and distribution costs. In each market, the Company will work to
optimize the balance of direct presence and presence through channel partners.
Expand Availability of Consulting and Training. The Company intends to
enhance and expand the delivery of consulting and training, both directly and
through training partners. Making such services widely available allows the
Company to benefit from the increasing demand for trained Web developers. Such
services also are often required for sales to major accounts that intend to
develop and deploy complex, large-scale and business-critical Web applications.
By offering high-quality consulting and training services, the Company expects
to better ensure and enhance its customers' productive and successful use of
its products.
Maintain Technological Leadership. The Company intends to continue to
devote substantial resources to the development and acquisition of new and
innovative products for the development and deployment of Web applications. The
products developed or acquired by the Company to date are among the earliest
and most recognized entrants into the emerging markets for Web application
server technology and Web development software. From its earliest days, the
Company believes it has been able to leverage its understanding of the market
opportunity for Web development products, its innovation, and the active
support of its developer base into productive and successful application server
products. The Company intends to continue to use these core strengths to
introduce additional innovative products for the development and deployment of
open, scalable and secure Web applications, including the development of
application frameworks to accelerate the creation of new Web-based business
applications.
Products
The Company has two product brands, HomeSite, an HTML design tool, and
ColdFusion, an integrated Web development environment and Web application
server product line. The Company's products enable Web developers to build
high-volume, interactive Web sites and Web applications, including applications
for electronic commerce, content management and personalization. The Company
introduced versions 4.0 of ColdFusion and HomeSite in November 1998. The
discussion and chart below describe the Company's products.
HomeSite
HomeSite is a leading HTML design tool, which is principally used for the
creation of static Web sites. More than 100,000 licenses of HomeSite 4.0 and
earlier versions have been sold to date. HomeSite 4.0 and earlier versions have
won the 1998 Web Techniques Editors' Choice Award; the 1998 Win 100 Award from
Windows Magazine; PC Magazine's Editors' Choice Award; Internet Computing
Magazine's 'Net Best' Award; Webdeveloper.com's Product Award; CNET's
builder.com Editor's Choice Award; CNET's builder.com 1998 Product Award and
CNET's Internet Excellence Award. HomeSite 4.0 runs on Microsoft Windows NT,
Windows 95 and Windows 98.
ColdFusion
ColdFusion is a leading cross-platform Web application development system.
ColdFusion includes an integrated development environment, ColdFusion Studio,
and a Web application server, ColdFusion Server. More than 30,000 application
server licenses of ColdFusion 4.0 and earlier versions have been sold to date.
ColdFusion 4.0 and earlier versions have won a 1998 Codie Award for software
excellence from the Software Publishers Association; a "Best of the Show Award"
at the 1998 Fall Internet World; CNET's builder.com 1998 Product Award and the
Network World Blue Ribbon Award.
ColdFusion Studio 4.0. ColdFusion Studio is the integrated development
environment for ColdFusion. Based on HomeSite, ColdFusion Studio allows
developers to preserve development skills as well as individual projects as
they move from developing static Web pages and sites to interactive Web sites
and Web applications. ColdFusion Studio 4.0 runs on Microsoft Windows NT,
Windows 95 and Windows 98.
ColdFusion Server 4.0. ColdFusion Server 4.0 is an open, scalable and
secure Web application server. A Web application server is a software program
that hosts applications to be accessed by Web browsers and other client
36
devices and that enables applications to access enterprise servers and legacy
systems. Web applications built with ColdFusion range from simple
database-driven pages to full electronic commerce solutions deployed on
intranets, extranets and the Internet. ColdFusion Server 4.0 is available in
two editions, Professional and Enterprise, and runs on Windows NT. In addition,
the Enterprise edition runs on Sun Solaris.
Product
(Suggested List Price) Description Typical Applications Target Users
- ------------------------ ------------------------------- ---------------------------- ---------------------------
HomeSite 4.0 HTML page design and High-quality static Web site developers
(Electronic Version Web site development tool corporate Web sites Web development
$89; Packaged Version Features an intuitive team managers
$99) graphical interface
- -----------------------------------------------------------------------------------------------------------------
ColdFusion An integrated development Business systems (HR, Web application
Studio 4.0 environment with a financial, customer developers
($395) number of visual tools for support) Enterprise and client-
creating Web applications Electronic commerce server programmers
Includes the award- (stores, business to HTML and desktop
winning HomeSite HTML business) database developers
design tool Dynamic content Development team
Features include publishing (document managers
interactive debugging, management, dynamic
remote development news and personalized
capabilities and one-step information)
deployment Collaboration (discussion,
Team development support project and workflow
management)
- -----------------------------------------------------------------------------------------------------------------
ColdFusion Server Supports up to four Business intranets and Large enterprises
Professional 4.0 processors and allows an extranets Large systems integrators
($1,295) unlimited number of Field office extranets
concurrent users New Web-based
Single server applications businesses
Features include open using a relational database Internet service providers
state repository and shared
server security
Access to any ODBC and
OLE-DB data source
- -----------------------------------------------------------------------------------------------------------------
ColdFusion Server Supports up to eight High-volume, business- Large enterprises
Enterprise 4.0 processors and allows an critical commerce sites Large systems integrators
($3,495) unlimited number of and applications
concurrent users New Web-based
Includes all Professional 4.0 Enterprise intranet businesses
features, plus features applications
required for large scale Internet service providers
applications, including Enterprise applications
clustering, load balancing requiring native database
and automatic fail over and drivers or CORBA
CORBA support
Sybase, Oracle and
Microsoft SQL Server
native database drivers
- -----------------------------------------------------------------------------------------------------------------
37
Technology
The Company's products and services enable Web developers to build
high-volume, interactive Web sites and Web applications, including applications
for electronic commerce, content management and personalization. The Company's
technology enables organizations to overcome Web development challenges by
making Web developers more productive in developing Web sites and applications,
by enabling Web sites and applications to readily incorporate key emerging Web
platforms and technologies, and by enabling these sites and applications, once
deployed, to be scalable and secure.
Productive Development
The Company's technology is focused on increasing the productivity of Web
developers and development teams. ColdFusion includes a number of innovative
features to enhance individual and team development productivity, including the
easy to use, tag-based CFML, an integrated development environment and team
development capabilities.
CFML is the Company's tag-based server programming language. CFML uses the
same tag and attribute syntax as HTML and XML. HTML is the tag-based markup
language used for creating the majority of static Web pages and interfaces for
interactive Web applications. HTML is easy to learn and use, consisting of a
limited number of descriptive tags, each with a limited number of possible
attributes. As a result, a large number of people have been able to learn and
use HTML professionally to develop static Web pages and Web sites. XML is a
rapidly emerging markup language which uses the same tag and attribute syntax
as HTML for structuring and manipulating data on the Web platform.
Web developers rely more heavily on declarative tag-based development
languages than on traditional scripting languages. A number of the programming
languages that have migrated from client-server development or have emerged for
developing Web applications, such as Perl and JavaScript, however, use a
non-declarative scripting syntax. As a result, Web application developers are
faced with the prospect of having to code simultaneously in unfamiliar
scripting languages and declarative, tag-based languages. At the same time,
developers creating Web applications are often required to integrate a variety
of enterprise technologies, such as databases, directories, messaging servers,
transaction monitors and object middleware. Many of these technologies require
the use of complex programming interfaces that are difficult to learn.
CFML's similarity to HTML and XML makes it easy to learn and use,
particularly for Web developers who are familiar with HTML and are driving the
adoption of XML. When used in conjunction with HTML for creating user
interfaces and XML for data manipulation, CFML provides developers with a
complete application programming environment without requiring them to change
programming syntax. CFML tags also include high-level building blocks that
encapsulate complex processes to reduce programming effort and the amount of
code and development time required for advanced interactions with enterprise
servers, such as database, messaging, directory, Web and file servers.
38
Code Example
The example below illustrates the declarative nature of CFML syntax and
the encapsulation of interaction with a database server. It compares the CFML
code required with the code required to accomplish the same result using a
scripting language, in this case JavaScript. This database retrieval example
demonstrates the code required to connect to a database, retrieve a list of
employees and output the list ordered by department, displaying the first name
and last name with one record per line.
[CODE EXAMPLES]
CFML Code
[Descriptive Computer Directives -- CFML Code]
JavaScript Code
[Descriptive Computer Directives -- JavaScript Code]
[/CODE EXAMPLES]
39
The Company's HomeSite 4.0 and ColdFusion 4.0 products provide a visual
editing environment to enable Web developers to quickly build state-of-the-art
static Web sites and interactive Web applications. Both tools provide two-way
visual programming, which enables Web developers to prototype and modify pages
from within a visual representation of the page itself. In addition, ColdFusion
Studio includes visual debugging capabilities. However, unlike the
"what-you-see-is-what-you-get," or WYSIWYG, tools, HomeSite and ColdFusion
Studio include graphical support only where it is likely to enhance
productivity, and focus on code development and maintaining the integrity of
code generated in the graphical editing mode. HomeSite and ColdFusion Studio
both include a number of additional productivity enhancements, and support
emerging Web technologies, including JavaScript, cascading style sheets,
dynamic HTML, or DHTML, and XML. ColdFusion team development features permit
geographically dispersed Web development teams to work together productively
and securely on large projects across servers distributed throughout multiple
locations.
Open Integration
The Company specifically designs its products to be open by supporting key
Web client and Web server software platforms, technologies and protocols, as
well as key enterprise and client-server standards. ColdFusion is fully
integrated with a broad range of Internet protocols and technologies, enabling
developers to incorporate these technologies in ColdFusion applications through
the use of straightforward CFML tags. The CFML tag for XML supports automatic
parsing of XML data into CFML variables and the translation of query record
sets into XML.
ColdFusion 4.0 enables interaction with any open database connectivity, or
ODBC, compliant relational database with a single CFQUERY tag. ColdFusion also
contains native database drivers for Oracle, Sybase or Microsoft SQL servers
and support for object linking and embedding database, or OLE-DB, which permits
ColdFusion applications to utilize additional datasource types such as Lotus
Notes and Microsoft Exchange. Additional tags enable interaction with other
servers, such as mail servers, for groupware and workflow applications.
ColdFusion supports a number of methods for extending ColdFusion
applications to interoperate with legacy systems and other enterprise
technologies. ColdFusion natively supports application components built using
cross-platform enterprise component object standards. CFML is also extensible
through ColdFusion extensions, or CFXs. CFXs can be used to extend the
functionality provided by the Company's core set of tags or to create a
multi-tier component application architecture in which advanced programmers can
encapsulate complex logic or database interaction into component building
blocks to be used by other developers.
Scalable, Secure Deployment
To successfully support large volume sites and transaction-intensive
applications, a Web application development system requires performance,
availability and scalability from the application server. ColdFusion 4.0
provides a high degree of cross-platform performance and fault-tolerance from
individual servers and multiple server clusters. ColdFusion runs as a 32-bit
multithreaded system service, which permits applications to experience an
increase in processing performance as processors are added to the server.
Clusters of multiple ColdFusion servers significantly enhance an application's
availability and scalability. ColdFusion automatically balances load among
servers deployed in a cluster, so that performance is optimized. ColdFusion
permits a cluster deployment to store client state information in a shared
repository, so it will not be lost when a server fails. If any machine in the
cluster fails or is heavily loaded, ColdFusion automatically transfers its
responsibilities to one of the remaining servers. Because ColdFusion clusters
use a software-based system for load balancing and fail-over, there is no
single point of failure.
ColdFusion provides a complete set of features for securely deploying
applications. Principal among these is the ability of ColdFusion to restrict
access to specific resources needed to run an application, including
directories, files, databases and components. Therefore, multiple applications
on the same server cannot access another application's resources. Other
security features include authentication and encryption for commercial Web
applications.
Applications Built Using ColdFusion
The Company believes that ColdFusion is well suited for a wide range of
Web application development projects. ColdFusion is particularly appropriate
for projects that have a short development cycle, mix rich content with
transactions, require interactivity and personalization and require deployment
to a variety of Web browsers from multiple server platforms. Although
ColdFusion is used to build a wide range of applications, the majority of
ColdFusion applications fall into three basic categories: electronic commerce,
content management and personalization. The following are examples of
applications built by the Company's customers using ColdFusion:
40
autobytel.com inc.
autobytel.com is the leading automobile Internet electronic commerce Web
site. autobytel.com enables consumers to research car and truck model
specifications, incentives, dealer invoice prices and promotions and to apply
for financing, purchase automobiles and obtain insurance online. According to
autobytel.com, its site has aided more than 1.5 million car buyers in their
search for a vehicle. autobytel.com also includes a dealer extranet that
enables more than 2,700 accredited dealer franchises to access autobytel.com to
check the status of sales and financing, receive news and upload inventory
information and pictures.
In 1996, autobytel.com sought to migrate its static Web pages to dynamic,
transaction-oriented content. After evaluating several products based on their
ability to provide a rapid application development environment, scalability and
database integration capabilities, autobytel.com selected ColdFusion. During
development, autobytel.com used a team development approach, using a dedicated
database team to write SQL statement components which were then incorporated
into the Web site by a separate Web team.
autobytel.com employs more than 20 clustered ColdFusion 3.1 servers. In
January 1998, during Super Bowl XXXII, autobytel.com ran a television ad
promoting its online service. The clustered ColdFusion servers enabled
autobytel.com to handle loads many times greater than normal in response to the
ad and, as a result, to complete a greater number of purchase transactions.
Internal Revenue Service
The IRS Compliance Division uses ColdFusion for an information delivery
extranet serving field offices agency-wide. The application, built and deployed
for the IRS by Booz, Allen & Hamilton Inc., enables employees to search and
retrieve research materials, which include more than 200,000 pages of reports
dating back 30 years, without traveling to the main IRS library in Washington,
D.C. The application also includes online project management, time reporting,
meetings and help desk. Through the applications, agents can create content,
publish news and information, assign tasks, share documents, schedule events
and communicate regarding various projects.
SmartMoney Interactive
SmartMoney Interactive, a joint venture of Dow Jones & Company, Inc. and
Hearst Publishing Corporation, is an online publication that provides financial
data services and personalized online financial tools. SmartMoney Interactive
uses ColdFusion to generate personalized portfolio and investment information
and for site management. It integrates content from a number of financial data
sources, including quotes from a quote server, news from a wire feed and data
from a stock and mutual fund database.
Using ColdFusion, SmartMoney completed development within five months. As
part of the development process, SmartMoney created a number of ColdFusion
extensions, including a single CFX tag to retrieve live, 20-minute delayed
quotes from a PC Quote quote server system. This custom tag encapsulated the
complexity of accessing and retrieving data from the PC Quote system,
simplifying and accelerating the development process.
Anticipating more than 100,000 site visits and nearly 1 million page
requests per day, SmartMoney also required the publication to be highly
scalable. ColdFusion has scaled as the site's traffic has increased, both on
average and during periods of high demand, such as during significant market
fluctuations which occurred during the Fall of 1998. As deployed, SmartMoney
uses a front-end cluster of four Web servers running ColdFusion for dynamic
content, which interfaces with two back-end database servers, one serving as a
data warehouse and one for managing personalized content for more than 60,000
SmartMoney users.
Research and Development
The Company devotes a substantial portion of its resources to developing
new products and product features, extending and improving its products and
technology, and strengthening its technological expertise. During 1997 and the
nine months ended September 30, 1998, the Company spent approximately $2.7
million and $3.4 million, respectively, on research and development. The
Company intends to continue to devote substantial resources toward research and
development. As of September 30, 1998, the Company had 29 employees engaged in
research and development activities. The Company must hire additional skilled
software engineers to further its research and development efforts. The
Company's business, operating results and financial condition could be
adversely affected if it is not able to hire and retain the required number of
engineers.
41
Sales, Marketing and Distribution
The Company markets and sells its products and services to Web developers
using a combination of direct and indirect distribution channels, including a
corporate sales force, domestic and international distribution, electronic
commerce and sales through partners. During 1997 and the nine months ended
September 30, 1998, 28% and 41%, respectively, of the Company's total revenue
was generated through the indirect distribution channel. As of September 30,
1998, the Company had 65 sales and marketing employees worldwide.
Corporate Sales Force. The Company's corporate account sales force focuses
on sales to corporate customers worldwide. Corporate account sales can be
filled either directly from the Company or through the Company's distribution
partners. The corporate account sales force is comprised of field
representatives and telesales representatives. The field representatives market
and sell to corporate customers primarily interested in server products for
commercial Internet Web sites or intranets. The telesales representatives
develop and pursue leads generated from inquiries on the Company's Web sites
and from downloads of its application server products.
Indirect Distribution. The Company has a number of domestic and
international distributors and resellers that market and sell the Company's
products. As of September 30, 1998, the Company had 19 distributors in North
America, Europe and Asia Pacific, including Ingram Micro, Inc. and Mitsubishi
Corporation. In addition, as of September 30, 1998, the Company had over 500
corporate and catalog resellers, OEMs and value-added resellers. The Company
has an OEM agreement with Macromedia Corporation pursuant to which HomeSite is
bundled with Macromedia's Dreamweaver and an OEM agreement with NetObjects,
Inc. pursuant to which HomeSite is bundled with NetObjects Fusion. None of the
Company's distribution partners have exclusive distribution rights.
Electronic Commerce. The Company's Web site allows users to download,
evaluate and purchase the Company's products. A number of third-party
electronic commerce sites, including CNET's Buydirect.com, Beyond.com,
RealStore.com and JapanMarket.com, distribute commercial copies of the
Company's products for delivery by direct download. Electronic distribution
provides the Company with a low-cost, globally accessible, 24-hour sales
channel.
Allaire Alliance. The Company believes that establishing a large community
of active users of its products and technology representing key segments of the
Web platform is critical to its success. To further the development of this
community, the Company has established the Allaire Alliance program. Allaire
Alliance members include solution developers, application developers and
Internet service providers, as well as the distributors, corporate and catalog
resellers, OEMs and value-added resellers referenced above. The Company
typically enters into written agreements with its Allaire Alliance members.
These agreements typically do not provide for firm financial commitments from
the member, but are intended to establish the basis upon which the parties will
work together to achieve mutually beneficial objectives. As of September 30,
1998, the Allaire Alliance had over 1,000 members.
Marketing Programs. The Company engages in a broad range of marketing
activities, including sponsoring seminars for potential customers, participating
in trade shows and conferences, providing product information through the
Company's Web site, promoting special events and advertising the Company's
products and services in print and electronic media. During the nine months
ended September 30, 1998, the Company held 81 seminars in 43 cities. The
Company's marketing programs are aimed at informing customers of the
capabilities and benefits of the Company's products and services, increasing
brand name awareness, stimulating demand across all market segments and
encouraging independent software developers to develop products and applications
that are compatible with the Company's products and technology.
42
Customers
The Company's products are marketed and distributed to a diverse group of
customers, ranging from small, independent consultants and Internet presence
providers to Web developers and information technology departments of large
organizations. Many of the Company's customers are global organizations that use
the Company's products to create Web sites and Web applications in areas such as
electronic commerce, content management and personalization for Internet,
intranet and extranet use. From January 1, 1997 through September 30, 1998, the
Company recognized revenue from sales to more than 20% of the Fortune 500
companies (based on 1997 revenue). End user customers from which the Company has
recognized in excess of $25,000 in revenue include the following:
AT&T Corporation
Australian Trade Commission
The Boeing Company
Booz, Allen & Hamilton, Inc.
Credit Suisse First Boston Corporation
Hewlett-Packard Company
Intel Corp.
JC Penney Company, Inc.
Lockheed Martin Corporation
Lucent Technologies, Inc.
MCI Worldcom, Inc.
Microsoft Corporation
PSINet, Inc.
SBC Communications Inc.
State Street Global Advisors United Kingdom Ltd.
United Parcel Service of America, Inc.
United Space Alliance
UUNet Technologies, Inc.
Visa International Service Association
Revenue from customers outside North America, primarily Asia and Europe,
were approximately 17%, 20% and 14% of total revenue in 1996 and 1997 and the
nine months ended September 30, 1998, respectively. Sales by the Company to
Ingram Micro, Inc. accounted for approximately 22% of the Company's total
revenue for the nine months ended September 30, 1998. No single customer
accounted for 10% or more of the Company's total revenue for 1996 or 1997.
Support and Professional Services
The Company offers a broad range of support and training services to its
customers. The Company believes that providing a high level of customer service
and technical support is necessary to achieve rapid product implementation
which, in turn, is essential to customer satisfaction and continued license
sales and revenue growth. The Company's customers have a choice of support
options depending on the level of service desired. The Company maintains a
technical support hotline staffed by engineers from 8:00 a.m. to 8:00 p.m.,
Eastern time, Monday through Friday, from the Company's corporate office in
Cambridge, Massachusetts. Internationally, the Company's distribution partners
provide telephone support to customers with technical assistance from the
Company. The Company's support staff also responds to e-mail inquiries. The
Company tracks support requests through a series of customer databases,
including current status reports and historical customer interaction logs. The
Company uses customer feedback as a source of ideas for product improvements
and enhancements.
The Company provides training in the use of its products through classroom
instruction at its Cambridge facility and at authorized training centers
throughout North America and in Japan and Europe. The Company also provides
free multimedia online training.
As of September 30, 1998, the Company had 23 technical support engineers
and professional services employees.
Competition
The Web development products market is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
activities of market participants. Primary competitors include large Web and
database platform companies that offer a variety of software products, such as
Microsoft Corporation, IBM, Netscape Communications Corporation, Sun
Microsystems, Inc., Oracle Corporation, Sybase, Inc., Symantec Corporation,
Informix Software and Inprise Corporation (formerly Borland International
Inc.). In addition, the Company experiences competition from a number of
medium-sized and start-up companies that have introduced or are developing Web
development products, such as NetDynamics, Inc., which was recently acquired by
Sun Microsystems, Inc., Vignette Corporation, HAHT Software, Inc., GoLive
Systems Inc., WebLogic, Inc., which was recently acquired by BEA Systems,
43
Inc., BroadVision, Inc. and SilverStream Software, Inc. In addition, the
Company has strategic relationships with NetObjects, Inc. and Macromedia
Corporation. In some cases, these Web development products vendors compete with
the Company, and there can be no assurance that these strategic relationships
will continue.
The Company believes that additional competitors may enter the market with
competing products as the size and visibility of the market opportunity
increases. Increased competition could result in pricing pressures, reduced
margins or the failure of the Company's products to achieve or maintain market
acceptance, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. Many of the Company's
current and potential competitors have longer operating histories and
substantially greater financial, technical, marketing and other resources than
the Company and therefore may be able to respond more quickly than the Company
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 such competitors were to
bundle competing products with their products, the demand for the Company's
products might be substantially reduced and the ability of the Company to
distribute its products successfully would be substantially diminished.
New technologies and the expansion of existing technologies will likely
increase the competitive pressures on the Company. There can be no assurance
that competing technologies developed by market participants or the emergence
of new industry standards will not adversely affect the Company's competitive
position or render its products or technologies noncompetitive or obsolete. As
a result of the foregoing and other factors, there can be no assurance that the
Company will compete effectively with current or future competitors or that
competitive pressures faced by the Company will not have a material adverse
effect on the Company's business, operating results and financial condition.
Competitive factors in the Web development products market include the
quality and reliability of software; features for creating, editing and
adapting content; ease of use and interactive user features; application server
scalability, availability and performance; cost per user; and compatibility
with the user's existing network components and software systems. To expand its
user base and further enhance the user experience, the Company must continue to
innovate and improve the performance of its products. The Company anticipates
that consolidation will continue in the Web development products industry and
related industries such as computer software, media and communications.
Consequently, competitors may be acquired by, receive investments from or enter
into other commercial relationships with, larger, well-established and
well-financed companies. There can be no assurance that the Company can
establish or sustain a leadership position in this market segment.
Intellectual Property
The Company's success and competitiveness are dependent to a significant
degree on the development and protection of its proprietary technology. The
Company relies primarily on a combination of copyrights, trademarks, licenses,
trade secret laws and restrictions on disclosure to protect its intellectual
property and trade secrets. The Company also enters into confidentiality
agreements with its employees and consultants, and generally controls access to
and distribution of its documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise attain and use the Company's intellectual property or trade secrets
without authorization. In addition, the Company relies in part on "shrinkwrap"
and "clickwrap" licenses that are not signed by the end user and, therefore,
may be unenforceable under the laws of certain jurisdictions. Moreover, the
laws of other countries in which the Company markets its products may afford
the Company little or no effective protection of its intellectual property.
There can be no assurance that the precautions taken by the Company will
prevent misappropriation or infringement of its technology. In addition, there
can be no assurance that others will not independently develop substantially
equivalent intellectual property. A failure by the Company to protect its
intellectual property in a meaningful manner could have a material adverse
effect on the Company's business, operating results and financial condition.
Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets or to
determine the validity and scope of the proprietary rights of others. Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversion of management and technical resources, either of which
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company attempts to avoid infringing known proprietary rights of third
parties in its product development efforts. However, the Company has not
conducted and does not conduct comprehensive patent searches to determine
44
whether the technology used in its products infringes patents held by third
parties. In addition, it is difficult to proceed with certainty 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 the Company were to discover that its
products violated third party proprietary rights, there can be no assurance
that it would be able to obtain licenses to continue offering such products
without substantial reengineering or that any effort to undertake such
reengineering would be successful, or that any licenses would be available on
commercially reasonable terms.
The Company pursues the registration of certain of its trademarks and
service marks in the United States and in certain other countries, although it
has not secured registration of all its marks. The Company has registered
United States trademarks for "Cold Fusion" and a related design, and has an
application pending for a United States trademark for "HomeSite." A significant
portion of the Company's marks contain the word "Fusion" (such as ColdFusion).
The Company is aware of other companies that use "Fusion" in their marks alone
or in combination with other words, and the Company does not expect to be able
to prevent third party uses of the word "Fusion" for competing goods and
services. For example, NetObjects, Inc. markets its principal products for
designing, building and updating Web sites under the names "NetObjects Fusion"
and "NetObjects Team Fusion." In addition, the laws of some foreign countries
do not protect the Company's proprietary rights to the same extent as do the
laws of the United States, and effective patent, copyright, trademark and trade
secret protection may not be available in such jurisdictions. The Company
licenses certain of its proprietary rights to third parties, and there can be
no assurance that such licensees will not fail to abide by compliance and
quality control guidelines with respect to such proprietary rights or take
actions that would materially adversely affect the Company's business,
financial condition and results of operations.
The Company currently licenses technology from third parties that it
incorporates into its products. Examples include licenses from Microsoft for
certain visual editing technology, from Bright Tiger Technologies, Inc. for
certain load balancing and failover technology, from Netegrity, Inc. for
certain security technology and from Verity, Inc. for full-text indexing and
searching technology. In light of the rapidly evolving nature of the Web
platform and the Company's strategy to pursue industry partnerships to ensure
its support of and by the emerging platform, the Company will increasingly need
to rely on technology that it licenses from other vendors which is integrated
with internally developed software and used in the Company's products to
perform key functions. Microsoft and other such technology partners are also
significant competitors in the Web development products market. There can be no
assurance that technology from others will continue to be available to the
Company on commercially reasonable terms, if at all. The loss or inability to
access such technology could result in delays in development and introduction
of new products or enhancements by the Company until equivalent or replacement
technology could be accessed, if available, or developed, if feasible, by the
Company, which could have a material adverse effect on the Company's business,
operating results and financial condition. Moreover, although the Company is
generally indemnified against claims that such third party technology infringes
the proprietary rights of others, such indemnification is not always available
for all types of intellectual property rights (for example, patents may be
excluded) and in some cases the scope of such indemnification is limited. Even
if the Company receives broad indemnification, third party indemnitors are not
always well capitalized and may not be able to indemnify the Company in the
event of infringement, resulting in substantial exposure to the Company. There
can be no assurance that infringement or invalidity claims arising from the
incorporation of third party technology, and claims for indemnification from
the Company's customers resulting from such claims, will not be asserted or
prosecuted against the Company. Such claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources in
addition to potential product redevelopment costs and delays, all of which
could materially adversely affect the Company's business, financial condition
or results of operations.
Employees
As of September 30, 1998, the Company had 153 employees, 136 of whom were
based at the Company's headquarters in Cambridge, Massachusetts. None of the
Company's employees is subject to a collective bargaining agreement, and the
Company believes that its relations with its employees are good.
45
Facilities
The Company's headquarters is located in Cambridge, Massachusetts. The
Company has two leases for approximately 87,000 square feet of space in
separate office buildings in Cambridge. The first lease, which covers
approximately 54,000 square feet of space, expires in March 2003. The second
lease, which covers approximately 33,000 square feet of space, expires in
December 2003. The Company has an option to extend the second lease for an
additional five year term. The Company also leases office space in other cities
for its sales personnel. The Company believes that these existing facilities
are adequate to meet its current foreseeable requirements or that suitable
additional or substitute space will be available on commercially reasonable
terms.
Legal Proceedings
From time to time the Company 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 the Company and its licensees. Such claims,
even if not meritorious, could result in the expenditure of significant
financial and managerial resources. The Company 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.
46
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company, and their ages and
positions, are as follows:
Name Age Position
- ---------------------------- ----- -----------------------------------------------------
David J. Orfao ............. 39 President, Chief Executive Officer and Director
Joseph J. Allaire .......... 29 Chairman of the Board of Directors, Chief Technology
Officer and Executive Vice President, Products
David A. Gerth ............. 46 Vice President, Finance and Operations, Chief
Financial Officer and Treasurer
Amy E. Lewis ............... 41 Vice President, Worldwide Sales
Stephen F. Clark ........... 33 Vice President, Marketing
Jack P. Lull ............... 40 Vice President, Engineering and Development
Maria Morrissey ............ 41 Vice President, Worldwide Services and Support
Jonathan A. Flint .......... 47 Director
John J. Gannon ............. 44 Director
Thomas A. Herring .......... 48 Director
Mitchell Kapor ............. 48 Director
Peter R. Roberts ........... 43 Director
David J. Orfao has served the Company as President and Chief Executive
Officer and as a director since February 1997. From November 1995 until
December 1996, Mr. Orfao served as Senior Vice President, Worldwide Sales,
Marketing and Service for SQA, Inc. From August 1993 until October 1995, he
served as Senior Vice President, Worldwide Sales, Support and Channel Marketing
for Claris Corporation. Prior to that, Mr. Orfao held a series of sales and
operational positions of increasing responsibility at Frame Technology
Corporation since 1988.
Joseph J. Allaire founded the Company in May 1995 and served as Chairman
of the Board of Directors, Chief Executive Officer and President from inception
to January 1997. Since January 1997, Mr. Allaire has continued to serve as
Chairman of the Board of Directors, as well as Chief Technology Officer and
Executive Vice President, Products. From September 1993 to June 1995, Mr.
Allaire performed software engineering services for several private companies.
David A. Gerth has served the Company as Vice President, Finance and
Operations, Chief Financial Officer and Treasurer since April 1997. From
November 1995 to April 1997, Mr. Gerth served as Chief Financial Officer for
Visibility Software, Inc., a software company. From July 1995 to November 1995,
he served as Chief Financial Officer for Computron Software, Inc., a software
company. From April 1994 to July 1995, Mr. Gerth served as Director of Finance
for Powersoft Corporation. Prior to that, Mr. Gerth served in a number of
financial roles of increasing responsibility for Computervision Corporation
since 1981.
Amy E. Lewis has served the Company as Vice President, Worldwide Sales
since April 1997. From June 1995 to March 1997, Ms. Lewis served as Director,
North America Field Sales for Claris Corporation. Prior to that, Ms. Lewis
served as Manager, North America Channel Sales for Apple Computer since April
1994. From February 1987 to December 1993, she was Director of Sales for
Farallon Communications, Inc., a networking hardware and software company.
Stephen F. Clark has served the Company as Vice President, Marketing since
September 1998. From January 1996 through September 1998, Mr. Clark held a
number of marketing positions of increasing responsibility at Sybase, Inc., a
computer software company, including Vice President, Tools and Application
Servers and Vice President and General Manager, Design Tools. From June 1993 to
December 1995, Mr. Clark was a Product Marketing Manager for Powersoft
Corporation.
Jack P. Lull has served the Company as Vice President, Engineering and
Development since December 1996. From January 1996 to August 1996, Mr. Lull
served as Director of Development for Integrated Industrial Information, Inc.,
a computer consulting company. From January 1993 to December 1995, Mr. Lull
served as Director of Development for Powersoft Corporation.
47
Maria Morrissey has served the Company as Vice President, Worldwide
Services and Support since September 1996. From February 1996 to July 1996, Ms.
Morrissey served as Vice President, Product Development for Computer Channel,
Inc., an education software company. From December 1992 to January 1996, she
served as Director, Professional Services for Powersoft Corporation.
Jonathan A. Flint has served as a director of the Company since June 1996.
Since May 1995, Mr. Flint has been a founder and a General Partner of Polaris
Venture Partners, a management company affiliated with the Polaris entities.
Prior to that, Mr. Flint was a General Partner of certain funds managed by Burr,
Egan, Deleage & Co., a venture capital firm and the lead venture investor in
Powersoft Corporation, a leading provider of application development tools. Mr.
Flint served as a director of Powersoft Corporation from 1991 to 1995.
John J. Gannon has served as a director of the Company since December
1996. Since June 1998, Mr. Gannon has served as a General Partner and Chief
Financial Officer of Polaris Venture Partners, a management company affiliated
with the Polaris entities. From June 1996 to April 1998, Mr. Gannon served as
the Chief Financial Officer for Firefly Network, Inc., an Internet software
company. From October 1992 to June 1996, Mr. Gannon worked for Powersoft
Corporation, where he held several positions including Chief Financial Officer
and Vice President of Finance and Administration.
Thomas A. Herring has served as a director of the Company since June 1997.
In October 1998, Mr. Herring joined Polaris Venture Partners, a management
company affiliated with the Polaris entities, as a Venture Partner. From
December 1997 until October 1998, Mr. Herring served as Senior Vice President
of Compuware Corporation, which acquired Nu-Mega Technologies, Inc. ("Nu-Mega")
in December 1997. From May 1996 to December 1997, Mr. Herring was the President
and Chief Executive Officer of Nu-Mega. From July 1995 to June 1996, Mr.
Herring was Vice President of Corporate Marketing for Sybase, Inc. Prior to
that, he was Vice President, Worldwide Marketing and Business Development for
Powersoft Corporation since June 1990. Mr. Herring also serves as a director of
PSW Technologies, Inc.
Mitchell Kapor has served as a director of the Company since March 1997.
Mr. Kapor co-founded the Electronic Frontier Foundation, a nonprofit Internet
organization, in 1990, and served as its Chairman from 1993 to 1995 and as a
director from 1995 to 1996. Mr. Kapor designed Lotus 1-2-3, and founded Lotus
Development Corporation in 1982 and served as its President and Chief Executive
Officer from 1982 to 1986. Mr. Kapor also serves as a director of RealNetworks,
Inc.
Peter R. Roberts has served as a director of the Company since June 1997.
Since January 1993, Mr. Roberts has been a managing director of BancBoston
Ventures Inc., a private equity investment company.
Executive officers of the Company are appointed by and serve at the
discretion of the Board of Directors. There are no family relationships among
any of the executive officers or directors of the Company.
Committees of the Board of Directors
The Board of Directors has a Compensation Committee, which sets objectives
and policies for the Company's compensation programs for executives and key
employees. Such objectives and policies include, but are not limited to,
attracting and retaining superior talent, rewarding individual performance and
achieving the Company's financial goals. The Compensation Committee also
administers the Company's 1997 Stock Incentive Plan, 1998 Stock Incentive Plan
and 1998 Employee Stock Purchase Plan and approves the compensation of all
officers and key employees of the Company. The Compensation Committee currently
consists of Messrs. Flint and Gannon.
The Board of Directors also has an Audit Committee, which reviews the
scope and results of the audit and other services provided by the independent
auditors. The Audit Committee currently consists of Messrs. Flint and Gannon.
Director Compensation
Directors of the Company are reimbursed for expenses incurred in attending
meetings of the Board of Directors. Directors of the Company generally are not
paid any separate fees for serving as directors. On December 31, 1996, the
Company granted to Mr. Gannon an option to purchase 25,000 shares of Common
Stock at an exercise price of $.50 per share. On March 21, 1997, the Company
granted to Mr. Kapor an option to purchase 35,000 shares of Common Stock at an
exercise price of $.50 per share. On June 18, 1997, the Company granted to Mr.
Herring an option to purchase 25,000 shares of Common Stock at an exercise
price of $.50 per share. These options become exercisable for shares of Common
Stock not subject to repurchase by the Company according to the following
48
schedule: 25% of the option shares one year from the grant date, and 1/36 of
the remaining shares on the first of each month thereafter for 36 months. These
options have maximum terms of 10 years measured from the grant date, subject to
earlier termination following the cessation of the respective director's Board
service.
Executive Compensation
The following table sets forth the total compensation paid or accrued for
1997 for the Company's Chief Executive Officer and the four other most highly
compensated executive officers who were employed by the Company at December 31,
1997 (collectively, the "Named Executive Officers"):
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
---------------------------- --------------------
Number of Securities
Name and Principal Position Salary Bonus Underlying Options
- ------------------------------------------------ --------------- ---------- --------------------
David J. Orfao ................................. $134,155(1) $149,500(2) 560,000(3)
President, Chief Executive Officer and Director
Joseph J. Allaire (4) .......................... $155,251 $ 15,500 0
Chairman of the Board of Directors,
Chief Technology Officer and
Executive Vice President, Products
Amy E. Lewis ................................... $ 83,771(5) $ 59,700(6) 105,000
Vice President, Worldwide Sales
Jack P. Lull ................................... $119,824 $ 13,200 0
Vice President, Engineering and Development
Maria Morrissey ................................ $120,152 $ 18,200 0
Vice President, Worldwide Services and Support
- ------------
(1) David J. Orfao joined the Company as President and Chief Executive Officer
in February 1997. Mr. Orfao's annualized 1997 salary was $160,000.
(2) Represents the intrinsic value of a below-market option granted to Mr. Orfao
in 1998 in lieu of a cash bonus for services rendered in 1997.
(3) Includes 50,000 shares of Common Stock underlying a below-market option
granted in 1998 in lieu of a cash bonus for services rendered in 1997.
(4) Joseph J. Allaire served as President and Chief Executive Officer until
February 1997.
(5) Amy E. Lewis joined the Company as Vice President, Worldwide Sales in April
1997. Ms. Lewis' annualized 1997 salary was $110,000. (6) Represents bonuses
and commissions.
Option Grants in Last Fiscal Year
The following table sets forth grants of stock options to each of the
Named Executive Officers during 1997. No stock appreciation rights were granted
during 1997.
Individual Grants
------------------------------------------------- Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Exercise Annual Rates of
Underlying Granted to or Base Stock Price
Options Employees in Price Expiration Appreciation for
Granted Fiscal Year Per Share Date Option Term (1)
---------- ------------- --------- ---------- --------------------
5% 10%
--------- --------
David J. Orfao ............ 510,000 34.6% $ 0.50 2/07/07 $160,368 $406,404
Joseph J. Allaire ......... 0 -- -- -- -- --
Amy E. Lewis .............. 105,000 7.1% $ 0.50 4/18/07 $ 33,017 $ 83,671
Jack P. Lull .............. 0 -- -- -- -- --
Maria Morrissey ........... 0 -- -- -- -- --
- ------------
(1) Amounts reported in these columns represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration
of their term assuming the specified compound rates of appreciation (5%
and 10%) compounded annually over the term of the option. These numbers
are calculated based on rules promulgated by the Securities and Exchange
Commission. Actual gains, if any, on stock option exercises and Common
Stock holdings are dependent on the timing of such exercise and the future
performance of the Common Stock. There can be no assurance that the rates
of appreciation assumed in this table can be achieved or that the amounts
reflected will be received by the individuals.
49
Option Exercises and Fiscal Year-End Values
The following table sets forth certain information regarding exercisable
and unexercisable stock options held as of December 31, 1997 by each of the
Named Executive Officers. There were no options exercised by the Named
Executive Officers in 1997.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Year-End at Fiscal Year-End (1)
------------------------------- ------------------------------
Exercisable Unexercisable (2) Exercisable Unexercisable (2)
----------- ----------------- ----------- -----------------
David J. Orfao ............ -- 510,000 $ -- $127,500
Joseph J. Allaire ......... --- -- $ -- $ --
Amy E. Lewis .............. -- 105,000 $ -- $ 26,250
Jack P. Lull .............. 71,875 158,125 $17,969 $ 39,531
Maria Morrissey ........... 35,625 78,375 $ 8,906 $ 19,594
- ------------
(1) There was no public trading market for the Common Stock as of December 31,
1997. Accordingly, these values have been calculated by determining the
difference between the estimated fair market value of the Company's Common
Stock, as set by the Board of Directors, underlying the option as of
December 31, 1997 ($0.75 per share) and the exercise price per share
payable upon exercise of such options.
(2) These options were exercisable at December 31, 1997. However, shares of
Common Stock issuable upon exercise of these options would be subject to
the Company's right to repurchase at the option exercise price. Such right
of repurchase would expire according to the original option vesting
schedule.
Severance Arrangement; Change in Control Arrangements
Mr. Orfao is entitled to continue to receive his base salary and benefits
for 12 months in the event he is involuntarily terminated for reasons other
than cause. Additionally, Mr. Orfao is entitled to accelerated vesting of his
unvested options to purchase Common Stock in the event there is a change in
control, as defined in Mr. Orfao's option agreement, of the Company and (i) he
is terminated without cause within six months of the change in control, (ii) he
is not offered a position with the successor comparable to his current position
with the Company after the change in control, or (iii) he is removed from a
comparable position within six months of the change in control.
The 1997 Stock Incentive Plan and the underlying option agreements provide
for the accelerated vesting of all unvested options and other rights granted
pursuant to the plan in the event there is a merger or consolidation involving
the Company, unless appropriate provision shall be made for outstanding options
and other rights by the substitution of options, stock appreciation rights and
appropriate voting common stock of the corporation surviving any such merger or
consolidation (or the parent of such surviving corporation).
Benefit Plans
1997 Stock Incentive Plan
In 1997, the Board of Directors of the Company adopted and the Company's
stockholders approved the 1997 Stock Incentive Plan (as amended, the "1997
Option Plan"). A total of 1,726,000 shares of Common Stock have been reserved
for issuance under the 1997 Option Plan. The 1997 Option Plan authorizes (i)
the grant of options to purchase Common Stock intended to qualify as incentive
stock options ("Incentive Options"), as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") and (ii) the grant of options
that do not so qualify ("Nonqualified Options"). The exercise price of
Incentive Options granted under the 1997 Option Plan must be at least equal to
the fair market value of the Common Stock of the Company on the date of grant.
The exercise price of Incentive Options granted to an optionee who owns stock
possessing more than 10% of the voting power of the Company's outstanding
capital stock must be at least equal to 110% of the fair market value of the
Common Stock on the date of grant, and such optionee must exercise his or her
Option within five years from the date of the grant of such Option. The
exercise price of Nonqualified Options granted under the 1997 Option Plan must
be at least equal to 50% of the fair market value of the Common Stock on the
date of grant. The 1997 Option Plan provides, that, upon a merger or
consolidation of the Company, all outstanding Plan options and other awards
must be substituted for with similar options or awards of the corporation
surviving any such merger or consolidation, or such options or awards shall
become immediately exercisable in full. The 1997 Option Plan also provides for
awards of stock appreciation rights, performance shares, restricted stock and
other stock-based awards.
50
The 1997 Option Plan is administered by the Compensation Committee. The
Compensation Committee selects the individuals to whom options will be granted
and determines the option exercise price and other terms of each award, subject
to the provisions of the 1997 Option Plan. Incentive Options may be granted
under the 1997 Option Plan to key employees of the Company and its affiliates
within the meaning of the Code, including officers and directors of the Company
and its affiliates who are also employees. Nonqualified Options may be granted
under the 1997 Option Plan to officers and other employees and to directors and
other individuals providing services to the Company, whether or not they are
employees of the Company.
1998 Stock Incentive Plan
The Company expects that, before the consummation of the Offering, the
Company's stockholders will approve the 1998 Stock Incentive Plan (the "1998
Option Plan"), which has been approved by the Board of Directors. A total of
1,900,000 shares of Common Stock have been reserved for issuance under the 1998
Option Plan. The 1998 Option Plan authorizes the grant of Incentive Options and
Nonqualified Options. The exercise price of Incentive Options granted under the
1998 Option Plan must be at least equal to the fair market value of the Common
Stock of the Company on the date of grant. The exercise price of Incentive
Options granted to an optionee who owns stock possessing more than 10% of the
voting power of the Company's outstanding capital stock must be at least equal
to 110% of the fair market value of the Common Stock on the date of grant, and
such optionee must exercise his or her Option within five years from the date
of the grant of such Option. There are no limits on the exercise price of
Nonqualified Options granted under the 1998 Option Plan. The 1998 Option Plan
provides, that, upon a change in control of the Company, all outstanding Plan
options and other awards (i) may be substituted for similar options or awards
of the corporation surviving any such change in control, (ii) may become
immediately exercisable in full or (iii) terminate as of the effective date of
such change in control, provided that the holders of such options or awards
have the right to exercise such options or awards to the extent the same are
then exercisable. The 1998 Option Plan also provides for awards of stock
appreciation rights, performance shares, restricted stock and other stock-based
awards.
The 1998 Option Plan is administered by the Compensation Committee. The
Compensation Committee selects the individuals to whom options will be granted
and determines the option exercise price and other terms of each award, subject
to the provisions of the 1998 Option Plan. Incentive Options may be granted
under the 1998 Option Plan to key employees of the Company and its affiliates
within the meaning of the Code, including officers and directors of the Company
and its affiliates who are also employees. Nonqualified Options may be granted
under the 1998 Option Plan to directors, officers and employees of the Company
and other individuals providing services to the Company.
1998 Employee Stock Purchase Plan
The Company expects that, before the consummation of the Offering, the
Company's stockholders will approve the 1998 Employee Stock Purchase Plan (the
"Stock Purchase Plan"), which has been approved by the Board of Directors. The
Stock Purchase Plan will authorize the issuance of up to an aggregate of
300,000 shares of Common Stock to participating employees. The Stock Purchase
Plan will be administered by the Compensation Committee.
Under the terms of the Stock Purchase Plan, all employees of the Company
(other than seasonal employees) who have completed three months of employment
with the Company and whose customary employment is more than part-time (i.e.
more than 20 hours per week and more than five months in the calendar year)
will be eligible to participate in the Stock Purchase Plan. Employees who own
stock, and/or hold outstanding options to purchase stock, representing 5% or
more of the total combined voting power or value of all classes of stock of the
Company will not be eligible to participate in the Stock Purchase Plan.
The right to purchase Common Stock under the Stock Purchase Plan will be
made available through a series of offerings (each, an "Offering Period"). On
the first day of an Offering Period, the Company will grant to each eligible
employee who has elected in writing to participate in the Stock Purchase Plan
an option to purchase shares of Common Stock. The employee will be required to
authorize an amount (between 1% and 10% of the employee's compensation) to be
deducted by the Company from the employee's pay during the Offering Period. On
the last day of the Offering Period, the employee will be deemed to have
exercised the option, at the option exercise price, to the extent of
accumulated payroll deductions. Under the terms of the Stock Purchase Plan, the
option exercise price is an amount equal to 85% of the fair market value of one
share of Common Stock on either the first or last day of the Offering Period,
whichever is lower.
51
No employee may be granted an option that would permit the employee's
rights to purchase Common Stock to accrue at a rate in excess of $25,000 of the
fair market value of the Common Stock, determined as of the date the option is
granted, in any calendar year.
The Company has made no determination as to when the first Offering Period
under the Stock Purchase Plan will commence.
Allaire Corporation 401(k) Plan
The Company maintains the Allaire Corporation 401(k) plan (the "401(k)
Plan"), qualified under Section 401(k) of the Code. All employees of the
Company who are at least 21 years of age are eligible to make salary reduction
contributions pursuant to the 401(k) Plan. A participant may contribute a
maximum of 15% of his or her pre-tax salary, commissions and bonuses through
payroll deductions (up to the statutorily prescribed annual limit of $10,000 in
1998) to the 401(k) Plan. The percentage elected by more highly compensated
participants may be required to be lower. The Company may also make
discretionary profit-sharing contributions on behalf of participants (i) who
are at least 21 years of age and (ii) who either have completed at least 500
hours of service during the fiscal year or are employed by the Company on the
last day of the fiscal year. Any profit-sharing contribution is allocated to
eligible participants as a percentage of their total compensation (up to the
statutorily prescribed maximum of $160,000 in 1998). While a participant's
contribution amount is always 100% vested, the amount attributable to Company
profit sharing contributions is not fully vested until the participant has
three full years of service with the Company. The Company determines the level
of the discretionary contributions on an annual basis. Through September 30,
1998, the Company made no profit-sharing contributions to the 401(k) Plan.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee takes recommendations concerning salaries and
incentive compensation for employees of and consultants to the Company and
administers and grants stock options pursuant to the Company's stock option
plan. No executive officer of the Company has served as a director or member of
the compensation committee (or other committee serving an equivalent function)
of any other entity, whose executive officers served as a director of or member
of the Compensation Committee of the Company.
52
CERTAIN TRANSACTIONS
Organization of the Company
In connection with the formation of the Company, the Company issued
2,040,000 shares of Common Stock to founder Joseph J. Allaire for cash
consideration of $51,000, and 40,000 shares to Jeremy D. Allaire, the brother
of Joseph J. Allaire, for cash consideration of $1,000. Prior to the closing of
the Offering, Joseph J. Allaire's shares were subject to a stock restriction
agreement.
Sales of Stock
Beginning in June 1996, the Company issued an aggregate of 514,306 shares
of the Company's Series B Redeemable Convertible Preferred Stock ("Series B
Preferred Stock") to private investors for aggregate consideration of
$2,324,664. The Company issued 364,684 shares of Series B Preferred Stock to
Polaris Venture Partners Limited Partnership ("Polaris Venture Partners L.P.")
for $1,648,372, and 22,484 shares of Series B Preferred Stock to Polaris
Venture Partners Founders' Fund Limited Partnership ("Polaris Founders' Fund";
and together with Polaris Venture Partners L.P., the "Polaris entities") for
$101,628. The Polaris entities own beneficially more than 5% of the outstanding
shares of stock of the Company. In addition, Jonathan A. Flint, John Gannon and
Thomas Herring, who are directors of the Company, are affiliated with the
Polaris entities. Pursuant to the Company's Certificate of Incorporation, each
share of Series B Preferred Stock will automatically convert into two shares of
Common Stock upon the closing of the Offering.
Beginning in June 1996, the Company issued an aggregate of 169,200 shares
of the Company's Series C Redeemable Convertible Preferred Stock ("Series C
Preferred Stock") to private investors for aggregate consideration of $999,972.
The Company issued 79,687 shares of Series C Preferred Stock for $470,950 to
Polaris Venture Partners L.P. and 4,913 shares of Series C Preferred Stock for
$29,036 to Polaris Founders' Fund. The Company also issued 84,600 shares of
Series C Preferred Stock in April 1997 for $499,986 to Mitchell Kapor, a
director of the Company. Pursuant to the Company's Certificate of
Incorporation, each share of Series C Preferred Stock will automatically
convert into two shares of Common Stock upon the closing of the Offering.
In May and June 1997, the Company issued an aggregate of 2,336,909 shares
of the Company's Series D Redeemable Convertible Preferred Stock ("Series D
Preferred Stock") to private investors for aggregate consideration of
$9,347,636. In this transaction, the Company issued 57,894 shares of Series D
Preferred Stock for $231,576 to Mitchell Kapor, 413,910 shares of Series D
Preferred Stock for $1,655,640 to Polaris Venture Partners L.P., 23,590 shares
of Series D Preferred Stock for $94,360 to Polaris Founders' Fund, and
1,000,000 shares of Series D Preferred Stock for $4,000,000 to BancBoston
Ventures Inc. ("BancBoston"). BancBoston owns beneficially more than 5% of the
outstanding shares of stock of the Company, and Peter R. Roberts, a director of
the Company, is a managing director of BancBoston. Pursuant to the Company's
Certificate of Incorporation, each share of Series D Preferred Stock will
automatically convert into one share of Common Stock upon the closing of the
Offering. Two months prior to the issuance of the Series D Preferred Stock,
Polaris Venture Partners L.P. lent the Company $238,412 pursuant to a
Promissory Note at an interest rate of 10%, and Polaris Founders' Fund lent the
Company $13,588 pursuant to a Promissory Note at an interest rate of 10%
(collectively, the "Polaris Notes"). The Polaris Notes were converted in
connection with the issuance of Series D Preferred Stock to the Polaris
entities.
Issuance of Warrants
In connection with the issuance of the Polaris Notes, in March 1997 the
Company issued a warrant to Polaris Venture Partners L.P. (the "Polaris Venture
Partners Warrant") to purchase 5,960 shares of Common Stock at an exercise
price of $4.00 per share, and a warrant to Polaris Founders' Fund (the "Polaris
Founders' Warrant") to purchase 340 shares of Common Stock at an exercise price
of $4.00 per share. Both the Polaris Venture Partners Warrant and the Polaris
Founders' Fund Warrant are currently exercisable in whole or in part, at any
time or from time to time, until March 7, 2002, and both contain certain
protections against dilution resulting from stock splits, stock dividends and
similar events.
53
Stock Restriction Agreement
In May 1997, the Polaris entities, BancBoston and certain other
stockholders (collectively, the "Holders"), Joseph J. Allaire and the Company
entered into an amended and restated stock restriction agreement (the "Stock
Restriction Agreement"). Pursuant to the Stock Restriction Agreement, the
Company and the Holders have a right of participation in and a right of first
refusal with respect to certain sales of shares of Common Stock by Mr. Allaire.
The agreement also grants the Company the right to purchase a certain number of
Mr. Allaire's shares, at a price of $2.26 per share, in the event he ceases to
be affiliated with the Company. In addition, the parties agreed to fix the
number of directors of the Company at seven and to elect to the Board of
Directors the following individuals: (i) Mr. Allaire, for as long as he is
affiliated with the Company; (ii) one member designated by Polaris Venture
Partners L.P.; (iii) one member designated by BancBoston; (iv) the Company's
Chief Executive Officer; (v) John J. Gannon; and (vi) Mitchell Kapor. The
directors designated pursuant to this agreement were Joseph J. Allaire,
Jonathan A. Flint, Peter R. Roberts, David J. Orfao, John J. Gannon and
Mitchell Kapor. The Stock Restriction Agreement will automatically terminate
upon the closing of the Offering. This termination will eliminate the Company's
right to purchase any of Mr. Allaire's remaining 255,000 unvested shares of
Common Stock.
Working Capital Line of Credit
In December 1998, the Polaris entities provided the Company with a
commitment to provide a working capital line of credit in the event the Company
has not completed the Offering or obtained other financing in excess of $3.0
million by February 28, 1999. The line of credit would allow the Company to
borrow up to $3.0 million, would bear interest at a mutually agreed upon rate
between 5.0% and 20%, and would expire on the earlier of the closing of an
initial public offering or February 28, 2000.
Yesler Software, Inc.
The Company is a party to certain agreements with Yesler Software, Inc.
("Yesler"). Initially capitalized in July 1998, Yesler was created to develop,
market and sell a commercial software application, conceived by the Company,
and designed for use by end-users to create multimedia web-based presentations
(the "Yesler Software"). The principal stockholders of Yesler are the Company,
Weld, Brown LLC ("Weld Brown") and the Polaris entities.
The Company acquired its ownership interest in Yesler pursuant to a
Contribution and Restricted Stock Purchase Agreement dated July 14, 1998,
between the Company and Yesler (the "Yesler Agreement"). Pursuant to the Yesler
Agreement, the Company acquired 907,591 shares of Yesler common stock,
representing on that date approximately 34% of the outstanding shares of
capital stock of Yesler. The stock acquired by the Company is subject to
vesting requirements, a right of repurchase by Yesler and certain transfer
restrictions. In exchange for the shares of Yesler common stock, the Company
assigned its rights to the Yesler Software source code to Yesler, agreed to
provide Yesler with technical, sales and marketing support and agreed not to
compete with Yesler. Also in connection with its acquisition of the Yesler
common stock, the Company entered into an OEM Agreement with Yesler whereby the
Company granted Yesler the right to obtain, at a 95% discount, certain of the
Company's commercial software products for distribution together with the
Yesler Software as a single commercial unit. In addition, the Company entered
into a Voting Agreement with Weld Brown and the Polaris entities which grants
the Company the right to designate one member of Yesler's four-person board of
directors. The Company's designee to the Yesler board is Joseph J. Allaire.
Yesler also granted the Company registration, information and certain other
rights pursuant to an Investor Rights Agreement among Yesler, the Company, Weld
Brown and the Polaris entities. In August 1998, the Company transferred 76,903
shares of Yesler common stock owned by the Company to three of its employees,
including 38,451 shares of Yesler common stock to Maria Morrissey, Vice
President, Worldwide Services and Support. The fair value of the shares
transferred was not material at the time of transfer.
On the date the Company entered into the Yesler Agreement, the Polaris
entities purchased for $750,000 preferred stock of Yesler representing
approximately 33% of the outstanding shares of capital stock of Yesler on that
date. Jonathan A. Flint, a director of the Company, is a director of Yesler.
See Note 4 of Notes to Financial Statements.
The Company believes that all transactions set forth above were made on
terms no less favorable to the Company than would have been obtained from
unaffiliated third parties.
54
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 30, 1998, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by:
(i) each person known by the Company to be the beneficial owner of more than 5%
of the Company's Common Stock; (ii) each Named Executive Officer; (iii) each of
the Company's directors; and (iv) all executive officers and directors as a
group.
Percentage of Common
Stock Outstanding (3)
----------------------
Number of Shares Before After
Name of Beneficial Owner (1) Beneficially Owned (2) Offering Offering
- ----------------------------------------------- ------------------------ ---------- ---------
Joseph J. Allaire (4) ......................... 2,005,000 25.2% 19.7%
Entities affiliated with Polaris Venture
Management Co., LLC (5) ...................... 1,387,336 17.4% 13.6%
Jonathan A. Flint (6) ......................... 1,387,336 17.4% 13.6%
BancBoston Ventures Inc. (7) .................. 1,000,000 12.6% 9.8%
Peter R. Roberts (8) .......................... 1,000,000 12.6% 9.8%
David J. Orfao (9) ............................ 305,000 3.8% 3.0%
Amy E. Lewis (10) ............................. 105,000 1.3% 1.0%
Jack P. Lull (11) ............................. 135,917 1.7% 1.3%
Maria Morrissey (12) .......................... 66,500 * *
John J. Gannon (13) ........................... 16,146 * *
Thomas A. Herring (14) ........................ 25,000 * *
Mitchell Kapor (15) ........................... 262,094 3.3% 2.6%
All executive officers and directors as a group
(12 persons)(16) ............................. 5,412,993 66.6% 52.4%
- ------------
* Represents beneficial ownership of less than 1%.
(1) Unless otherwise noted below, the address of each person listed on the
table is c/o Allaire Corporation, One Alewife Center, Cambridge, MA 02140.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock issuable by the Company pursuant to options
held by the person which may be exercised within 60 days after November
30, 1998 for shares of Common Stock not subject to repurchase by the
Company ("Presently Exercisable Options") or pursuant to warrants held by
the person which may be exercised within 60 days after November 30, 1998
("Presently Exercisable Warrants") are deemed to be outstanding and to be
beneficially owned by the person holding such options or warrants for
purposes of computing the number of shares beneficially owned and the
percentage of such person or entity holding such securities but are not
outstanding for the purpose of computing the percentage of any other
person or entity. Except as otherwise indicated, each stockholder named in
the table has sole voting and investment power with respect to the shares
set forth opposite such stockholder's name.
(3) For purposes of calculating the percentage beneficially owned, the number
of shares deemed outstanding before the Offering includes: (i) 4,145,169
shares of Common Stock outstanding as of November 30, 1998; and (ii)
3,817,691 shares of Common Stock issuable upon the conversion of Preferred
Stock; and (iii) the Presently Exercisable Options and Presently
Exercisable Warrants held by that person.
(4) Includes 140,000 shares of Common Stock held by Mr. Allaire that are
subject to options held by Jeremy Allaire, Adam Berrey and Simeon
Simeonov, each of whom are employees of the Company.
(5) Polaris Venture Management Co., LLC manages Polaris Venture Partners L.P.
and Polaris Founders' Fund. Includes 1,302,652 shares of Common Stock
issuable upon the conversion of Preferred Stock owned by Polaris Venture
Partners L.P. and 5,960 shares of Common Stock issuable upon the exercise
of Presently Exercisable Warrants owned by Polaris Venture Partners L.P.,
as well as 78,384 shares issuable upon the conversion of Preferred Stock
owned by Polaris Founders' Fund and 340 shares of Common Stock issuable
55
upon the exercise of Presently Exercisable Warrants owned by Polaris
Founders' Fund. Mr. Flint, a director of the Company, is a General Partner
of Polaris Venture Management Co., LLC and has shared voting and investment
power with respect to the shares held by the Polaris entities. However, Mr.
Flint disclaims his beneficial ownership of all such shares, except to the
extent of his pecuniary interest therein. The address of Polaris Venture
Management Co., LLC is 1000 Winter Street, Suite 3350, Waltham, MA 02154.
(6) Includes shares owned beneficially by Polaris Venture Management Co., LLC
(see note 5). Mr. Flint's address is 1000 Winter Street, Suite 3350,
Waltham, MA 02154.
(7) Includes 1,000,000 shares of Common Stock issuable upon the conversion of
Preferred Stock owned by BancBoston. Mr. Roberts, a director of the
Company, is a managing director of BancBoston and has shared voting and
investment power with respect to the shares held by BancBoston. However,
Mr. Roberts disclaims beneficial ownership of all such shares, except to
the extent of his pecuniary interest therein. The address of BancBoston is
175 Federal Street, Boston, MA 02110.
(8) Includes shares owned beneficially by BancBoston (see note 7). Mr.
Roberts' address is 175 Federal Street, Boston, MA 02110.
(9) Includes 31,875 shares of Common Stock which are subject to the Company's
right of repurchase as of November 30, 1998.
(10) Includes 63,438 shares of Common Stock which are subject to the Company's
right of repurchase as of November 30, 1998.
(11) Includes 135,917 shares of Common Stock issuable upon the exercise of
Presently Exercisable Options. Also includes 1,750 shares of Common Stock
issuable upon the exercise of Presently Exercisable Options held by Mr.
Lull's wife.
(12) Includes 9,500 shares of Common Stock issuable upon the exercise of
Presently Exercisable Options.
(13) Includes 16,146 shares of Common Stock issuable upon the exercise of
Presently Exercisable Options. Mr. Gannon's address is 1000 Winter Street,
Suite 3350, Waltham, MA 02154.
(14) Includes 16,146 shares of Common Stock which are subject to the Company's
right of repurchase as of November 30, 1998. Mr. Herring's address is 1000
Winter Street, Suite 3350, Waltham, MA 02154.
(15) Includes 35,000 shares of Common Stock, of which 20,417 are subject to the
Company's right of repurchase as of November 30, 1998, and 227,094 shares
of Common Stock issuable upon the conversion of Preferred Stock. Mr.
Kapor's address is 238 Main Street, Suite 400, Cambridge, MA 02142.
(16) Includes 2,637,000 shares of Common Stock, of which 195,314 are subject to
the Company's right of repurchase as of November 30, 1998, 2,608,130
shares of Common Stock issuable upon conversion of Preferred Stock,
161,563 shares of Common Stock issuable upon the exercise of Presently
Exercisable Options and 6,300 shares of Common Stock issuable upon the
exercise of Presently Exercisable Warrants.
56
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 35,000,000 shares
of common stock, with a par value of $.01 ("Common Stock"), and 5,000,000
shares of preferred stock, with a par value of $.01 per share ("Preferred
Stock"). Of the 5,000,000 shares of authorized Preferred Stock, 1,616,494
shares are undesignated and available for issuance.
Common Stock
As of September 30, 1998, there were 7,958,260 shares of Common Stock
outstanding and held of record by 83 stockholders, after giving effect to the
conversion of all outstanding shares of Preferred Stock upon the closing of the
Offering. Based upon the number of shares outstanding as of that date and
giving effect to the issuance of the shares of Common Stock offered by the
Company hereby, there will be 10,158,260 shares of Common Stock outstanding
upon the closing of the Offering.
Holders of Common Stock are entitled to one vote per share for each share
held of record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to the holders of Preferred Stock that may
be issued, the holders of Common Stock are entitled to receive such lawful
dividends as may be declared by the Board of Directors. In the event of a
liquidation, dissolution or winding up of the affairs of the Company, whether
voluntary or involuntary, and subject to the rights of the holders of
outstanding Preferred Stock, if any, the holders of Common Stock will be
entitled to receive pro rata all of the remaining assets of the Company
available for distribution to its stockholders. The Common Stock has no
preemptive, redemption, conversion or subscription rights. All outstanding
shares of Common Stock are fully paid and non-assessable. The shares of Common
Stock to be issued by the Company in the Offering will be fully paid and
non-assessable.
Preferred Stock
The Company has authorized four series of Preferred Stock, consisting of
200,000 shares of Series A Preferred Stock, 514,306 shares of Series B Preferred
Stock, 169,200 shares of Series C Preferred Stock and 2,500,000 shares of Series
D Preferred Stock. All outstanding shares of Series A, B, C and D Preferred
Stock (including 31,250 shares of Series A Preferred Stock sold on December 7,
1998) will be automatically converted into an aggregate of 3,848,941 shares of
Common Stock upon the closing of the Offering.
The Board of Directors is authorized, subject to any limitations
prescribed by Delaware law, to provide for the issuance of Preferred Stock in
one or more series, to establish from time to time the number of shares to be
included in each series and to fix the voting powers, preferences,
qualifications and special or relative rights or privileges thereof. The Board
of Directors is authorized to issue Preferred Stock with voting, conversion and
other rights and preferences that could adversely affect the voting power or
other rights of the holders of Common Stock. Although the Company has no
current plans to issue any Preferred Stock, the issuance of Preferred Stock or
of rights to purchase Preferred Stock could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, a majority of the outstanding voting stock of the
Company.
Warrants
As of September 30, 1998, the Company had outstanding two warrants to
purchase an aggregate of 17,699 shares of Series A Preferred Stock at an
exercise price of $4.52 per share. The warrants are currently exercisable in
whole or in part, at any time or from time to time until five years from the
effective date of the Offering. Upon the closing of the Offering, these
outstanding warrants will automatically convert into warrants to purchase an
aggregate of 35,398 shares of Common Stock at an exercise price of $2.26 per
share. The warrants contain certain protections against dilution resulting from
stock splits, stock dividends and similar events. The warrants may be exercised
for cash or pursuant to certain cashless exercise provisions.
As of September 30, 1998, the Company also had outstanding four warrants to
purchase an aggregate of 14,899 shares of Common Stock. Two warrants are to
purchase an aggregate of 8,599 shares of Common Stock at an exercise price of
$2.03 per share, and are currently exercisable in whole or in part, at any time
or from time to time, until December 31, 2001. Two warrants are to purchase an
aggregate of 6,300 shares of Common Stock at an exercise price of $4.00 per
share, and are currently exercisable in whole or in part, at any time or from
time to time, until March 7, 2002, and contain certain protections against
dilution resulting from stock splits, stock dividends and similar events.
57
Registration Rights
Pursuant to a registration rights agreement among the Company and the
holders of an aggregate of 3,108,878 shares of Preferred Stock which will
automatically convert in the aggregate to 3,848,941 shares of Common Stock upon
consummation of the Offering, the holders of warrants exercisable for 14,899
shares of Common Stock, and the holders of warrants exercisable for 17,699
shares of Series A Preferred Stock which will automatically convert to warrants
to purchase an aggregate of 35,398 shares of Common Stock upon the consummation
of the Offering (together the "Registration Rights Holders"), such holders are
entitled to certain rights with respect to the registration of such shares
under the Securities Act.
If the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other security
holders, the Registration Rights Holders are entitled to notice of such
registration and to include their shares of Common Stock in such registration.
However, in the event of a registration pursuant to an underwritten public
offering of Common Stock, the underwriters shall have the right, subject to
certain conditions, to limit the number of shares included in such
registration.
The holders of more than 50% of the then-outstanding shares of Common
Stock held by all of the Registration Rights Holders are entitled, at any time
beginning at the earlier of 180 days after the Company's initial underwritten
public offering or June 30, 2000, to request that the Company file a
registration statement under the Securities Act covering the sale of some or
all of the shares held by the requesting holder or holders, provided, however,
that no such request may be made within 120 days of the filing of a
registration statement by the Company in which such requesting stockholders
were permitted to include their shares. Upon the receipt of such a request, the
Company is required to use commercially reasonable efforts to effect such
registration. The Company is not required to effect more than two such demand
registrations.
Once the Company has qualified to use Form S-3 to register securities
under the Securities Act, the Registration Rights Holders shall have the right
to request that the Company file a registration statement on Form S-3 or any
successor thereto for a public offering of all or any portion of their shares,
provided that the reasonably anticipated aggregate price to the public of such
offering would exceed $1,000,000. The Company shall not be required to effect a
registration in this manner more than once in any 12-month period.
In general, all fees, costs and expenses of such registrations (other than
insurance costs and fees and disbursements of counsel to the selling
stockholders) will be borne by the Company. The Company has agreed to indemnify
the Registration Rights Holders against, and provide contribution with respect
to, certain liabilities relating to any registration in which any shares of
Registration Rights Holders are sold under the Securities Act.
Anti-Takeover Effects of Provisions of the Company's Amended and Restated
Certificate of Incorporation and Amended and Restated By-Laws and Delaware Law
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") and the Company's Amended and Restated By-Laws (the "By-Laws")
and Delaware Law contain certain provisions that could be deemed to have
anti-takeover effects and that could discourage, delay, or prevent a change in
control of the Company or an acquisition of the Company at a price which many
stockholders may find attractive. The existence of these provisions could limit
the price that investors might be willing to pay in the future for shares of
Common Stock.
Amended and Restated Certificate of Incorporation and By-Laws
The By-Laws provide that, except as otherwise provided by law or the
Certificate, newly created directorships resulting from an increase in the
authorized number of directors or vacancies on the Board resulting from death,
resignation, disqualification or removal of directors or any other cause may be
filled only by the Board (and not by the stockholders unless there are no
directors in office), provided that a quorum is then in office and present, or
by a majority of the directors then in office, if less than a quorum is then in
office, or by the sole remaining director. These provisions prevent a
stockholder from enlarging the Board and filling the new directorships with
such stockholder's own nominees without Board approval.
The provisions of the By-Laws governing the removal of directors and the
filling of vacancies may have the effect of discouraging a third party from
initiating a proxy contest, making a tender offer or otherwise attempting to
gain control of the Company, or of attempting to change the composition or
policies of the Board, even though such attempts might be beneficial to the
Company or its stockholders.
58
The Certificate and the By-Laws provide that, unless otherwise prescribed
by law or the Certificate, (i) only a majority of the Board, or the Chairman of
the Board or the President is able to call a special meeting of stockholders;
and (ii) stockholder action may be taken only at a duly called and convened
annual or special meeting of stockholders and may not be taken by written
consent. These provisions, taken together, prevent stockholders from forcing
consideration by the stockholders of stockholder proposals over the opposition
of the Board, except at an annual meeting.
The By-Laws also establish an advance notice procedure for stockholders to
make nominations of candidates for election as director, or to bring other
business before an annual meeting of stockholders of the Company (the "Notice
Procedure"). The Notice Procedure provides that, unless otherwise prescribed by
law or the Certificate, only persons who are nominated by or at the direction
of the Board or by a stockholder who has given timely written notice to the
Secretary of the Company prior to the meeting at which directors are to be
elected will be eligible for election as directors of the Company. The Notice
Procedure provides that at an annual meeting only such business may be
conducted as has been brought before the meeting by, or at the direction of,
the Board, or by a stockholder who has given timely written notice to the
Secretary of the Company of such stockholder's intention to bring such business
before such meeting. Under the Notice Procedure, notice of stockholder
nominations or proposals to be made (a) at an annual or special meeting in lieu
of an annual meeting must be received by the Company not less than 60 days nor
more than 90 days prior to the scheduled date of the meeting (or, if less than
70 days notice or prior public disclosure of the date of the meeting is given,
then not later than the 10th day following the earlier of (i) the day such
notice was mailed or (ii) the day such public disclosure was made) or (b) at a
special meeting (other than a special meeting in lieu of an annual meeting),
not later than the 10th day following the earlier of (i) the day such notice
was mailed or (ii) the day such public disclosure was made. These notices must
contain certain prescribed information.
The Notice Procedure affords the Board an opportunity to consider the
qualifications of proposed director nominees or the merit of stockholder
proposals, and, to the extent deemed appropriate by the Board, to inform
stockholders about such matters, and also provides a more orderly procedure for
conducting annual meetings of stockholders. Although the By-Laws do not give
the Board any power to approve or disapprove stockholder nominations for the
election of directors or proposals for action, the foregoing provisions may
have the effect of precluding a contest for the election of directors or the
consideration of stockholder proposals and of deterring a third party from
conducting a solicitation of proxies to elect its own slate of directors or to
approve its own proposal if the proper advance notice procedures are not
followed, without regard to whether consideration of such nominees or proposals
might be harmful or beneficial to the Company and its stockholders.
Delaware Law
The Company is subject to Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless (i) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors
and authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least two-thirds of the
outstanding voting stock which is not owned by the interested stockholder. The
application of Section 203 may limit the ability of stockholders to approve a
transaction that they may deem to be in their best interests.
Section 203 defines "business combination" to include (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets of
the corporation to or with the interested stockholder; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing
the proportionate share
59
of the stock of any class or series of the corporation beneficially owned by
the interested stockholder; or (v) the receipt by the interested stockholder of
the benefit of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation. In general, Section 203
defines an "interested stockholder" as any entity or person beneficially owning
15% or more of the outstanding voting stock of the corporation and any entity
or person associated with, affiliated with or controlling or controlled by such
entity or person.
Limitation of Liability
The Certificate provides that no director of the Company shall be
personally liable to the Company or to its stockholders for monetary damages
for breach of fiduciary duty as a director, except that the limitation shall
not eliminate or limit liability to the extent that the elimination or
limitation of such liability is not permitted by the Delaware General
Corporation Law as the same exists or may hereafter be amended.
The Certificate further provides for the indemnification of the Company's
directors and officers to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, including circumstances in which
indemnification is otherwise discretionary. A principal effect of these
provisions is to limit or eliminate the potential liability of the Company's
directors for monetary damages arising from breaches of their duty of care,
subject to certain exceptions. These provisions may also shield directors from
liability under federal and state securities laws.
Stock Transfer Agent
The transfer agent and registrar for the Common Stock is Boston EquiServe
L.P.
60
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock of
the Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after the Offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of the Offering (based on shares outstanding at September
30, 1998), the Company will have outstanding an aggregate of 10,158,260 shares
of Common Stock, assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options or warrants. Of these shares, the
2,200,000 shares sold in the Offering will be freely tradable without
restrictions or further registration under the Securities Act, unless such
shares are purchased by an existing "affiliate" of the Company as that term is
defined in Rule 144 under the Securities Act (an "Affiliate"). On the date of
this Prospectus, no shares in addition to the shares offered hereby will be
eligible for sale. The remaining 7,958,260 shares of Common Stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act ("Restricted Shares") or are subject to the
contractual restrictions described below. Restricted Shares may be sold in the
public market only if registered or if they qualify for an exception from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which are summarized below. As a result of the contractual restrictions
described below and the provisions of Rules 144, 144(k) and 701, 7,736,870
shares will be eligible for sale (and not subject to repurchase by the Company)
upon expiration of the lock-up agreements 180 days after the date of this
Prospectus.
All of the officers and directors and certain stockholders and
optionholders of the Company have agreed not to offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or publicly disclose the intention to make any such offer, sale,
pledge or disposal for a period of 180 days after the date of this Prospectus,
without the prior written consent of Credit Suisse First Boston Corporation.
Credit Suisse First Boston Corporation currently has no plans to release any
portion of the securities subject to lock-up agreements. When determining
whether or not to release shares from the lock-up agreements, Credit Suisse
First Boston Corporation will consider, among other factors, the stockholder's
reasons for requesting the release, the number of shares for which the release
is being requested and market conditions at the time.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 101,583 shares immediately after
the Offering); or (ii) the average weekly trading volume of the Common Stock on
the Nasdaq National Market during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to such sale. Sales under Rule 144 are
also subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. Under rule
144(k), a person who is not deemed to have been an Affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years (including the holding
period of any prior owner except an Affiliate), is entitled to sell such shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Accordingly, unless otherwise
restricted, "144(k) shares" may therefore be sold immediately upon the
completion of the Offering.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisors prior to the date the
issuer becomes subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") pursuant to written compensatory
benefit plans or written contracts relating to the compensation of such
persons. In addition, the Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired upon
exercise of such options (including exercises after the date of the Offering).
Securities issued in reliance on Rule 701 are restricted securities and,
subject to the contractual restrictions described above, beginning 90 days
after the date of this Prospectus, may be sold (i) by
61
persons other than Affiliates, subject only to the manner of sale provisions of
Rule 144 and (ii) by Affiliates, under Rule 144 without compliance with its
one-year minimum holding period requirements.
The Company has agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Commission a
registration statement under the Securities Act relating to, any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or publicly disclose the intention to make any such offer,
sale, pledge, disposition or filing, for a period of 180 days after the date of
this Prospectus, without the prior written consent of Credit Suisse First
Boston Corporation, subject to certain limited exceptions.
Following the Offering, the Company intends to file registration
statements under the Securities Act covering approximately 3,840,000 shares of
Common Stock subject to outstanding options or reserved for issuance under the
Company's 1997 Stock Incentive Plan, 1998 Stock Incentive Plan and 1998
Employee Stock Purchase Plan. Accordingly, shares registered under such
registration statements will, subject to Rule 144 volume limitations applicable
to Affiliates, be available for sale in the open market, except to the extent
that such shares are subject to vesting restrictions with the Company or the
contractual restrictions described above. See "Management -- Benefit Plans."
62
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1999 (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters"), for whom Credit Suisse First Boston
Corporation, Dain Rauscher Wessels, a division of Dain Rauscher Incorporated
("Dain Rauscher Wessels"), and NationsBanc Montgomery Securities LLC are acting
as representatives (the "Representatives"), have severally but not jointly
agreed to purchase from the Company the following respective number of shares
of Common Stock:
Number of
Underwriters Shares
- ------------------------------------------------------ ----------
Credit Suisse First Boston Corporation .........
Dain Rauscher Wessels ..........................
NationsBanc Montgomery Securities LLC ..........
---------
Total ........................................ 2,200,000
=========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to approval of certain conditions precedent and that
the Underwriters will be obligated to purchase all of the shares of the Common
Stock offered hereby (other than those shares covered by the over-allotment
option described below) if any are purchased. The Underwriting Agreement
provides that, in the event of a default by an Underwriter, in certain
circumstances the purchase commitments of non-defaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option expiring on the 30th
day after the date of this Prospectus to purchase up to 330,000 additional
shares of Common Stock at the initial public offering price, less the
underwriting discounts and commissions, all as set forth on the cover page of
this Prospectus. Such option may be exercised only to cover over-allotments in
the sale of shares of Common Stock. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of Common
Stock as it was obligated to purchase pursuant to the Underwriting Agreement.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus and,
through the Representatives, to certain dealers (who may include the
Underwriters) at such price less a concession of $ per share, and the
Underwriters and such dealers may allow a discount of $ per share on sales
to certain other dealers. After the Offering, the public offering price and
concession and discount to dealers may be changed by the Representatives.
The following table summarizes the compensation to be paid to the
Underwriters by Allaire and the expenses payable by Allaire.
Total
------------------------------
Without With
Per Share Over-allotment Over-allotment
--------- -------------- --------------
Underwriting Discounts and Commissions paid by
Allaire ..................................... $ $ $
Expenses payable by Allaire .................. $ $ $
The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the shares being
offered hereby.
The Company, its officers and directors, and certain other existing
stockholders and optionholders of the Company have agreed that they will not
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or, in the case of the Company, file with the Securities and
Exchange Commission a registration statement relating to, any shares of Common
Stock or securities exchangeable or exercisable for or convertible into shares
of Common Stock or publicly disclose the intention to do any of the foregoing
without the prior written consent
63
of Credit Suisse First Boston Corporation for a period of 180 days after the
date of this Prospectus, except under certain circumstances.
The Underwriters have reserved for sale, at the initial public offering
price, up to shares of the Common Stock for employees, directors and
certain other persons associated with the Company who have expressed an
interest in purchasing such shares of Common Stock in the Offering. The number
of shares available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares not so
purchased will be offered by the Underwriters to the general public on the same
basis as other shares offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Underwriters may be required to make in
respect thereof.
WA&H Investments, LLC ("WA&H"), a stockholder of the Company, is
affiliated with Dain Rauscher Wessels, one of the Representatives of the
Underwriters. In June 1996 WA&H purchased 54,204 shares of Series B Preferred
Stock at a purchase price of $4.52 per share, which will automatically convert
into 108,408 shares of Common Stock upon the closing of the Offering, and in
May 1997 WA&H purchased 62,500 shares of Series D Preferred Stock at a purchase
price of $4.00 per share, which will automatically convert into the same number
of shares of Common Stock upon the closing of the Offering.
Credit Suisse First Boston Corporation has purchased approximately $90,000
of the Company's software products and related services since the Company's
inception. Credit Suisse First Boston Corporation obtained such products and
services through arms-length negotiations on terms substantially similar to
terms obtained by other customers of the Company for similar products and
services.
Application has been made to list the shares of Common Stock on The Nasdaq
Stock Market's National Market under the symbol "ALLR."
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiation
between the Company and the Representatives. Among the principal factors to be
considered in determining the public offering price include the information set
forth in this Prospectus and otherwise available to the Representatives; the
history of, and the prospects for, the Company and the industry in which it
competes; an assessment of the Company's management; the prospects for, and the
timing of, future earnings of the Company; the present state of the Company's
development and its current financial condition; the general condition of the
securities markets at the time of the Offering; the recent market prices of,
and the demand for, publicly-traded common stock of companies in businesses
similar to those of the Company; market conditions for initial public
offerings; and other relevant factors. There can be no assurance that an active
trading market will develop for the Common Stock or that the Common Stock will
trade in the market subsequent to the Offering at or above the initial public
offering price.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934 (the "Exchange Act"). Over-allotment involves syndicate sales in excess
of the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of shares of the Common Stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Representatives to reclaim a selling
concession from a syndicate when shares of the Common Stock originally sold by
such syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Common Stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
64
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare
and file a prospectus with the securities regulatory authorities in each
province where trades of Common Stock are effected. Accordingly, any resale of
the Common Stock in Canada must be made in accordance with applicable
securities laws which will vary depending on the relevant jurisdiction, and
which may require resales to be made in accordance with available statutory
exemptions or pursuant to a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Purchasers are advised to seek legal
advice prior to any resale of the Common Stock.
Representations of Purchasers
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from
whom such purchase confirmation is received that (i) such purchaser is entitled
under applicable provincial securities laws to purchase such Common Stock
without the benefit of a prospectus qualified under such securities laws, (ii)
where required by law, that such purchaser is purchasing as principal and not
as agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to the Offering. Such a report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
Legislation.
65
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Foley, Hoag & Eliot LLP, Boston, Massachusetts. Certain
legal matters will be passed upon for the Underwriters by Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The financial statements of Allaire Corporation as of December 31, 1996 and
1997 and as of September 30, 1998 and for the period from inception (May 5,
1995) through December 31, 1995, for each of the two years in the period ended
December 31, 1997 and for the nine months ended September 30, 1998, all of which
are included in this Prospectus, have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (including all amendments,
exhibits, schedules and supplements thereto, the "Registration Statement")
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Common Stock, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and, in each instance,
reference is made to the copy of the contract or document filed as an exhibit
to the Registration Statement, and each such statement is qualified in all
respects by reference to such exhibit. Copies of the Registration Statement may
be examined without charge at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Regional Offices of the Commission at Suite 1400, 500
West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center,
Thirteenth Floor, New York, New York 10048. Copies of all or any portion of the
Registration Statement may be obtained from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington
D.C. 20549, or by calling the Commission at 1-800-SEC-0330, at prescribed
rates. The Commission also maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that make electronic filings with
the Commission.
The Company intends to furnish to its stockholders annual reports
containing financial statements audited by an independent public accounting
firm.
66
ALLAIRE CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
-----
Report of Independent Accountants ................................................... F-2
Balance Sheet as of December 31, 1996 and 1997 and September 30, 1998 ............... F-3
Statement of Operations for the period from inception (May 5, 1995)
through December 31, 1995, the years ended December 31, 1996
and 1997 and the nine months ended September 30, 1997 (unaudited) and 1998 ......... F-4
Statement of Redeemable Convertible Preferred Stock and Stockholders' Deficit for the
period from inception (May 5, 1995) through December 31, 1995, the years ended
December 31, 1996 and 1997 and the nine months ended September 30, 1998 ............ F-5
Statement of Cash Flows for the period from inception (May 5, 1995) through
December 31, 1995, the years ended December 31, 1996 and 1997 and the
nine months ended September 30, 1997 (unaudited) and 1998 .......................... F-6
Notes to Financial Statements ....................................................... F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Allaire Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of redeemable convertible preferred stock and stockholders' deficit
and of cash flows present fairly, in all material respects, the financial
position of Allaire Corporation at December 31, 1996 and 1997 and September 30,
1998, and the results of its operations and its cash flows for the period from
inception (May 5, 1995) through December 31, 1995, the two years in the period
ended December 31, 1997 and the nine months ended September 30, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 9, 1998
F-2
ALLAIRE CORPORATION
BALANCE SHEET
(In thousands, except share and per share data)
December 31,
-----------------------
1996 1997
----------- -----------
Assets
Current assets:
Cash and cash equivalents ....................................................... $ 526 $ 5,521
Accounts receivable, net of allowance for doubtful accounts and sales returns
of $220, $487, and $480 at December 31, 1996 and 1997 and September 30,
1998, respectively ............................................................. 617 1,413
Prepaid expenses and other current assets ....................................... 87 236
--------- ---------
Total current assets ....................................................... 1,230 7,170
Property and equipment, net ...................................................... 568 2,209
Other assets, net ................................................................ 240 318
--------- ---------
Total assets ............................................................... $ 2,038 $ 9,697
========= =========
Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Deficit
Current liabilities:
Current portion of capital lease obligations .................................... $ -- $ 315
Current portion of notes payable ................................................ 33 --
Accounts payable ................................................................ 486 1,601
Accrued expenses ................................................................ 120 1,320
Accrued employee compensation and benefits ...................................... 259 1,130
Deferred revenue ................................................................ 108 1,312
--------- ---------
Total current liabilities .................................................. 1,006 5,678
Capital lease obligations ........................................................ -- 499
Notes payable .................................................................... -- --
--------- ---------
Total liabilities .......................................................... 1,006 6,177
--------- ---------
Redeemable convertible preferred stock:
Series B, $.01 par value;
Authorized: 508,849 shares at December 31, 1996; 514,306
at December 31, 1997 and September 30, 1998 actual and pro forma
Issued and outstanding: 508,849 shares at December 31, 1996; 514,306 at
December 31, 1997 and September 30, 1998 actual; none at September 30, 1998
pro forma .................................................................... 2,300 2,325
Series C, $.01 par value;
Authorized: 84,600 shares at December 31, 1996; 169,200 at December 31, 1997
and September 30, 1998 actual and pro forma
Issued and outstanding: 84,600 shares at December 31, 1996; 169,200 at December
31, 1997 and September 30, 1998 actual; none at September 30, 1998 pro forma 500 1,000
Series D, $.01 par value;
Authorized: no shares at December 31, 1996; 2,500,000 at December 31, 1997 and
September 30, 1998 actual and pro forma
Issued and outstanding: no shares at December 31, 1996; 2,336,909 at
December 31, 1997 and September 30, 1998 actual; none at September 30, 1998
pro forma .................................................................... -- 9,348
--------- ---------
Total redeemable convertible preferred stock ..................................... 2,800 12,673
--------- ---------
Stockholders' deficit:
Series A convertible preferred stock, $.01 par value;
Authorized: 200,000 shares at December 31, 1996, December 31, 1997 and
September 30, 1998 actual and pro forma
Issued and outstanding: 43,557 shares at December 31, 1996; 56,557 at December
31, 1997; 57,213 at September 30, 1998 actual; none at September 30, 1998 pro
forma ........................................................................ 177 255
Common stock, $.01 par value;
Authorized: 10,000,000 shares at December 31, 1996, December 31, 1997 and
September 30, 1998 actual; 35,000,000 at September 30, 1998 pro forma
Issued and outstanding: 3,002,500 shares at December 31, 1996 and 1997;
4,143,986 issued and 4,140,569 outstanding at September 30, 1998 actual;
7,961,677 issued and 7,958,260 outstanding at September 30, 1998 pro forma 30 30
Additional paid-in capital ...................................................... 13 13
Accumulated deficit ............................................................. (1,968) (9,435)
Deferred compensation ........................................................... -- --
Stock subscriptions receivable .................................................. (20) (16)
--------- ---------
Total stockholders' deficit ...................................................... (1,768) (9,153)
--------- ---------
Commitments and contingencies (Note 13)
Total liabilities, redeemable convertible preferred stock and
stockholders' deficit ..................................................... $ 2,038 $ 9,697
========= =========
Pro Forma
Sept. 30, Sept. 30,
1998 1998
------------ ----------------
(Notes 2 and 7)
(unaudited)
Assets
Current assets:
Cash and cash equivalents ....................................................... $ 1,879 $ 1,879
Accounts receivable, net of allowance for doubtful accounts and sales returns
of $220, $487, and $480 at December 31, 1996 and 1997 and September 30,
1998, respectively ............................................................. 2,388 2,388
Prepaid expenses and other current assets ....................................... 610 610
---------- ----------
Total current assets ....................................................... 4,877 4,877
Property and equipment, net ...................................................... 3,072 3,072
Other assets, net ................................................................ 381 381
---------- ----------
Total assets ............................................................... $ 8,330 $ 8,330
========== ==========
Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Deficit
Current liabilities:
Current portion of capital lease obligations .................................... $ 334 $ 334
Current portion of notes payable ................................................ 352 352
Accounts payable ................................................................ 1,842 1,842
Accrued expenses ................................................................ 3,055 3,055
Accrued employee compensation and benefits ...................................... 2,302 2,302
Deferred revenue ................................................................ 2,933 2,933
---------- ----------
Total current liabilities .................................................. 10,818 10,818
Capital lease obligations ........................................................ 247 247
Notes payable .................................................................... 973 973
---------- ----------
Total liabilities .......................................................... 12,038 12,038
---------- ----------
Redeemable convertible preferred stock:
Series B, $.01 par value;
Authorized: 508,849 shares at December 31, 1996; 514,306
at December 31, 1997 and September 30, 1998 actual and pro forma
Issued and outstanding: 508,849 shares at December 31, 1996; 514,306 at
December 31, 1997 and September 30, 1998 actual; none at September 30, 1998
pro forma .................................................................... 2,325 --
Series C, $.01 par value;
Authorized: 84,600 shares at December 31, 1996; 169,200 at December 31, 1997
and September 30, 1998 actual and pro forma
Issued and outstanding: 84,600 shares at December 31, 1996; 169,200 at December
31, 1997 and September 30, 1998 actual; none at September 30, 1998 pro forma 1,000 --
Series D, $.01 par value;
Authorized: no shares at December 31, 1996; 2,500,000 at December 31, 1997 and
September 30, 1998 actual and pro forma
Issued and outstanding: no shares at December 31, 1996; 2,336,909 at
December 31, 1997 and September 30, 1998 actual; none at September 30, 1998
pro forma .................................................................... 9,348 --
---------- ----------
Total redeemable convertible preferred stock ..................................... 12,673 --
---------- ----------
Stockholders' deficit:
Series A convertible preferred stock, $.01 par value;
Authorized: 200,000 shares at December 31, 1996, December 31, 1997 and
September 30, 1998 actual and pro forma
Issued and outstanding: 43,557 shares at December 31, 1996; 56,557 at December
31, 1997; 57,213 at September 30, 1998 actual; none at September 30, 1998 pro
forma ........................................................................ 260 --
Common stock, $.01 par value;
Authorized: 10,000,000 shares at December 31, 1996, December 31, 1997 and
September 30, 1998 actual; 35,000,000 at September 30, 1998 pro forma
Issued and outstanding: 3,002,500 shares at December 31, 1996 and 1997;
4,143,986 issued and 4,140,569 outstanding at September 30, 1998 actual;
7,961,677 issued and 7,958,260 outstanding at September 30, 1998 pro forma 41 79
Additional paid-in capital ...................................................... 1,140 14,035
Accumulated deficit ............................................................. (17,423) (17,423)
Deferred compensation ........................................................... (383) (383)
Stock subscriptions receivable .................................................. (16) (16)
---------- ----------
Total stockholders' deficit ...................................................... (16,381) (3,708)
---------- ----------
Commitments and contingencies (Note 13)
Total liabilities, redeemable convertible preferred stock and
stockholders' deficit ..................................................... $ 8,330 $ 8,330
========== ==========
The accompanying notes are an integral part of these financial statements.
F-3
ALLAIRE CORPORATION
STATEMENT OF OPERATIONS
(In thousands, except per share data)
Period from
inception
(May 5, 1995) Year ended Nine months ended
through December 31, September 30,
December 31, ----------------------- ---------------------------
1995 1996 1997 1997 1998
-------------- ----------- ----------- ------------ -------------
(unaudited)
Revenue:
Software license fees .............................. $ -- $ 2,358 $ 7,116 $ 4,335 $ 11,716
Services ........................................... -- -- 534 260 2,187
------- -------- -------- -------- ---------
Total revenue ................................... -- 2,358 7,650 4,595 13,903
------- -------- -------- -------- ---------
Cost of revenue:
Software license fees .............................. -- 234 961 540 1,262
Services ........................................... -- -- 1,453 845 2,855
------- -------- -------- -------- ---------
Total cost of revenue ........................... -- 234 2,414 1,385 4,117
------- -------- -------- -------- ---------
Gross profit ........................................ -- 2,124 5,236 3,210 9,786
------- -------- -------- -------- ---------
Operating expenses:
Research and development ........................... 65 873 2,702 1,801 3,371
Sales and marketing ................................ 49 1,576 7,272 4,216 11,561
General and administrative ......................... 74 1,387 2,874 1,866 2,871
------- -------- -------- -------- ---------
Total operating expenses ........................ 188 3,836 12,848 7,883 17,803
------- -------- -------- -------- ---------
Loss from operations ................................ (188) (1,712) (7,612) (4,673) (8,017)
Interest income, net ................................ -- 14 187 125 29
------- -------- -------- -------- ---------
Net loss ............................................ $ (188) $ (1,698) $ (7,425) $ (4,548) $ (7,988)
======= ======== ======== ======== =========
Basic and diluted net loss per share ................ $ (0.09) $ (0.97) $ (4.40) $ (2.87) $ (2.84)
Shares used in computing basic and diluted
net loss per share ................................. 2,200 1,743 1,687 1,584 2,813
Unaudited pro forma basic and diluted net
loss per share ..................................... $ (1.38) $ (1.13)
Shares used in computing unaudited pro
forma basic and diluted net loss per share ......... 5,378 7,054
The accompanying notes are an integral part of these financial statements.
F-4
ALLAIRE CORPORATION
STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(In thousands, except share data)
Redeemable
convertible
preferred Convertible
stock preferred stock Common stock
----------------------- ----------------- -------------------------
Shares Amount Shares Amount Shares Par value
------------ ---------- -------- -------- ------------- -----------
Initial capital contribution by founders ..... $ $ 2,200,000 $22
Net loss ....................................
--------- ------- ------ ---- --------- -----
Balance, December 31, 1995 ................... -- -- -- -- 2,200,000 22
Issuance of common stock in
exchange for stock subscriptions
receivable ................................. 1,800,000 18
Issuance of Series A convertible
preferred stock upon conversion of
notes payable and accrued interest ......... 43,557 177
Issuance of Series B redeemable
convertible preferred stock, net of
issuance costs of $55 ...................... 508,849 2,300
Forgiveness of stock subscriptions
receivable in exchange for cancel-
lation of shares of common stock ........... (920,000) (9)
Repurchase and cancellation of shares
of common stock ............................ (80,000) (1)
Issuance of Series C redeemable
convertible preferred stock, net of
issuance costs of $12 ...................... 84,600 500
Exercise of employee stock options .......... 2,500 --
Net loss ....................................
--------- ------- ------ ---- --------- -----
Balance, December 31, 1996 ................... 593,449 2,800 43,557 177 3,002,500 30
Issuance of Series A convertible
preferred stock in acquisition of
Bradbury Software L.L.C. ................... 13,000 78
Issuance of Series C redeemable
convertible preferred stock ................ 84,600 500
Issuance of Series B redeemable
convertible preferred stock ................ 5,457 25
Issuance of Series D redeemable
convertible preferred stock, net of
issuance costs of $42 ...................... 2,272,719 9,091
Issuance of Series D redeemable
convertible preferred stock upon
conversion of notes payable and
accrued interest ........................... 64,190 257
Repayment of stock subscription
receivable .................................
Net loss ....................................
--------- ------- ------ ---- --------- -----
Balance, December 31, 1997 ................... 3,020,415 12,673 56,557 255 3,002,500 30
Issuance of Series A convertible
preferred stock ............................ 656 5
Exercise of employee stock options .......... 1,141,486 11
Repurchase of common stock held
in treasury ................................
Deferred compensation relating to
grants of stock options ....................
Compensation relating to grants of
stock options ..............................
Net loss ....................................
--------- ------- ------ ---- --------- -----
Balance, September 30, 1998 .................. 3,020,415 $12,673 57,213 $260 4,143,986 $41
========= ======= ====== ==== ========= =====
Additional Stock Total
paid-in Accumulated Deferred subscriptions stockholders'
capital deficit compensation receivable deficit
------------ ------------- -------------- --------------- --------------
Initial capital contribution by founders ..... $ -- $ (15) $ -- $ -- $ 7
Net loss .................................... (188) (188)
------- --------- ------ ----- ----------
Balance, December 31, 1995 ................... -- (203) -- -- (181)
Issuance of common stock in
exchange for stock subscriptions
receivable ................................. 27 (45) --
Issuance of Series A convertible
preferred stock upon conversion of
notes payable and accrued interest ......... 177
Issuance of Series B redeemable
convertible preferred stock, net of
issuance costs of $55 ...................... (55) (55)
Forgiveness of stock subscriptions
receivable in exchange for cancel-
lation of shares of common stock ........... (14) 23 --
Repurchase and cancellation of shares
of common stock ............................ (1) 2 --
Issuance of Series C redeemable
convertible preferred stock, net of
issuance costs of $12 ...................... (12) (12)
Exercise of employee stock options .......... 1 1
Net loss .................................... (1,698) (1,698)
------- --------- ------ ----- ----------
Balance, December 31, 1996 ................... 13 (1,968) -- (20) (1,768)
Issuance of Series A convertible
preferred stock in acquisition of
Bradbury Software L.L.C. ................... 78
Issuance of Series C redeemable
convertible preferred stock ................
Issuance of Series B redeemable
convertible preferred stock ................
Issuance of Series D redeemable
convertible preferred stock, net of
issuance costs of $42 ...................... (42) (42)
Issuance of Series D redeemable
convertible preferred stock upon
conversion of notes payable and
accrued interest ...........................
Repayment of stock subscription
receivable ................................. 4 4
Net loss .................................... (7,425) (7,425)
------- --------- ------ ----- ----------
Balance, December 31, 1997 ................... 13 (9,435) -- (16) (9,153)
Issuance of Series A convertible
preferred stock ............................ 5
Exercise of employee stock options .......... 526 537
Repurchase of common stock held
in treasury ................................ (2) (2)
Deferred compensation relating to
grants of stock options .................... 454 (454) --
Compensation relating to grants of
stock options .............................. 149 71 220
Net loss .................................... (7,988) (7,988)
------- --------- ------ ----- ----------
Balance, September 30, 1998 .................. $1,140 $ (17,423) $ (383) $ (16) $(16,381)
======= ========= ====== ===== ==========
The accompanying notes are an integral part of these financial statements.
F-5
ALLAIRE CORPORATION
STATEMENT OF CASH FLOWS
(In thousands, except share data)
Period from
inception
(May 5, 1995) Year ended
through December 31,
December 31, -------------------------
1995 1996 1997
-------------- ------------ ------------
Cash flows from operating activities:
Net loss ......................................................... $ (188) $ (1,698) $ (7,425)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization .................................. 1 94 726
Interest converted into shares of preferred stock .............. -- 2 5
Compensation expense relating to issuance of note payable
under severance agreement ..................................... -- 90 --
Compensation expense relating to issuance of equity
instruments ................................................... -- -- --
Changes in assets and liabilities:
Accounts receivable ........................................... (40) (577) (796)
Prepaid expenses and other current assets ..................... (11) (76) (149)
Other assets .................................................. -- (254) (55)
Accounts payable .............................................. 27 459 1,115
Accrued expenses .............................................. 11 368 2,071
Deferred revenue .............................................. 211 (103) 1,204
------ -------- --------
Total adjustments ........................................... 199 3 4,121
------ -------- --------
Net cash provided by (used for) operating activities ........ 11 (1,695) (3,304)
------ -------- --------
Cash flows from investing activities:
Purchases of property and equipment .............................. (47) (598) (1,502)
Payment for acquisition of Bradbury Software L.L.C. .............. -- -- (252)
------ -------- --------
Net cash used for investing activities ...................... (47) (598) (1,754)
------ -------- --------
Cash flows from financing activities:
Proceeds from sale leaseback transaction ......................... -- -- 421
Principal payments on capital lease obligations .................. -- -- (165)
Proceeds from issuance of convertible notes payable .............. -- 175 252
Proceeds from issuance of notes payable .......................... 60 88 --
Principal payments on notes payable .............................. (10) (195) (33)
Proceeds from sale of common stock ............................... 3 1 --
Proceeds from sale of redeemable convertible preferred stock,
net of issuance costs ........................................... -- 2,733 9,574
Payments to acquire treasury stock ............................... -- -- --
Payment received on stock subscription receivable ................ -- -- 4
------ -------- --------
Net cash provided by financing activities ................... 53 2,802 10,053
------ -------- --------
Net increase (decrease) in cash and cash equivalents .............. 17 509 4,995
Cash and cash equivalents, beginning of period .................... -- 17 526
------ -------- --------
Cash and cash equivalents, end of period .......................... $ 17 $ 526 $ 5,521
====== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................... $ -- $ 4 $ 46
Supplemental disclosure of non-cash investing and financing
activities:
Conversion of notes payable and related accrued interest of $2
into 43,557 shares of Series A convertible preferred stock ...... $ -- $ 175 $ --
Issuance of Series A convertible preferred stock for acquisition
of Bradbury Software L.L.C. ..................................... $ -- $ -- $ 78
Conversion of note payable and related accrued interest of $5
into 64,190 shares of Series D redeemable convertible
preferred stock ................................................. $ -- $ -- $ 252
Capital lease obligations ........................................ $ -- $ -- $ 979
Nine months ended
September 30,
----------------------------
1997 1998
------------ --------------
(unaudited)
Cash flows from operating activities:
Net loss ......................................................... $ (4,548) $(7,988)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization .................................. 432 1,030
Interest converted into shares of preferred stock .............. 5 --
Compensation expense relating to issuance of note payable
under severance agreement ..................................... -- --
Compensation expense relating to issuance of equity
instruments ................................................... -- 220
Changes in assets and liabilities:
Accounts receivable ........................................... (243) (975)
Prepaid expenses and other current assets ..................... (158) (374)
Other assets .................................................. (35) (270)
Accounts payable .............................................. 506 241
Accrued expenses .............................................. 1,358 2,907
Deferred revenue .............................................. 856 1,621
-------- -------
Total adjustments ........................................... 2,721 4,400
-------- -------
Net cash provided by (used for) operating activities ........ (1,827) (3,588)
-------- -------
Cash flows from investing activities:
Purchases of property and equipment .............................. (794) (1,686)
Payment for acquisition of Bradbury Software L.L.C. .............. (252) --
-------- -------
Net cash used for investing activities ...................... (1,046) (1,686)
-------- -------
Cash flows from financing activities:
Proceeds from sale leaseback transaction ......................... 421 --
Principal payments on capital lease obligations .................. (90) (233)
Proceeds from issuance of convertible notes payable .............. 252 --
Proceeds from issuance of notes payable .......................... -- 1,406
Principal payments on notes payable .............................. (33) (81)
Proceeds from sale of common stock ............................... -- 537
Proceeds from sale of redeemable convertible preferred stock,
net of issuance costs ........................................... 9,574 5
Payments to acquire treasury stock ............................... -- (2)
Payment received on stock subscription receivable ................ -- --
-------- ---------
Net cash provided by financing activities ................... 10,124 1,632
-------- ---------
Net increase (decrease) in cash and cash equivalents .............. 7,251 (3,642)
Cash and cash equivalents, beginning of period .................... 526 5,521
-------- ---------
Cash and cash equivalents, end of period .......................... $ 7,777 $ 1,879
======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................... $ 30 $ 93
Supplemental disclosure of non-cash investing and financing
activities:
Conversion of notes payable and related accrued interest of $2
into 43,557 shares of Series A convertible preferred stock ...... $ -- $ --
Issuance of Series A convertible preferred stock for acquisition
of Bradbury Software L.L.C. ..................................... $ 78 $ --
Conversion of note payable and related accrued interest of $5
into 64,190 shares of Series D redeemable convertible
preferred stock ................................................. $ 252 $ --
Capital lease obligations ........................................ $ 979 $ --
The accompanying notes are an integral part of these financial statements.
F-6
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Allaire Corporation (the "Company") develops, markets and supports
application development and server software for a wide range of Web development,
from static Web pages to high-volume, interactive Web applications. The
Company's products and services enable organizations to expand the reach of
their information systems to the Web, as well as to develop new Web-based
business applications in areas such as electronic commerce, content management
and personalization. The Company's products integrate key emerging Web client
and Web server software platforms and technologies and interoperate with key
enterprise and client-server technologies.
The Company 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 the Company's
common stock and substantially all assets and liabilities of Allaire, L.L.C.
were transferred to the Company at historical cost. In April 1997, the Company
was reorganized as a Delaware corporation.
The Company 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.
The Company has also experienced substantial net losses in each fiscal
period since its inception and, as of September 30, 1998, had an accumulated
deficit of $17.4 million. Such losses and accumulated deficit resulted from the
Company's lack of substantial revenue and significantly increased costs
incurred in the development of the Company's products and in the preliminary
establishment of the Company's infrastructure. For the foreseeable future, the
Company expects to continue to experience significant growth in its operating
expenses in order to execute its current business plan, particularly research
and development and sales and marketing expenses. As a result, the Company's
business plan indicates that additional financing would be required to support
its planned expenditures. In the event that an initial public offering is not
completed on a timely basis, the Company would seek such funding through a
private financing. In the event that the Company has not completed an initial
public offering or obtained other financing in excess of $3.0 million by
February 28, 1999, the Company has a commitment from existing investors to
provide a $3.0 million working capital line of credit. Any borrowings under
this arrangement would be payable at the earlier of the closing of an initial
public offering or February 28, 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
invests its excess cash in money market funds, commercial paper and U.S.
Treasury securities which are subject to minimal credit and market risk. The
Company's cash equivalents are classified as available-for-sale and recorded at
amortized cost which approximates fair value.
Revenue Recognition
The Company 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. The Company
accrues insignificant support costs associated with these licenses when revenue
is recognized. Revenue under arrangements where multiple products or services
are sold together under one contract is allocated to each element based on
their relative fair values, with these fair values being determined using the
price charged when that element is sold separately. For arrangements which
include specified upgrade rights, the fair value of such upgrade rights is
deferred until the specified upgrade is delivered. The Company 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 the
Company's return
F-7
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
policies and historical experience. The Company offers subscriptions which
entitle customers to all new releases for a specific product during the term of
the subscription agreement. Revenue from subscription sales is recognized
ratably over the term of the subscription agreement. Training and consulting
services revenue is recognized as services are rendered, and revenue under
support agreements is recognized ratably over the term of the support
agreement.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash equivalents, accounts receivable, accounts payable, accrued expenses,
notes payable and redeemable convertible preferred stock, approximate their
fair values at September 30, 1998.
Concentrations of Credit Risk and Significant Customers
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
To minimize this risk, ongoing credit evaluations of customers' financial
condition are performed, although collateral generally is not required. No
single customer accounted for more than 10% of gross accounts receivable at
December 31, 1996, while one customer accounted for 22% and 28% of gross
accounts receivable at December 31, 1997 and September 30, 1998, respectively.
In addition, this same customer accounted for 22% of total revenue for the nine
months ended September 30, 1998. No single customer accounted for 10% of total
revenue for the years ended December 31, 1996 and 1997. The Company 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 the Company's products
are expensed as incurred, except for certain software development costs. Costs
associated with the development of computer software are expensed prior to the
establishment of technological feasibility (as defined by 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 the Company's financial position or results of
operations. No software development costs have been capitalized by the Company
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
The Company 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 the Company's common stock at the date of
grant. The Company has adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," through disclosure only (Note 9). All stock-based
awards to non-employees are accounted for at their fair value in accordance
with SFAS No. 123.
Income Taxes
Prior to its reorganization as a C Corporation in February 1996 (Note 1),
the Company 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 the Company's members.
At the time of its reorganization, the Company adopted the liability method of
accounting for income taxes as set forth in SFAS No. 109, "Accounting for
Income Taxes."
F-8
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising Expense
The Company recognizes advertising expense as incurred. Advertising
expense was approximately $6,000, $152,000, $643,000, and $553,000 for the
period from inception (May 5, 1995) through December 31, 1995, the years ended
December 31, 1996 and 1997 and the nine months ended September 30, 1998,
respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
In the opinion of the Company's management, the September 30, 1997
unaudited interim financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for that period. The results of
operations for the nine month period ended September 30, 1998 are not
necessarily indicative of the results of operations for the full year of 1998.
Unaudited Pro Forma Balance Sheet
Upon the closing of the Company's initial public offering, all of the
outstanding shares of Preferred Stock will automatically convert into 3,817,691
shares of common stock. These conversions have been reflected in the unaudited
pro forma balance sheet as of September 30, 1998, and exclude 31,250 shares of
Common Stock issuable upon the conversion of Series A Preferred Stock sold
after September 30, 1998.
Net Loss Per Share
Net loss per share is computed under SFAS No. 128, "Earnings Per Share."
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding, excluding shares of common stock subject to
repurchase. Diluted loss per share does not differ from basic loss per share
since potential common shares from conversion of preferred stock, stock options
and warrants and outstanding shares of common stock subject to repurchase are
anti-dilutive for all periods presented. Pro forma basic and diluted net loss
per share have been calculated assuming the conversion of all outstanding
shares of preferred stock into common shares, as if the shares had converted
immediately upon their issuance.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement establishes
standards for the reporting and display of comprehensive income and its
components. SFAS No. 130 was effective for the Company's fiscal year ending
December 31, 1998. Adoption of SFAS No. 130 is for presentation purposes only
and had no effect on the Company's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." This statement changes the
way that public business enterprises report segment information, including
financial and descriptive information about their selected segment information.
Under SFAS No. 131, operating segments are defined as revenue-producing
components of the enterprise which are generally used internally for evaluating
segment performance. SFAS No. 131 is effective for the Company's fiscal year
ending December 31, 1998 and will not affect the Company's financial position
or results of operations.
F-9
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes
the disclosure requirements for pensions and other postretirement benefits and
is effective for the Company's fiscal year ending December 31, 1998. SFAS No.
132 relates to disclosure only and will not affect the Company's financial
position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company does
not expect SFAS No. 133 to have a material affect on its financial position or
results of operations.
In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SoP 98-1 establishes
the accounting for costs of software products developed or purchased for
internal use, including when such costs should be capitalized. The Company does
not expect SoP 98-1, which is effective for the Company beginning January 1,
1999, to have a material affect its financial position or results of
operations.
In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for the Company's fiscal 1999 financial statements and
the Company does not expect its adoption to have a material affect on its
financial position or results of operations.
3. ACQUISITION
In March 1997, the Company 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 the Company's Series A convertible preferred stock valued at
$78,000. The Bradbury acquisition has been accounted for under the purchase
method of accounting. Accordingly, the purchase price was allocated based upon
the fair value of assets acquired and liabilities assumed. The excess of the
purchase price over the fair value of the net assets acquired totaled $315,000.
This amount has been included in other assets and is being amortized using the
straight-line method over a three-year period. Amortization expense relating to
this excess purchase price totaled $88,000 during the year ended December 31,
1997 and $79,000 during the nine months ended September 30, 1998. The operating
results of Bradbury have been included in the financial statements since the
date of the acquisition. Pro forma presentations have not been included as the
acquisition was not material to the results of operations of the Company.
The former owner of Bradbury is entitled to additional cash payments of up
to $165,000, depending on the length of time he remains employed by the
Company. During the year ended December 31, 1997 and the nine months ended
September 30, 1998, a total of $82,000 and $83,000, respectively, was earned
and recorded as compensation expense under this arrangement.
In order to finance the Bradbury acquisition, the Company issued 10%
convertible notes payable totaling $252,000 and warrants to purchase 6,300
shares of the Company's common stock at a price of $4.00 per share to a
stockholder (Note 8). All principal and accrued interest of $5,000 on these
notes was converted into 64,190 shares of Series D preferred stock in May 1997.
4. INVESTMENT IN YESLER SOFTWARE, INC.
In July 1998, the Company entered into an agreement under which it
contributed certain non-core technology and agreed to provide certain services
to Yesler Software, Inc. ("Yesler") in exchange for 907,591 shares of Yesler's
voting common stock, representing approximately 34% of the outstanding capital
stock of Yesler at that time.
F-10
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
4. INVESTMENT IN YESLER SOFTWARE, INC. (Continued)
Subsequently, the Company transferred 76,903 shares of Yesler common stock to
three of its employees. The value of the shares transferred was not material at
the date transferred. Of the shares acquired, an aggregate of 605,060 shares
are subject to repurchase at a price of $0.10 per share under certain
circumstances. The number of shares subject to this repurchase right will be
reduced quarterly over a three-year period. The Company has no obligation to
fund the future operations of Yesler and plans to account for its investment
under the equity method.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
--------------------------- September 30,
1996 1997 1998
----------- ------------- --------------
Furniture and fixtures .................................. $ 106,000 $ 574,000 $ 835,000
Furniture and fixtures under capital lease .............. -- 127,000 78,000
Equipment ............................................... 502,000 638,000 1,857,000
Equipment under capital lease ........................... -- 852,000 843,000
Software ................................................ -- 316,000 420,000
Leasehold improvements .................................. 38,000 148,000 296,000
--------- ---------- ------------
646,000 2,655,000 4,329,000
Less: Accumulated depreciation and amortization ......... (78,000) (446,000) (1,257,000)
--------- ---------- ------------
$ 568,000 $2,209,000 $ 3,072,000
========= ========== ============
Depreciation and amortization expense for the period from inception (May
5, 1995) through December 31, 1995, the years ended December 31, 1996 and 1997
and the nine months ended September 30, 1998 was $1,000, $80,000, $434,000, and
$822,000, respectively.
Capital Lease
In December 1996, the Company entered into an agreement with a leasing
company to establish a line of credit which enabled the Company to finance up
to $1,000,000 in purchases of property and equipment under capital leases (the
"Lease Line"). Each borrowing under the Lease Line is payable in equal monthly
installments over a period of 36 months. In connection with this agreement, the
Company issued warrants to purchase shares of its Series A convertible
preferred stock (Note 7). The Lease Line expired in December 1997.
During 1997, the Company sold and immediately leased back certain
equipment under the Lease Line. The loss on this sale leaseback transaction was
recorded in 1997 and was not material to the Company's results of operations.
Amortization of property and equipment under capital leases totaled $181,000
and $220,000 during the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively. Accumulated amortization on property and
equipment under capital lease totaled $181,000 at December 31, 1997 and
$401,000 at September 30, 1998. Interest expense relating to capital lease
obligations totaled $38,000 and $40,000 for the year ended December 31, 1997
and the nine months ended September 30, 1998, respectively.
6. LINES OF CREDIT
Equipment and Working Capital Line
In December 1996, the Company entered into an agreement with a bank to
establish a line of credit which enabled the Company to borrow up to $400,000
for the acquisition of fixed assets and for working capital purposes through
June 1997. In March 1998, this line of credit agreement was canceled and
replaced with a new line of credit which provides for borrowings up to
$2,000,000 for working capital purposes and for the issuance of letters of
credit through the earlier of an initial public offering or March 26, 1999.
Amounts available under the line are determined based upon eligible accounts
receivable. All borrowings and letters of credit are collateralized by
substantially all of the Company's assets and all borrowings bear interest at
the bank's prime rate (8.25% as of September 30, 1998) plus 1%. As of
September 30,
F-11
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
6. LINES OF CREDIT (Continued)
1998, letters of credit totaling $487,000 had been issued against the line and
$1,513,000 was available for additional borrowings. The terms of the line of
credit require the maintenance of certain minimum financial ratios and
conditions and include other covenants similar to those in the initial
agreement. In August 1998, the Company received a covenant waiver from the bank
for the months of May and June 1998, and the bank amended the terms of the
arrangement to waive certain financial covenants through October 1998. In
December 1998, the bank extended the terms of the arrangement to waive certain
financial covenants from November 1998 through the earlier of the closing of an
initial public offering or March 26, 1999.
Equipment Loan Line
In May 1998, the Company entered into an equipment loan line agreement
(the "Equipment Loan Line") under which the Company may borrow up to $2,000,000
to finance fixed asset purchases through December 1998. The initial term of
each loan is 36 months from the borrowing date. Monthly payments are equal to
3.155% of the original amount borrowed, for an effective interest rate of
approximately 15%. At the end of term, the Company may choose to make one
additional payment of 15% of the original amount funded or, if no default has
occurred, the term may be extended for an additional 6 months at the original
monthly payment rate. The Equipment Loan Line contains no financial covenants
and there are no cross-default provisions in connection with the equipment and
working capital line described above. All borrowings are collateralized by the
purchased assets. In June 1998, the Company borrowed $1,406,000 under the
Equipment Loan Line, which was collateralized by previously purchased
equipment. At September 30, 1998, annual cash payments on the borrowings under
the Equipment Loan Line are as follows:
1998 (three months ended December 31, 1998) ......... $ 133,000
1999 ................................................ 532,000
2000 ................................................ 532,000
2001 ................................................ 477,000
----------
Total cash payments ................................. 1,674,000
Less--amount representing interest .................. 349,000
----------
Present value of notes payable ...................... $1,325,000
==========
In December 1998, the Company borrowed an additional $214,000 under the
Equipment Loan Line.
7. PREFERRED STOCK
The holders of the Series A, Series B, Series C and Series D preferred
stock (the "Preferred Stock") are hereinafter referred to collectively as the
"Preferred Stockholders" and the holders of the Series B, Series C and Series D
preferred stock (the "Redeemable Preferred Stock") are hereinafter referred to
collectively as the "Redeemable Preferred Stockholders." The Preferred
Stockholders have the following rights and privileges:
Voting Rights
The Preferred Stockholders generally vote together with all other classes
and series of stock as a single class on all matters and are entitled to a
number of votes equal to the number of shares of common stock into which each
share of such stock is convertible. With respect to the number of directors,
only the Redeemable Preferred Stockholders, voting as a single class, may vote
on any increase of the maximum number of directors constituting the Board of
Directors to a number in excess of five. With respect to the election of
directors, (i) the Redeemable Preferred Stockholders, voting as a single class,
may elect one director and (ii) 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 (i) the common
stockholders and the Series A preferred stockholders, voting as a single class,
and (ii) the Redeemable Preferred Stockholders, voting as a single class.
Conversion
Each share of Series A, Series B and Series C preferred stock is
convertible, at the option of the holder, into two shares of common stock,
except for 656 shares of Series A preferred stock, each of which converts into
one
F-12
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
7. PREFERRED STOCK (Continued)
share of common stock, subject to certain anti-dilution adjustments. Each share
of Series D preferred stock is convertible, at the option of the holder, into
one share of common stock, subject to certain anti-dilution adjustments. The
Series A preferred stock will automatically convert into shares of common stock
upon the closing of an underwritten public offering of the Company's common
stock involving aggregate proceeds to the Company of at least $2,000,000. The
Series B, Series C and Series D preferred stock will automatically convert into
shares of common stock upon the closing of an underwritten public offering of
the Company's common stock involving aggregate proceeds to the Company of at
least $15,000,000 and a per share price of not less than $11.30.
Dividend Rights
The Preferred Stockholders are not entitled to receive any dividends
unless declared by the Company'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 the Company,
the Preferred Stockholders shall be entitled to receive, in preference to the
holders of the common stock, an amount equal to the greater of (i) the original
purchase price per share, respectively, subject to certain anti-dilution
adjustments, or (ii) such amount as would have been payable had such shares
been converted to common stock just prior to liquidation. The original purchase
price per share of the Series B, Series C and Series D preferred stock was
$4.52, $5.91 and $4.00, respectively. The original purchase price per share of
the Series A preferred stock was $4.07, except for 656 shares which had an
original purchase price per share of $8.00. Any assets remaining following the
initial distribution to the Preferred Stockholders shall be available for
distribution ratably among the common stockholders only.
Redemption
At the request of at least 50% of the holders of the Redeemable Preferred
Stock at any time beginning in June 2002, the Company 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, the Company 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, the Company issued 10% convertible notes payable totaling
$175,000 to two of the Company's stockholders. All principal and accrued
interest of $2,000 on these notes was subsequently converted into 43,557 shares
of Series A preferred stock prior to December 31, 1996.
Preferred Stock Warrants
Pursuant to the terms of a capital lease line of credit (Note 5), the
Company 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 (i) ten years from the date of
grant or (ii) five years from the effective date of an initial public offering
of the Company's common stock. The value ascribed to these warrants was not
significant.
At September 30, 1998, the Company has reserved 17,699 shares of its
Series A preferred stock for issuance upon exercise of outstanding warrants.
Undesignated Preferred Stock
At September 30, 1998, the Company 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 of the
Company (without stockholder approval) in one or more series and with such
designations, rights
F-13
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
7. PREFERRED STOCK (Continued)
and preferences as determined by the Board. As a result, the undesignated
preferred stock may have dividend, liquidation, conversion, redemption, voting
or other rights which may be more expansive than the rights of the holders of
the Preferred Stock and the common stock.
8. COMMON STOCK
Treasury Shares
Of the common stock issued, an aggregate of 3,417 shares with a cost of
$2,000 were held by the Company as treasury shares and were included as a
reduction to additional paid-in capital at September 30, 1998.
Stock Restriction Agreements
The Company has executed stock restriction agreements with its founder and
certain of its employees. Under the terms of the founder's stock restriction
agreement, the Company has the right to repurchase, at a price of $2.26 per
share, any unvested common shares in the event of the founder's voluntary
resignation. All other restriction agreements give the Company 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 the Company for cause. The Company's repurchase rights lapse at
various dates through January 31, 2000 or, in the case of the founder, upon an
initial public offering of the Company's common stock, if earlier. At September
30, 1998, an aggregate of 255,000 and 180,000 shares of the Company's
outstanding common stock were subject to repurchase under the stock restriction
agreements, at prices of $2.26 and $.025 per share, respectively.
All employees who have been granted options by the Company under the 1997
Stock Incentive Plan are eligible to elect immediate exercise of all such
options. However, shares obtained by employees who elect to exercise prior to
the original option vesting schedule are subject to the Company's right of
repurchase, at the option exercise price, in the event of termination. The
Company's repurchase rights lapse at the same rate as the shares would have
become exercisable under the original vesting schedule. At September 30, 1998,
the Company had the right to repurchase 455,749 shares of common stock issued
under the 1997 Stock Incentive Plan.
Stock Subscriptions Receivable
The Company held notes receivable from certain stockholders at September
30, 1998 in consideration for the purchase of common stock of the Company. The
notes are due February 1, 2001 and accrue interest at a rate of 5.61% per
annum. These loans are secured by the underlying common stock and,
consequently, are reflected as an offset to stockholders' equity.
Common Stock Warrants
Pursuant to the issuance of convertible notes payable in 1996 (Note 7),
the Company issued warrants to purchase 8,599 shares of its common stock at a
price of $2.03 per share, subject to certain anti-dilution adjustments. These
warrants are fully vested, exercisable at the option of the holders, in whole
or in part, and expire in December 2001. The value ascribed to these warrants
was not significant.
Pursuant to the issuance of convertible notes payable in 1997 (Note 3),
the Company issued warrants to purchase 6,300 shares of its common stock at a
price of $4.00 per share, subject to certain anti-dilution adjustments. These
warrants are fully vested, exercisable at the option of the holder, in whole or
in part, and expire in March 2002. The value ascribed to these warrants was not
significant.
Reserved Shares
At September 30, 1998, the Company had 5,544,852 shares of common stock
reserved for issuance upon the exercise of common stock warrants and options
and the conversion of the Preferred Stock, including shares issuable upon the
conversion of preferred stock warrants.
F-14
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
8. COMMON STOCK (Continued)
Authorized Shares
On August 10, 1998, the Company's Board of Directors approved, subject to
stockholder approval, an increase in the authorized shares of common stock,
$.01 par value, to 35,000,000.
9. STOCK OPTIONS
No options were granted during 1995 and all options issued by the Company
during the year ended December 31, 1996 were non-qualified, non-plan stock
options issued to employees, advisors and consultants of the Company. All
options granted by the Company during this period of time were issued at fair
market value at the date of grant, vest either immediately or over a four-year
period and expire ten years from the date of grant.
1997 Stock Incentive Plan
During 1997, the Company's Board of Directors adopted the 1997 Stock
Incentive Plan (the "1997 Stock Plan"). The 1997 Stock Plan provides for the
granting of incentive and non-qualified stock options and stock bonus awards to
officers, directors, employees and consultants of the Company. The maximum
number of common shares that may be issued pursuant to the 1997 Stock Plan, as
amended, is 1,726,000.
The exercise price of each stock option issued under the 1997 Stock Plan
shall be specified by the Board of Directors at the time of grant. However,
incentive stock options may not be granted at less than the fair market value
of the Company's common stock as determined by the Board of Directors at the
date of grant or for a term in excess of ten years. All options granted under
the 1997 Stock Plan through September 30, 1998 vest either immediately or over
a four-year period for employees or over the service period for non-employees
and expire ten years from the date of grant.
1998 Stock Incentive Plan
On August 10, 1998, the Board of Directors authorized, subject to
stockholder approval, the 1998 Stock Incentive Plan (the "1998 Stock Plan").
The 1998 Stock Plan provides for the issuance of up to 1,900,000 shares of the
Company's common stock to eligible employees, officers, directors, consultants
and advisors of the Company. 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 the Company's
common stock at the date of grant and for a term not to exceed ten years. The
exercise price under each non-qualified stock option shall be specified by the
Compensation Committee. Grants of stock appreciation rights, performance
shares, restricted stock and unrestricted stock may be made at the discretion
of the Compensation Committee with terms to be defined therein.
During the period from inception (May 5, 1995) through December 31, 1997,
compensation expense recognized for stock option grants made by the Company
under APB Opinion No. 25 was not significant. For the nine months ended
September 30, 1998, compensation expense recognized for stock option grants
totaled $220,000. Had compensation cost for the Company's option grants been
determined based on the fair value at the date of grant consistent with the
method prescribed by SFAS No. 123, the Company's net losses would not have
differed materially from the amounts reported for all periods presented.
However, because the determination of the fair value of all options granted
after the Company becomes a public entity will include an expected volatility
factor, because additional option grants are expected to be made subsequent to
September 30, 1998, and because most options vest over several years, the pro
forma effects of applying the fair value method may be material to reported net
income or loss in future years.
Under SFAS No. 123, the fair value of each employee option grant is
estimated on the date of grant using the Black-Scholes option pricing model to
apply the minimum value method with the following weighted-average assumptions
used for grants made during the years ended December 31, 1996 and 1997 and the
nine months ended September 30, 1998: no dividend yield; risk free interest
rates of 5.9%, 6.1% and 5.3%, respectively; no volatility; and an expected
option term of 5 years.
Stock option activity during the years ended December 31, 1996 and 1997
and the nine months ended September 30, 1998 was as follows:
F-15
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
9. STOCK OPTIONS (Continued)
Outstanding options
-----------------------------------
Number of Weighted average
shares exercise price
--------------- -----------------
Outstanding--December 31, 1995 ........................... -- $ --
Granted (weighted average fair value of $.11) .......... 1,130,000 .44
Exercised .............................................. (2,500) .50
Canceled ............................................... (7,500) .50
---------
Outstanding--December 31, 1996 ........................... 1,120,000 .44
Granted (weighted average fair value of $.17) .......... 1,475,360 .54
Exercised .............................................. -- --
Canceled ............................................... (221,260) .51
---------
Outstanding--December 31, 1997 ........................... 2,374,100 .50
Granted (weighted average fair value of $2.53) ......... 466,000 5.41
Exercised .............................................. (1,141,486) .47
Canceled ............................................... (21,750) 2.01
----------
Outstanding--September 30, 1998 .......................... 1,676,864 $ 1.86
==========
As of September 30, 1998, 131,667 and 1,733,150 shares were available for
grant under the 1997 Stock Plan and the 1998 Stock Plan, respectively.
The following table summarizes information about stock options outstanding
at September 30, 1998:
Vested and exercisable
-----------------------------
Weighted-average Number Weighted-average
remaining contractual of exercise
Exercise price Number outstanding life (in years) shares price
- ---------------- -------------------- ----------------------- --------- -----------------
$ .25-.50 1,140,772 8.3 363,646 $ .44
.75-1.50 272,492 9.1 35,786 .75
4.00-7.00 89,050 9.6 3,125 4.00
9.00-11.05 174,550 9.9 -- --
--------- -------
$ .25-11.05 1,676,864 8.7 402,557 $ .50
========= =======
Deferred Compensation
During the period January 1998 through August 1998, the Company granted
stock options to purchase 266,650 shares of its common stock with exercise
prices ranging from $.01 to $4.00. The Company recorded compensation expense
and deferred compensation relating to these options totaling $149,000 and
$454,000, respectively, representing the difference between the estimated fair
market value of the common stock on the date of grant and the exercise price.
Compensation relating to options which vested immediately upon grant was
expensed in full at the date of grant, while compensation related to options
which vest over time was recorded as a component of stockholders' deficit and
is being amortized over the vesting periods of the related options.
1998 Employee Stock Purchase Plan
On August 10, 1998, the Board of Directors authorized, subject to
stockholder approval, the 1998 Employee Stock Purchase Plan (the "Purchase
Plan"). The Purchase Plan provides for the issuance of up to 300,000 shares of
the Company's common stock to eligible employees. Under the Purchase Plan, the
Company 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. The Company has made no determination as to when the first offering
period under the Purchase Plan will commence.
F-16
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES
Deferred tax assets are comprised of the following:
December 31,
------------------------------- Sept. 30,
1996 1997 1998
------------- --------------- ---------------
Deferred tax assets:
Net operating loss carryforwards ...................... $ 583,000 $ 3,442,000 $ 6,176,000
Reserves not currently deductible ..................... 87,000 216,000 551,000
Research and development credit carryforwards ......... 17,000 95,000 208,000
Other ................................................. 29,000 85,000 167,000
---------- ------------ ------------
Total deferred tax assets ........................... 716,000 3,838,000 7,102,000
Deferred tax asset valuation allowance ................ (716,000) (3,838,000) (7,102,000)
---------- ------------ ------------
$ -- $ -- $ --
========== ============ ============
Realization of total deferred tax assets is contingent upon the generation
of future taxable income. Due to the uncertainty of realization of these tax
benefits, the Company has provided a valuation allowance for the full amount of
its deferred tax assets.
Income taxes computed using the federal statutory income tax rate differs
from the Company's effective tax rate primarily due to the following:
Year ended Nine months
December 31, ended
--------------------------------- September 30,
1996 1997 1998
-------------- ---------------- ----------------
Income tax benefit at U.S. federal statutory tax rate ......... $ (594,000) $ (2,599,000) $ (2,796,000)
State taxes, net of federal tax impact ........................ (105,000) (455,000) (473,000)
Permanent differences ......................................... 2,000 18,000 117,000
Research and development credit carryforwards ................. (18,000) (91,000) (111,000)
Other ......................................................... (1,000) 5,000 (1,000)
Change in valuation allowance ................................. 716,000 3,122,000 3,264,000
---------- ------------ ------------
Provision for income taxes ................................... $ -- $ -- $ --
========== ============ ============
At September 30, 1998, the Company had net operating losses and research
and development tax credit carryforwards of approximately $15.0 million and
$131,000 available for federal purposes to reduce future taxable income and
future tax liabilities, respectively. If not utilized, these carryforwards will
expire at various dates ranging from 2001 to 2018. Under the provisions of the
Internal Revenue Code, certain substantial changes in the Company's ownership
may have limited, or may limit in the future, the amount of net operating loss
and research and development tax credit carryforwards which could be utilized
annually to offset future taxable income and income tax liability. The amount
of any annual limitation is determined based upon the Company's value prior to
an ownership change.
11. GEOGRAPHIC INFORMATION
Revenue was distributed geographically as follows:
Year ended Nine months
December 31, ended
----------------------------- September 30,
1996 1997 1998
------------- ------------- --------------
North America ............... $1,953,000 $6,153,000 $12,002,000
Europe ...................... 197,000 822,000 1,269,000
Other international ......... 208,000 675,000 632,000
---------- ---------- -----------
$2,358,000 $7,650,000 $13,903,000
========== ========== ===========
F-17
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
12. EMPLOYEE SAVINGS PLAN
During 1997, the Company adopted an employee retirement savings plan under
Section 401(k) of the Internal Revenue Code (the "401(k) Plan") which covers
substantially all employees. Under the terms of the 401(k) Plan, employees may
contribute a percentage of their salary, up to a maximum of 15%, which is then
invested in one or more of several mutual funds selected by each employee. The
Company did not make any contributions to the 401(k) Plan on behalf of its
employees for the year ended December 31, 1997 or for the nine months ended
September 30, 1998.
13. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain office equipment under
noncancelable operating lease agreements. Rent expense under these leases for
the years ended December 31, 1996 and 1997 and for the nine months ended
September 30, 1998, totaled approximately $163,000, $372,000, and $698,000,
respectively. In addition, the Company also leases certain fixed assets under
capital leases, which expire at various dates through October 2000.
In May 1998, the Company entered into a new facility lease for additional
office space. The lease commenced in September 1998 and has a term of five
years and four months.
Future minimum commitments under noncancelable operating and capital
leases at September 30, 1998 are as follows:
Operating Capital
leases leases
-------------- ----------
1998 (three months ended December 31, 1998) ......... $ 423,000 $ 92,000
1999 ................................................ 2,611,000 366,000
2000 ................................................ 2,606,000 163,000
2001 ................................................ 2,595,000 --
2002 ................................................ 2,593,000 --
Thereafter .......................................... 1,379,000 --
----------- --------
Total minimum lease payments ........................ $12,207,000 621,000
===========
Less--amount representing interest ................................. 40,000
--------
Present value of capital lease obligations ......................... $581,000
========
Restricted Time Deposit
In connection with a facility lease entered into during 1997, the Company
is required to maintain, on behalf of the landlord, an irrevocable letter of
credit with a bank in the amount of $125,000 over the term of the lease. In
addition, the Company was required to maintain a certificate of deposit in an
equal amount as security for the letter of credit. This certificate of deposit
was restricted, was automatically renewed on a monthly basis as long as the
letter of credit was in effect and was included in cash and cash equivalents at
December 31, 1997. In June 1998, the aforementioned letter of credit was
replaced with a letter of credit issued under a new line of credit (Note 6) and
the restricted certificate of deposit was released.
Legal Proceedings
In April 1996, a wrongful termination action was brought against the
Company and its founder by a former employee under which the plaintiff sought
severance pay and the right to 400,000 shares of the Company's common stock
which were canceled upon termination. Although the Company continues to deny
any liability in this matter, the Company 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, the Company agreed to pay the plaintiff a cash
settlement totaling $285,000 in exchange for the termination of all legal
action against the Company and its founder. This amount was fully accrued at
the time of the settlement.
F-18
ALLAIRE CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
13. COMMITMENTS AND CONTINGENCIES (Continued)
In addition to the matter noted above, the Company 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 the
Company's financial position or results of operations.
14. SUBSEQUENT EVENTS
Series A Preferred Stock Sale
On December 7, 1998, the Company sold 31,250 shares of Series A preferred
stock at a price of $16.00 per share to MC Silicon Valley, Inc., a subsidiary
of Mitsubishi Corporation, the Company's Japanese distributor. Each of these
shares has the same rights and privileges as all other shares of Series A
preferred stock (Note 7), each share is convertible into one share of common
stock, subject to certain anti-dilution adjustments, and the liquidation
preference for each share is $16.00.
F-19
[LOGO] allaire
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with the
issuance and distribution of the securities being registered, other than the
underwriting discount. All amounts shown are estimates except the Securities
and Exchange Commission registration fee, the National Association of
Securities Dealers, Inc. filing fee and the Nasdaq National Market listing fee.
Payable
by the
Company
-------------
Securities and Exchange Commission registration fee .............. $ 11,957
National Association of Securities Dealers, Inc. filing fee ...... 4,801
Nasdaq National Market listing fee ............................... 78,875
Printing and engraving expenses .................................. 125,000
Transfer agent fees .............................................. 5,000
Accounting fees and expenses ..................................... 280,000
Legal fees and expenses .......................................... 375,000
Blue Sky fees and expenses (including related legal fees) ........ 10,000
Miscellaneous .................................................... 109,367
----------
Total ........................................................ $1,000,000
==========
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law affords a Delaware
corporation the power to indemnify its present and former directors and
officers under certain conditions. Article Sixth of the Certificate provides
that the Company shall indemnify each person who at any time is, or shall have
been, a director or officer of the Company and was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that he or she is or was a director or officer of the
Company, or is or was serving at the request of the Company as a director,
officer, trustee of, or in a similar capacity with, another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
incurred in connection with any such action, suit or proceeding, to the maximum
extent permitted by the Delaware General Corporation Law, as the same exists or
may hereafter be amended. No amendment to or repeal of the provisions of
Article Sixth of the Certificate shall deprive a director or officer of the
benefit thereof with respect to any act or failure occurring prior to such
amendment or repeal.
Section 102(b)(7) of the Delaware General Corporation Law gives a Delaware
corporation the power to adopt a charter provision eliminating or limiting the
personal liability of directors to the corporation or its stockholders for
breach of fiduciary duty as directors, provided that such provision may not
eliminate or limit the liability of directors for (i) any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) any
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) any payment of a dividend or approval of a
stock purchase that is illegal under Section 174 of the Delaware General
Corporation Law or (iv) any transaction from which the director derived an
improper personal benefit. Article Seventh of the Certificate provides that to
the maximum extent permitted by the Delaware General Corporation Law, no
director of the Company shall be personally liable to the Company or to any of
its stockholders for monetary damages arising out of such director's breach of
fiduciary duty as a director of the Company. No amendment to or repeal of the
provisions of Article Seventh shall apply to or have any effect on the
liability or the alleged liability of any director of the Company with respect
to any act or failure to act of such director occurring prior to such amendment
or repeal. A principal effect of such Article Seventh is to limit or eliminate
the potential liability of the Company's directors for monetary damages arising
from breaches of their duty of care, unless the breach involves one of the four
exceptions described in (i) through (iv) above.
Section 145 of the Delaware General Corporation Law also affords a
Delaware corporation the power to obtain insurance on behalf of its directors
and officers against liabilities incurred by them in those capacities. The
Company
II-1
has procured a directors' and officers' liability and company reimbursement
liability insurance policy that (a) insures directors and officers of the
Company against losses (above a deductible amount) arising from certain claims
made against them by reason of certain acts done or attempted by such directors
or officers and (b) insures the Company against losses (above a deductible
amount) arising from any such claims, but only if the Company is required or
permitted to indemnify such directors or officers for such losses under
statutory or common law or under provisions of its Amended and Restated
Certificate of Incorporation or its By-Laws.
Reference is also made to Section 7 of the Underwriting Agreement between
the Company and the Underwriters, filed as Exhibit 1.1 to this Registration
Statement, for a description of indemnification arrangements between the
Company and the Underwriters.
Item 15. Recent Sales of Unregistered Securities.
The following information is furnished with regard to all securities sold
by the Company within the past three years which were not registered under the
Securities Act.
(a) Issuances of Common Stock by Allaire Minnesota.
From February 1996 through January 1997, Allaire Corp., a Minnesota
corporation ("Allaire Minnesota"), issued and sold an aggregate of 2,000,000
shares of its Common Stock for consideration valued at $51,690.
(b) Issuances of Preferred Stock by Allaire Minnesota.
From June 1996 through March 1997, Allaire Minnesota issued and sold an
aggregate of 56,557 shares of its Series A Convertible Preferred Stock, for
aggregate consideration of $255,165. From June 1996 through March 1997, Allaire
Minnesota also issued and sold an aggregate of 514,306 shares of its Series B
Convertible Preferred Stock, for aggregate consideration of $2,324,664. In
December 1996, Allaire Minnesota issued and sold an aggregate of 84,600 shares
of its Series C Preferred Stock, for aggregate consideration of $499,986.
(c) Grants and Exercises of Allaire Minnesota's Stock Options.
From June 1996 through April 1997, Allaire Minnesota issued options to
purchase an aggregate of 1,086,800 shares of its Common Stock, and sold 1,250
shares of its Common Stock pursuant to the exercise of such options for
aggregate consideration of $1,250.
On April 25, 1997 Allaire Minnesota was reincorporated as a Delaware
corporation through the merger of Allaire Minnesota into the Company. Pursuant
to the reincorporation merger, each share of Common Stock of Allaire Minnesota
was automatically changed and converted into two shares of Common Stock of the
Company. Each share of Series A, B and C Convertible Preferred Stock of Allaire
Minnesota was automatically changed and converted into one share of the
corresponding series of the Company's Convertible Preferred Stock. Each share
of the Company's Series A, B and C Convertible Preferred Stock issued pursuant
to the reincorporation merger will automatically change and convert into two
shares of the Company's Common Stock upon the closing of the Offering. Also
pursuant to the reincorporation merger, each option to purchase one share of
Common Stock of Allaire Minnesota was automatically converted and changed into
an option to purchase two shares of the Company's Common Stock.
(d) Issuances of Common Stock by the Company.
From January 1998 through October 1998, the Company issued and so1d
1,146,086 shares of its Common Stock for aggregate consideration of $538,483.
(e) Issuances of Preferred Stock by the Company
On December 7, 1998, the Company issued and sold 31,250 shares of Series A
Convertible Preferred Stock for aggregate consideration of $500,000. Each of
these 31,250 shares of Series A Convertible Stock will automatically change and
convert into one share of the Company's Common Stock upon the closing of the
Offering.
In February 1998, the Company issued and sold 656 shares of Series A
Convertible Preferred Stock, for aggregate consideration of $5,250. Each of
these 656 shares of Series A Convertible Preferred Stock will automatically
change and convert into one share of the Company's Common Stock upon the
closing of the Offering. In May and June 1997, the Company issued and sold
2,336,909 shares of Series D Convertible Preferred Stock,
II-2
for aggregate consideration of $9,347,636. Each share of Series D Convertible
Preferred Stock will automatically change and convert into one share of the
Company's Common Stock upon the closing of the Offering.
(f) Grants of the Company's Stock Options.
From April 1997 through October 1998, the Company granted options to
purchase an aggregate of 1,368,360 shares of its Common Stock, exercisable at a
weighted average exercise price of $2.46 per share.
The issuances described in this Item 15 were made in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act
relating to sales by an issuer not involving any public offering. None of the
foregoing transactions involved a distribution or public offering. No
underwriters were engaged in connection with the foregoing issuances of
securities, and no underwriting discounts or commissions were paid.
Item 16. Exhibits and Financial Schedules.
(a) Exhibits
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Company
3.2 Proposed form of Certificate of Amendment of Certificate of
Incorporation of the Company (to become effective prior to the Offering)
3.3 Proposed form of Amended and Restated Certificate of Incorporation of
the Company (to become effective immediately after the Offering)
3.4 By-Laws of the Company
3.5 Proposed form of Amended and Restated By-Laws of the Company (to become
effective immediately prior to the Offering)
*4.1 Specimen certificate for the Common Stock of the Company
*5.1 Opinion of Foley, Hoag & Eliot LLP
10.1 1997 Stock Incentive Plan as amended
10.2 1998 Stock Incentive Plan
10.3 1998 Employee Stock Purchase Plan
10.4 Option Agreement for David J. Orfao
10.5 Form of Option Agreement for other executive officers
10.6 Office Lease Agreement between the Company and One Alewife Center Realty
Trust, dated November 5, 1997
10.7 Lease Agreement between the Company and CambridgePark Two, L.P., dated
May 21, 1998
10.8 Loan and Security Agreement between the Company and Silicon Valley Bank,
dated March 26, 1998
10.9 Negative Pledge Agreement between the Company and Silicon Valley Bank,
dated March 26, 1998
10.10 Loan Modification Agreement between the Company and Silicon Valley Bank,
dated August 6, 1998
10.11 Loan Modification Agreement between the Company and Silicon Valley Bank,
dated December 9, 1998
10.12 Senior Loan and Security Agreement between the Company and Phoenix
Leasing Incorporated, dated May 1, 1998
10.13 Warrant Agreement between the Company and Comdisco, Inc., dated
August 21, 1998
10.14 Warrant Agreement between the Company and Gregory Stento, dated
August 21, 1998
10.15 Warrant Agreement between the Company and Polaris Venture Partners,
L.P., dated March 7, 1997
10.16 Warrant Agreement between the Company and Polaris Venture Partners
Founders' Fund, L.P., dated March 7, 1997
10.17 Amended and Restated Registration Rights Agreement, dated May 15, 1997
10.18 Waiver and Amendment No. 1 to Amended and Restated Registration Rights
Agreement, dated December 7, 1998
10.19 Letter of Offer of Employment from the Company to David J. Orfao, dated
December 23, 1996
10.20 Contribution and Restricted Stock Purchase Agreement between the Company
and Yesler Software, Inc., dated July 14, 1998
II-3
10.21 Working Capital Line of Credit Letter from Polaris Ventures Partners,
L.P., and Polaris Venture Partners Founders' Fund, L.P., dated December
4, 1998
11.1 Statement re computation of per share earnings
23.1 Consent of PricewaterhouseCoopers LLP
*23.2 Consent of Foley, Hoag & Eliot LLP (included in Exhibit 5.1)
24.1 Power of Attorney (contained on page II-5 of this Registration
Statement)
27.1 Financial Data Schedule
- ----------------
* To be filed by amendment.
(b) Financial Statement Schedules
II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Massachusetts,
on the 9th day of December, 1998.
ALLAIRE CORPORATION
By: /s/ David J. Orfao
------------------------------
David J. Orfao
President and Chief Executive
Officer
POWER OF ATTORNEY
We the undersigned officers and directors of Allaire Corporation hereby
severally constitute and appoint David J. Orfao, David A. Gerth and Joseph C.
Baker and each of them singly, our true and lawful attorneys-in- fact with full
power to them, to sign for us and in our names in the capacities indicated
below, any and all pre- or post-effective amendments to this Registration
Statement, any subsequent registration statement for the same offering which
may be filed under Rule 462(b) under the Securities Act ("a Rule 462(b)
Registration Statement") and any and all pre- or post-effective amendments
thereto, and to file the same, with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, and
generally to do all such things in our names and on our behalf in our
capacities as officers and directors to enable Allaire Corporation to comply
with the provisions of the Securities Act of 1933 and all requirements of the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys-in-fact, or any of them,
to said Registration Statement and any and all amendments thereto or to any
subsequent Registration Statements for the same offering which may be filed
under said Rule 462(b).
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Joseph J. Allaire Chairman of the Board
- -------------------------
Joseph J. Allaire December 9, 1998
/s/ David J. Orfao President, Chief Executive Officer and
- ------------------------- Director (principal executive officer)
David J. Orfao December 9, 1998
/s/ David A. Gerth Vice President, Finance and Operations,
- ------------------------- Treasurer and Chief Financial Officer December 9, 1998
David A. Gerth (principal financial and accounting officer)
/s/ Jonathan A. Flint Director
- -------------------------
Jonathan A. Flint December 9, 1998
/s/ John J. Gannon Director
- -------------------------
John J. Gannon December 9, 1998
/s/ Thomas A. Herring Director
- -------------------------
Thomas A. Herring December 9, 1998
/s/ Mitchell Kapor Director
- -------------------------
Mitchell Kapor December 9, 1998
/s/ Peter R. Roberts Director December 9, 1998
- -------------------------
Peter R. Roberts
II-5
Schedule II
Valuation and Qualifying Accounts
Year ended Nine months
Period from inception December 31, ended
(May 5, 1995) through ----------------- September 30,
December 31, 1995 1996 1997 1998
Allowance for Doubtful Accounts and Sales Returns ----------------------- ------ -------- --------------
(in thousands)
Balance at beginning of period ................... $-- $ 10 $ 220 $ 487
Additions:
Charged to expense .............................. 10 165 164 53
Charged against other accounts .................. -- 45 165 30
Deductions:
Write-offs and returns .......................... -- -- (62) (90)
--- ---- ----- -----
Balance at end of period ......................... $10 $220 $ 487 $ 480
=== ==== ===== =====
Exhibit Index
Exhibit
No. Description
- -------- -----------------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Company
3.2 Proposed form of Certificate of Amendment of Certificate of Incorporation of the Company
(to become effective prior to the Offering)
3.3 Proposed form of Amended and Restated Certificate of Incorporation of the Company (to
become effective immediately after the Offering)
3.4 By-Laws of the Company
3.5 Proposed form of Amended and Restated By-Laws of the Company (to become effective
immediately prior to the Offering)
*4.1 Specimen certificate for the Common Stock of the Company
*5.1 Opinion of Foley, Hoag & Eliot LLP
10.1 1997 Stock Incentive Plan as amended
10.2 1998 Stock Incentive Plan
10.3 1998 Employee Stock Purchase Plan
10.4 Option Agreement for David J. Orfao
10.5 Form of Option Agreement for other executive officers
10.6 Office Lease Agreement between the Company and One Alewife Center Realty Trust, dated
November 5, 1997
10.7 Lease Agreement between the Company and CambridgePark Two, L.P., dated May 21, 1998
10.8 Loan and Security Agreement between the Company and Silicon Valley Bank, dated
March 26, 1998
10.9 Negative Pledge Agreement between the Company and Silicon Valley Bank, dated
March 26, 1998
10.10 Loan Modification Agreement between the Company and Silicon Valley Bank, dated
August 6, 1998
10.11 Loan Modification Agreement between the Company and Silicon Valley Bank, dated
December 9, 1998
10.12 Senior Loan and Security Agreement between the Company and Phoenix Leasing Incorporated,
dated May 1, 1998
10.13 Warrant Agreement between the Company and Comdisco, Inc., dated August 21, 1998
10.14 Warrant Agreement between the Company and Gregory Stento, dated August 21, 1998
10.15 Warrant Agreement between the Company and Polaris Venture Partners, L.P., dated
March 7, 1997
10.16 Warrant Agreement between the Company and Polaris Venture Partners Founders' Fund, L.P.,
dated March 7, 1997
10.17 Amended and Restated Registration Rights Agreement, dated May 15, 1997
10.18 Waiver and Amendment No. 1 to Amended and Restated Registration Rights Agreement, dated
December 7, 1998
10.19 Letter of Offer of Employment from the Company to David J. Orfao, dated December 23, 1996
10.20 Contribution and Restricted Stock Purchase Agreement between the Company and Yesler
Software, Inc., dated July 14, 1998
10.21 Working Capital Line of Credit Letter from Polaris Venture Partners, L.P., and Polaris Venture
Partners Founders' Fund, L.P., dated December 4, 1998
11.1 Statement re computation of per share earnings
23.1 Consent of PricewaterhouseCoopers LLP
*23.2 Consent of Foley, Hoag & Eliot LLP (included in Exhibit 5.1)
24.1 Power of Attorney (contained on the page II-5 of this Registration Statement)
27.1 Financial Data Schedule
- ----------------
* To be filed by amendment.