-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SEXTWjWIDWdsl36S5L2XMKGTS+xlum+DUZccNsqF3CqUlM7tHeO6/3SEqBmMeqQy Krg3x0PKLULe3sAIqCbv1A== 0001047469-99-021115.txt : 19990518 0001047469-99-021115.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-021115 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLAIRE CORP CENTRAL INDEX KEY: 0001016139 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 411812820 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25265 FILM NUMBER: 99627231 BUSINESS ADDRESS: STREET 1: ONE ALEWIFE CENTER 3RD FLOOR STREET 2: SUITE 552 CITY: CAMBRIDGE STATE: MA ZIP: 02140 BUSINESS PHONE: 6177612000 MAIL ADDRESS: STREET 1: FOLEY HOAG & ELIOT LLP STREET 2: ONE POST OFFICE SQUARE CITY: BOSTON STATE: MA ZIP: 02109 10-Q 1 10-Q Securities and Exchange Commission WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended March 31, 1999. OR [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from _______ to _______. COMMISSION FILE NUMBER 0-25265 ALLAIRE CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 41-1830792 --------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) ONE ALEWIFE CENTER, CAMBRIDGE, MASSACHUSETTS 02140 - -------------------------------------------- ------- (Address of Principal Executive Offices) (Zip Code) (617) 761-2000 -------------- (Registrant's Telephone Number, Including Area Code) NOT APPLICABLE -------------- (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: TITLE OF CLASS SHARES OUTSTANDING AT APRIL 30, 1999 -------------- ------------------------------------ Common Stock, $.01 par value 11,225,095 ALLAIRE CORPORATION FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1999 TABLE OF CONTENTS - ------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheet as of March 31, 1999 and December 31, 1998 3 Consolidated Statement of Operations for the Three Months Ended March 31, 1999 and 1998 5 Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1999 and 1998 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 18 Exhibit Index 18
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ALLAIRE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
MARCH 31, DECEMBER 31, 1999 1998 ----------- ------------ ASSETS Current assets: Cash and cash equivalents $53,246 $ 1,847 Accounts receivable, net of allowance for doubtful accounts and returns of $440 and $479 at March 31, 1999 and December 31, 1998, respectively 2,982 3,142 Prepaid expenses and other current assets 648 1,060 ------- ------- Total current assets 56,876 6,049 Property and equipment, net 4,092 3,484 Other assets, net 405 420 ------- ------- TOTAL ASSETS $61,373 $ 9,953 ------- ------- ------- ------- LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of capital lease obligations $ 346 $ 340 Current portion of notes payable 435 418 Accounts payable 2,172 3,256 Accrued expenses 3,605 3,712 Accrued employee compensation and benefits 2,403 2,189 Deferred revenue 6,487 4,647 ------- ------- Total current liabilities 15,448 14,562 ------- ------- Capital lease obligations 70 159 Note payable 919 1,034 ------- ------- Total liabilities 16,437 15,755 ------- ------- Redeemable convertible preferred stock $.01 par value; Authorized: no shares at March 31, 1999 and 3,183,506 shares at December 31, 1998 Issued and outstanding: no shares at March 31, 1999 and 3,020,415 shares at December 31, 1998 -- 12,673 ------- -------
The accompanying notes are an integral part of these consolidated financial statements. 3
MARCH 31, DECEMBER 31, 1999 1998 ------------- --------------- Stockholders' equity (deficit): Preferred stock, $.01 par value; Authorized: 5,000,000 shares at March 31, 1999 -- -- Series A convertible preferred stock, $.01 par value; Authorized: no shares at March 31, 1999 and 200,000 shares at December 31, 1998 Issued and outstanding: no shares at March 31, 1999 and 88,463 shares at December 31, 1998 -- 751 Common stock, $.01 par value; Authorized: 35,000,000 shares Issued and outstanding: 10,875,877 shares issued and 10,861,523 shares outstanding at March 31, 1999 and 4,148,586 shares issued and 4,145,169 shares outstanding at December 31, 1998 109 41 Additional paid-in capital 67,622 1,804 Deferred compensation (906) (850) Accumulated deficit (21,889) (20,205) Stock subscriptions receivable -- (16) -------- -------- Total Stockholders' equity (deficit) 44,936 (18,475) -------- -------- Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit) $ 61,373 $ 9,953 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. 4 ALLAIRE CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 1998 --------------- -------------- REVENUE: Software license fees $ 6,124 $ 3,568 Services 1,712 464 --------------- -------------- Total revenue 7,836 4,032 --------------- -------------- COST OF REVENUE: Cost of software license fees 454 421 Cost of services 1,505 699 --------------- -------------- Total cost of revenue 1,959 1,120 --------------- -------------- GROSS PROFIT 5,877 2,912 --------------- -------------- OPERATING EXPENSES: Research and development 1,630 1,024 Sales and marketing 5,138 3,115 General and administrative 1,052 868 Stock-based compensation 67 161 --------------- -------------- Total operating expenses 7,887 5,168 --------------- -------------- LOSS FROM OPERATIONS (2,010) (2,256) Interest income, net 326 45 --------------- -------------- NET LOSS $ (1,684) $ (2,211) --------------- -------------- --------------- -------------- NET LOSS PER SHARE: Basic and diluted net loss per share $ (0.19) $ (0.89) Pro forma basic and diluted net loss per share $ (0.17) $ (0.32) WEIGHTED AVERAGE SHARES OUTSTANDING: Shares used in computing basic and diluted net loss per share 8,819 2,477 Shares used in computing pro forma basic and diluted net loss per share 9,757 6,804
The accompanying notes are an integral part of these consolidated financial statements. 5 ALLAIRE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 1998 ----------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash flows from operating activities: Net loss $ (1,684) $ (2,211) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 463 337 Stock-based compensation 67 161 Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable 160 (295) Prepaid expenses and other current assets 412 (38) Other assets (31) (49) Accounts payable (1,084) (553) Accrued expenses 107 749 Deferred revenue 1,840 601 -------- -------- Total adjustments 1,934 913 -------- -------- Net cash provided by (used for) operating activities 250 (1,298) -------- -------- Cash flows from investing activities: Purchases of property and equipment (1,025) (486) -------- -------- Net cash used for investing activities (1,025) (486) -------- -------- Cash flows from financing activities: Principal payments on capital lease obligations (83) (77) Principal payments on notes payable (98) -- Proceeds from sale of common stock, net of issuance costs 52,347 529 Payments to acquire treasury stock (8) -- Payments received on stock subscriptions receivable 16 5 -------- -------- Net cash provided by financing activities 52,174 457 -------- -------- Net increase (decrease) in cash and cash equivalents 51,399 (1,327) Cash and cash equivalents, beginning of period 1,847 5,521 -------- -------- Cash and cash equivalents, end of period $ 53,246 $ 4,194 -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 87 $ 15 SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Conversion of Series A convertible preferred stock to common stock $ 751 $ -- Conversion of redeemable convertible preferred stock to common stock $ 12,673 $ --
The accompanying notes are an integral part of these consolidated financial statements. 6 ALLAIRE CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Allaire Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Allaire Corporation and its subsidiaries are collectively referred to as the "Company" or "Allaire." Certain 1998 amounts have been reclassified to conform to the 1999 method of presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all financial information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the financial condition of the Company as of the date of the interim balance sheet. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company's audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 2. NET LOSS PER SHARE Net loss per share is computed under Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic net loss per share is computed using the weighted average number of shares of common stock outstanding, excluding shares of common stock subject to repurchase. Diluted net loss per share does not differ from basic net loss per share since potential common shares from conversion of preferred stock, stock options and warrants and outstanding shares of common stock subject to repurchase are anti-dilutive for all periods presented. Pro forma basic and diluted net loss per share have been calculated assuming the conversion of all outstanding shares of preferred stock into common stock, as if the shares had converted immediately upon their issuance. 3. COMPREHENSIVE INCOME Effective January 1, 1998, Allaire adopted SFAS No. 130 "Reporting Comprehensive Income." This statement requires that a full set of general purpose financial statements be expanded to include the reporting of "comprehensive income". Comprehensive income is comprised of two components, net income and other comprehensive income. During the quarters ended March 31, 1999 and 1998, Allaire had no items qualifying as other comprehensive income. 4. INITIAL PUBLIC OFFERING In January 1999, Allaire sold 2,875,000 shares of its common stock through an initial public offering. Net proceeds from the offering were approximately $52.3 million after deducting the underwriting discount and other offering expenses. At the time of the initial public offering, all of Allaire's outstanding preferred stock automatically converted into 3,848,941 shares of common stock. 5. SUBSEQUENT EVENT In April 1999, the Company completed a merger with Bright Tiger Technologies. Inc. ("Bright Tiger") by issuing approximately 300,000 shares of Allaire common stock in exchange for all of the outstanding equity securities of Bright Tiger. Bright Tiger provides software designed to enhance the performance, availability and manageability of large-scale Internet sites and Web applications. The Company had previously licensed technology from Bright Tiger that was incorporated in certain Allaire ColdFusion products. The transaction will be accounted for as a pooling of interests. Allaire expects to incur a non-recurring charge of approximately $2.2 million in the quarter ended June 30, 1999 primarily related to professional fees, severance packages and related risks associated with the acquisition. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-Q contains "forward-looking statements' within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. The forward-looking statements involve known and unknown risks, uncertainties and other factors, including the factors set forth below in "Item 2A. Risk Factors," that may cause the actual results, performance and achievements of Allaire to differ materially from those indicated by the forward-looking statements. OVERVIEW Allaire develops, markets and supports software for a wide range of Web development, from building static Web pages to developing high-volume, interactive Web applications. Allaire derives a majority of its revenue from its two primary products, ColdFusion and HomeSite. In November 1998, Allaire released versions 4.0 of its primary products, along with the introduction of a new application server version, ColdFusion Enterprise Server. Allaire's revenue is derived principally from license fees for software products and, to a lesser extent, fees for a range of services complementing these products, primarily training and technical support. Software license fees include sales of licenses for the then-current version of Allaire's products, product upgrades and subscriptions. Subscriptions entitle the customer to all new releases for a specific product during the subscription period, generally 12 months. Revenue from sales of licenses to use Allaire's software products and product upgrades is recognized upon delivery to customers, provided no significant post-delivery obligations or uncertainties remain and collection of the related receivable is probable. Revenue under arrangements where multiple products or services are sold together under one contract is allocated to each element based on their relative fair values, with these fair values being determined using the price charged when that element is sold separately. For agreements with specified upgrade rights, the revenue related to such upgrade rights is deferred until the specified upgrade is delivered. Allaire provides most of its distributors with rights of return. An allowance for estimated future returns is recorded at the time revenue is recognized based on Allaire's historical experience. Revenue from subscription sales is recognized ratably over the term of the subscription period. Services revenue is recognized as services are rendered or ratably over the term of the service agreement. Allaire generates its revenue through direct sales of licenses to end users and through its indirect distribution channel. Revenue generated by the indirect distribution channel accounted for 54% and 39% of total revenue for the quarters ended March 31, 1999 and 1998, respectively. Allaire anticipates that revenue derived from the indirect distribution channel will continue to represent a significant percentage of total revenue. Allaire primarily derives its international revenue through its indirect distribution channel. International revenue accounted for 16% and 13% of total revenue for the quarters ended March 31, 1999 and 1998, respectively. In April 1999, Allaire completed a merger with Bright Tiger by issuing approximately 300,000 shares of Allaire common stock for all of the outstanding equity securities of Bright Tiger. Bright Tiger provides software designed to enhance the performance, availability and manageability of large-scale Internet sites and Web applications. Allaire had previously licensed technology from Bright Tiger that was incorporated in certain Allaire ColdFusion products. Allaire expects to incur a non-recurring charge of approximately $2.2 million in the quarter ended June 30,1999 primarily related to professional fees, severance packages and related costs associated with the acquisition. Allaire has experienced substantial net losses in each fiscal period since its inception and, as of March 31, 1999, had an accumulated deficit of $21.9 million. Such net losses and accumulated deficit resulted primarily from the significant costs incurred in the development of Allaire's products and in the preliminary establishment of Allaire's infrastructure. Allaire expects to increase its expenditures in all areas in order to execute its business plan, particularly in research and development and sales and marketing. The planned increase in sales and marketing expense will primarily result from the hiring of additional sales force personnel to focus on major account sales, and marketing programs to increase brand awareness. Allaire's limited operating history and the undeveloped nature of the market for Web development products make predicting future revenue difficult. Allaire's expense levels are based, in part, on its expectations regarding future revenue increases, and to a large extent such expenses are fixed, particularly in the short term. There can be no assurance that Allaire's expectations regarding future revenue are accurate. Moreover, Allaire may be unable to 8 adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall of revenue in relation to Allaire's expectations would likely cause significant declines in Allaire's quarterly operating results. Allaire is also increasing its sales and marketing efforts focused on larger purchases by larger customers. Such transactions are generally more complex and may increase the length of Allaire's average sales cycle. Allaire anticipates that an increasing portion of its revenue could be derived from large orders, in which case timing of receipt and fulfillment of any such orders could cause fluctuations in Allaire's operating results, particularly on a quarterly basis. Due to the foregoing factors, Allaire's operating results are difficult to forecast. Allaire believes that period-to-period comparisons of its historical operating results are not meaningful and should not be relied upon as an indication of future performance. Also, Allaire's operating results may fall below its expectations or the expectations of securities analysts or investors in some future quarter. In such event, the market price of Allaire's common stock would likely be materially adversely affected. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 REVENUE Total revenue increased 94% to $7.8 million for the quarter ended March 31, 1999 from $4.0 million for the quarter ended March 31, 1998. SOFTWARE LICENSE FEES. Revenue from software license fees increased 72% to $6.1 million for the quarter ended March 31, 1999 from $3.6 million for the quarter ended March 31, 1998. This increase was primarily due to an increase in the number of licenses sold to use Allaire's ColdFusion software products and from an increase in product price associated with the release of new versions of Allaire's products during the fourth quarter of 1998. SERVICES. Revenue from services increased 269% to $1.7 million in the quarter ended March 31, 1999 from $464,000 for the quarter ended March 31, 1998. The increase was primarily attributable to growth in training revenue resulting from an increase in Allaire's installed customer base. COST OF REVENUE COST OF SOFTWARE LICENSE FEES. Cost of software license fees includes costs of product media duplication, manuals, packaging materials, licensed technology and fees paid to third-party vendors and agents for order fulfillment. Cost of software license fees increased 8% to $454,000 for the quarter ended March 31, 1999 from $421,000 for the quarter ended March 31, 1998. The increase in absolute dollars was due to higher unit sales volume. The improvement in software license fees gross margins to 93% for the quarter ended March 31, 1999 from to 88% for the quarter ended March 31,1998 was primarily attributable to economies of scale achieved with Allaire's higher sales volume. COST OF SERVICES. Cost of services consists primarily of personnel costs. Cost of services increased 115% to $1.5 million for the quarter ended March 31, 1999 from $699,000 for the quarter ended March 31, 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 to 12% for the quarter ended March 31, 1999 from (51)% for the quarter ended March 31,1998 was primarily attributable to the substantial growth in training revenue. Continued improvement in services gross margins is dependent upon the future demand for the services offered by Allaire. Overall gross margins are primarily affected by the mix of products licensed, sales through direct versus indirect distribution channels, software license fees revenue versus services revenue, and international versus domestic 9 revenue. Allaire typically realizes higher gross margins on direct sales relative to indirect distribution channel sales and higher gross margins on software license fees relative to services revenue. As services revenue or revenue derived through indirect distribution channels increase as a percentage of total revenue, Allaire's gross margins may be adversely affected. OPERATING EXPENSES RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of employee salaries, fees for outside consultants and related costs associated with the development of new products, the enhancement and localization of existing products, quality assurance and testing. Research and development expenses increased 59% to $1.6 million for the quarter ended March 31, 1999 from $1.0 million for the quarter ended March 31, 1998. The increase primarily resulted from salaries associated with newly hired development personnel. Allaire anticipates that research and development expenses will increase significantly due to the addition of employees in the second quarter of 1999 in connection with the Bright Tiger acquisition and increased product development consulting costs. 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 65% to $5.1 million for the quarter ended March 31, 1999 from $3.1 million for the quarter ended March 31, 1998. The increase was primarily attributable to costs associated with additional direct sales, pre-sales support and marketing personnel, and an increase in marketing programs, including promotions and advertising. Allaire anticipates that sales and marketing expenses will continue to increase in absolute dollars as it continues to expand its marketing programs and sales force to support its brand awareness, product launches, international expansion and increased focus on major account sales. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of employee salaries and other personnel related costs for executive and financial personnel, as well as legal, accounting and insurance costs. General and administrative expenses increased 21% to $1.1 million for the quarter ended March 31, 1999 from $868,000 for the quarter ended March 31, 1998. The increase was primarily attributable to salaries associated with newly hired personnel and related costs required to manage Allaire's growth and facilities expansion. Allaire expects that its general and administrative expenses will increase in absolute dollars as it continues to expand its staffing to support expanded operations and facilities, and incurs expenses relating to its new responsibilities as a public company. STOCK-BASED COMPENSATION. The amount that the estimated fair market value of Allaire's common stock exceeds the exercise price of stock options on the date of grant is recorded as deferred compensation and amortized to stock-based compensation expense as the options vest. Allaire recognized $67,000 of stock based compensation for the quarter ended March 31, 1999 compared to $161,000 for the quarter ended March 31, 1998. The decrease was primarily attributable to the grant of a fully vested option with an exercise price substantially below fair market value during the quarter ended March 31, 1998. INTEREST INCOME (EXPENSE), NET. Interest income, net of interest expense, increased to $326,000 for the quarter ended March 31, 1999 from $45,000 for the quarter ended March 31, 1998. The increase was due to interest income earned from the investment of the net cash proceeds from Allaire's initial public offering in January 1999. PROVISION FOR INCOME TAXES. Allaire incurred significant operating losses for all periods from inception through March 31, 1999. Allaire has recorded a valuation allowance for the full amount of its net deferred tax assets as the future realization of the tax benefit is not sufficiently assured. LIQUIDITY AND CAPITAL RESOURCES In January 1999, Allaire sold 2,875,000 shares of its common stock through an initial public offering. Net proceeds from the offering were approximately $52.3 million after deducting the underwriting discount and offering expenses. Prior to its initial public offering, Allaire had funded its operations primarily through net cash proceeds from private placements of preferred stock totaling $12.8 million. At March 31, 1999, Allaire had cash and cash equivalents totaling $53.2 million, an increase of $51.4 million from December 31, 1998. The increase was attributable to the net proceeds from the initial public offering and an increase in deferred revenue, partially offset by the net loss, capital expenditures and a decrease in accounts payable. The significant increase in deferred revenue primarily related to deferral of revenue on ColdFusion Enterprise Server shipments. Allaire was obligated to provide certain additional functionality to its customers which was not delivered by March 31, 1999. Allaire expects that such functionality will be delivered within the next two fiscal quarters. Capital expenditures primarily related to purchases of equipment and leasehold improvements to support Allaire's additional personnel. 10 In April 1999, Allaire completed a merger with Bright Tiger by issuing approximately 300,000 shares of Allaire common stock for all of the outstanding equity securities of Bright Tiger. In connection with the merger, Allaire assumed and paid off Bright Tiger debt obligations totaling approximately $2.6 million. Allaire expects to experience significant growth in its operating expenses for the foreseeable future in order to execute its business plan, particularly research and development and sales and marketing expenses. As a result, Allaire anticipates that such operating expenses, as well as planned capital expenditures, will constitute a material use of its cash resources. In addition, Allaire may utilize cash resources to fund acquisitions or investments in complementary businesses, technologies or product lines. Allaire believes that its current cash and cash equivalents will be sufficient to meet its anticipated cash requirements for working capital and capital expenditures for the foreseeable future. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. The use of software and computer systems that are not Year 2000 compliant could result in system failures or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with Year 2000 requirements. Because ColdFusion does not involve data storage, the ability of a Web application built with ColdFusion to comply with Year 2000 requirements is largely dependent on whether the database underlying the application is Year 2000 compliant. If ColdFusion is connected to a database that is not Year 2000 compliant, the information received by a ColdFusion application may be incorrect. Therefore, although Allaire believes its products are Year 2000 compliant, there can be no assurance that Web applications developed using its products will comply with Year 2000 complaints. The purchasing patterns of customers or potential customers may be affected by Year 2000 issues as companies expend significant resources to correct their current systems for Year 2000 compliance. These expenditures may result in reduced funds available for Web development activities, which could have a material adverse effect on Allaire's business, operating results and financial condition. Year 2000 complications may disrupt the operation, viability or commercial acceptance of the Internet, which could have a material adverse impact on Allaire's business, operating results and financial condition. In connection with Allaire's installation of new internal software systems in October 1998, Allaire received verbal confirmations from software vendors that the software it installed is Year 2000 complaint, and it is in the process of obtaining written certifications from such vendors to the same effect. Based on the foregoing, Allaire currently has no reason to believe that its internal software systems are not Year 2000 compliant. To date, Allaire has not incurred significant incremental costs in order to comply with Year 2000 requirements and does not believe it will incur significant incremental costs in the foreseeable future. However, there can be no assurance that Year 2000 errors or defects will not be discovered in Allaire's internal software systems and, if such errors or defects are discovered, there can be no assurance that the costs of making such systems Year 2000 compliant will not have a material adverse effect on Allaire's business, operating results and financial condition. Allaire relies on third party vendors which may not be Year 2000 complaint for certain equipment and services. In addition, many of Allaire's distributors are dependent on commercially available operating systems, which may be impacted by Year 2000 complications. To date, Allaire has not conducted a Year 2000 review of its vendors or distributors. Failure of systems maintained by Allaire's vendors or distributors to operate properly with regard to the Year 2000 and thereafter could require Allaire to incur significant unanticipated expenses to remedy any problems or replace affected vendors, could reduce Allaire's revenue from its indirect distribution channel and could have a material adverse effect on Allaire's business, operating results and financial condition. ITEM 2A: RISK FACTORS ALLAIRE HAS A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE ITS PROSPECTS Allaire commenced operations in May 1995 and recorded its first revenue upon delivery of ColdFusion 1.5 to customers in February 1996. Accordingly, Allaire has only a limited operating history on which to base an evaluation of Allaire's business and prospects. In addition, Allaire's prospects must be considered in light of the risks and uncertainties encountered by companies in an early stage of development in new and rapidly evolving markets. ALLAIRE MAY NOT BE PROFITABLE IN THE FUTURE Since Allaire began operations, it has incurred substantial net losses in every fiscal period. Allaire cannot be certain when it will become profitable, if at all. Failure to achieve profitability may adversely affect the market price of Allaire's common stock. At March 31, 1999, Allaire had an accumulated deficit of $21.9 million. Allaire has 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 its business plan. Although Allaire has 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. ALLAIRE'S QUARTERLY RESULTS MAY FLUCTUATE Allaire's quarterly revenue and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. If Allaire's quarterly revenue or operating results fall below the expectations of investors or public market analysts, the price of its common stock could fall substantially. Allaire's quarterly revenue may fluctuate for several reasons, including the following: - - the market for Web development products is in an early stage of development and it is therefore difficult to accurately predict customer demand; and - - the sales cycle for Allaire's products and services varies substantially from customer to customer and, if Allaire's average sales price increases as Allaire expects, Allaire expects the sales cycle to lengthen. As a result, Allaire has difficulty determining whether and when it will receive license revenue from a particular customer. In addition, because Allaire's revenue from training services is largely correlated with Allaire's license revenue, a decline in license revenue could also cause a decline in Allaire's services revenue in the same quarter or in subsequent quarters. Other factors, many of which are outside Allaire's control, could also cause variations in Allaire's quarterly revenue and operating results. 11 Most of Allaire's expenses, such as employee compensation and rent, are relatively fixed. Moreover, Allaire's expense levels are based, in part, on Allaire's expectations regarding future revenue increases. As a result, any shortfall in revenue in relation to Allaire's expectations could cause significant changes in Allaire's operating results from quarter to quarter and could result in quarterly losses. THE DEVELOPMENT OF A MARKET FOR ALLAIRE'S PRODUCTS IS UNCERTAIN If the market for Web development products does not grow at a significant rate, Allaire's business, operating results and financial condition will be materially adversely affected. Web technology has been used widely for only a short time, and the market for Web development products is new and rapidly evolving. As is typical for new and rapidly evolving industries, demand for recently introduced products is highly uncertain. ALLAIRE'S PERFORMANCE WILL DEPEND ON THE GROWTH AND COMMERCIAL ACCEPTANCE OF THE INTERNET Allaire's future success will depend substantially upon the widespread adoption of the Internet as a primary medium for commerce and business applications. If the Internet does not become a viable and substantial commercial medium, Allaire's business, operating results and financial condition will be materially adversely affected. The Internet has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused user frustration with slow access and download times. The Internet infrastructure may not be able to support the demands placed on it by continued growth. Moreover, critical issues concerning the commercial use of the Internet, such as security, reliability, cost, accessibility and quality of service, remain unresolved and may negatively affect the growth of Internet use or the attractiveness of commerce and business communication on the Internet. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased activity or due to increased government regulation and taxation of Internet commerce. ALLAIRE COMPETES WITH MICROSOFT WHILE SIMULTANEOUSLY SUPPORTING MICROSOFT TECHNOLOGIES Allaire currently competes with Microsoft in the market for Web development products while simultaneously maintaining a working relationship with Microsoft. Microsoft has a longer operating history, a larger installed base of customers and substantially greater financial, distribution, marketing and technical resources than Allaire. As a result, Allaire may not be able to compete effectively with Microsoft now or in the future, and Allaire's business, operating results and financial condition may be materially adversely affected. Allaire expects that Microsoft's commitment to and presence in the Web development products market will substantially increase competitive pressure in the market. Allaire believes 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. Allaire believes that it must maintain a working relationship with Microsoft to achieve success. Most of Allaire's customers use Microsoft-based operating platforms, so it is critical to Allaire's success that Allaire's products be closely integrated with Microsoft technologies. Notwithstanding Allaire's 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 Allaire's technology. ALLAIRE FACES SIGNIFICANT COMPETITION FROM OTHER TECHNOLOGY COMPANIES The Web development products market is intensely competitive. Many of Allaire's current and potential competitors have longer operating histories and substantially greater financial, technical, marketing, distribution and other resources than Allaire does and therefore may be able to respond more quickly than Allaire can to new or changing opportunities, technologies, standards or customer requirements. In addition to Microsoft, Allaire competes with other large Web and database platform companies that offer a variety of software products. Allaire also competes with a number of medium-sized and start-up companies that have introduced or that are developing Web development products. In addition, Allaire has strategic relationships with NetObjects, a majority-owned subsidiary of IBM, and Macromedia. In some cases, these vendors compete with Allaire, and there can be no assurance that these strategic relationships will continue. 12 Allaire expects that additional competitors will enter the market with competing products as the size and visibility of the market opportunity increases. Increased competition could result in pricing pressures, reduced margins or the failure of Allaire's products to achieve or maintain market acceptance. If, in the future, a competitor chooses to bundle a competing Web development product with other products, the demand for Allaire's products might be substantially reduced. In addition, new technologies will likely increase the competitive pressures that Allaire faces. The development of competing technologies by market participants or the emergence of new industry standards may adversely affect Allaire's competitive position. As a result of these and other factors, Allaire may not be able to compete effectively with current or future competitors, which would have a material adverse effect on Allaire's business, operating results and financial condition. ALLAIRE'S SUCCESS DEPENDS ON ITS ABILITY TO EXPAND ITS SALES FORCE AND DISTRIBUTION CHANNELS To increase Allaire's revenue, Allaire must increase the size of its sales force and the number of its indirect channel partners, including original equipment manufacturers, value-added resellers and systems integrators. A failure to do so could have a material adverse effect on Allaire's business, operating results and financial condition. There is intense competition for sales personnel in Allaire's business, and there can be no assurance that Allaire will be successful in attracting, integrating, motivating and retaining new sales personnel. Allaire's existing or future channel partners may choose to devote greater resources to marketing and supporting the products of other companies. In addition, Allaire will need to resolve potential conflicts among its sales force and channel partners. ALLAIRE'S SUCCESS DEPENDS ON ONGOING SALES THROUGH A LIMITED NUMBER OF DISTRIBUTORS Allaire derives a substantial portion of its revenue from a limited number of distributors. For the quarter ended March 31, 1999, revenue from Allaire's indirect distribution channel accounted for approximately 54% of Allaire's total revenue, and one distributor, Ingram Micro, accounted for approximately 31% of Allaire's total revenue. The loss of, or a reduction in orders from, Ingram Micro or any other significant distributor could have a material adverse effect on Allaire's business, operating results and financial condition. Because Allaire does not deal directly with end users when selling through distributors, Allaire is dependent upon the ability of distributors to accurately forecast demand and maintain appropriate levels of inventory. If a distributor purchases excess product, Allaire may be obligated to accept the return of some products. ALLAIRE MAY EXPERIENCE LOST OR DELAYED SALES AS ITS SALES CYCLE LENGTHENS A longer sales cycle reduces Allaire's ability to forecast revenue levels. Any delay or loss in sales of Allaire's products could have a material adverse effect on Allaire's business, operating results and financial condition, and could cause its operating results to vary significantly from quarter to quarter. As Allaire increases its marketing focus on larger purchases by larger customers, Allaire expects that increased executive-level involvement of information technology officers and other senior managers of Allaire's customers will occur. Potential large sales may be delayed, or lost altogether, because Allaire will have to provide a more comprehensive education to prospective customers regarding the use and benefits of Allaire's products. Allaire's customers' purchase decisions may be subject to delays over which Allaire may have little or no control, including budgeting constraints, internal purchase approval review procedures and the inclusion or exclusion of Allaire's products on customers' approved standards list. ALLAIRE'S PERFORMANCE WILL DEPEND ON CONTINUED MARKET ACCEPTANCE OF ITS PRODUCTS If Allaire's products do not continue to satisfy the Web developer community or otherwise fail to sustain sufficient market acceptance, its business, operating results and financial condition would be materially adversely affected. Allaire believes that a significant contributing factor to Allaire's initial growth has been its ability to create and maintain strong relationships with the community of Web developers that initially adopted Allaire's products. This community of early adopters demands rapid improvements in the performance, features and reliability of Allaire's products, as well as a high level of customer service. Due in part to the emerging nature of the Web development products market and the substantial resources available to many market participants, Allaire believes there is a time-limited opportunity to achieve and maintain market share in the Web development products market. ALLAIRE'S EFFORTS TO DEVELOP BRAND AWARENESS MAY BE UNSUCCESSFUL Allaire believes that developing and maintaining awareness of the "Allaire," "ColdFusion" and "HomeSite" brand names is critical to achieving widespread acceptance of Allaire's products. If Allaire fails to promote and maintain 13 its brands or incurs significant related expenses, Allaire's business, operating results and financial condition could be materially adversely affected. To promote its brands, Allaire may find it necessary to increase its marketing budget or otherwise increase its financial commitment to creating and maintaining brand awareness among potential customers. Although Allaire has obtained a United States registration of the trademark "Cold Fusion," Allaire is aware of other companies, including competitors, that use the word "Fusion" in their marks alone or in combination with other words, and Allaire does not expect to be able to prevent third party uses of the word "Fusion" for competing goods and services. For example, NetObjects markets its principal products for designing, building and updating Web sites under the names "NetObjects Fusion" and "NetObjects Team Fusion." Competitors that use marks that are similar to Allaire's brand names may cause confusion among actual and potential customers, which could prevent Allaire from achieving significant brand recognition. ALLAIRE'S PERFORMANCE DEPENDS ON THE SUCCESS OF COLDFUSION AND HOMESITE Allaire derives almost all of its revenue from licenses of Allaire's ColdFusion and HomeSite software products and related services. Any competitive pressures or other factors that adversely affect market acceptance of ColdFusion or HomeSite software would have a material adverse effect on Allaire's business, operating results and financial condition. ALLAIRE'S FUTURE SUCCESS WILL DEPEND ON ALLAIRE'S ABILITY TO ENHANCE EXISTING PRODUCTS AND DEVELOP NEW PRODUCTS To be competitive, Allaire must develop and introduce product enhancements and new products which increase Allaire's customers' ability to build and deploy Web applications. In the past, Allaire has been forced to delay introduction of several new products. If Allaire fails to develop and introduce new products and enhancements successfully and on a timely basis, it could have a material adverse effect on Allaire's business, operating results and financial condition. The emerging nature of the Web development products market requires that Allaire continually improve the performance, features and reliability of Allaire's products, particularly in response to competitive offerings and evolving customer needs. Allaire must also introduce enhancements to existing products as quickly as possible and prior to the introduction of competing products. ALLAIRE DEPENDS ON THIRD PARTIES FOR TECHNOLOGY IN ITS PRODUCTS Allaire licenses technology that is incorporated into Allaire's products from third parties. The loss of access to such technology could result in delays in Allaire's development and introduction of new products or enhancements until equivalent or replacement technology could be accessed, if available, or developed internally, if feasible. These delays could have a material adverse effect on Allaire's business, operating results and financial condition. In light of the rapidly evolving nature of Web technology and Allaire's strategy to pursue industry partnerships, Allaire believes that it will increasingly need to rely on technology from third party vendors, such as Microsoft, which may also be competitors. There can be no assurance that technology from others will continue to be available to Allaire on commercially reasonable terms, if at all. Moreover, although Allaire is generally indemnified against claims that such third party technology infringes the proprietary rights of others, such indemnification is not always available for all types of intellectual property rights (for example, patents may be excluded) and in some cases the scope of such indemnification is limited. Even if Allaire receives broad indemnification, third party indemnitors are not always well capitalized and may not be able to indemnify Allaire in the event of infringement, resulting in substantial exposure to Allaire. There can be no assurance that infringement or invalidity claims arising from the incorporation of third party technology, and claims for indemnification from Allaire's customers resulting from such claims, will not be asserted or prosecuted against Allaire. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources in addition to potential product redevelopment costs and delays, all of which could materially adversely affect Allaire's business, operating results and financial condition. ALLAIRE MAY HAVE DIFFICULTY MANAGING ITS GROWTH Allaire has been experiencing a period of rapid growth that has been placing a significant strain on all of Allaire's resources. The number of Allaire's employees increased from 95 at December 31, 1997 to 181 at March 31, 1999. To manage future growth effectively Allaire must maintain and enhance its financial and accounting systems and controls, integrate new personnel and manage expanded operations. Any failure to do so could have a material adverse effect on the quality of Allaire's products, Allaire's ability to retain key personnel and Allaire's business, operating results and financial condition. 14 ALLAIRE IS DEPENDENT ON JOSEPH ALLAIRE AND DAVID ORFAO Allaire's future success depends to a significant degree on the skills, experience and efforts of Joseph J. Allaire, Allaire's founder, Chairman of the Board, Chief Technology Officer and Executive Vice President, and David J. Orfao, Allaire's President and Chief Executive Officer. The loss of the services of Mr. Allaire or Mr. Orfao could have a material adverse effect on Allaire's business, operating results and financial condition. Allaire also depends on the ability of its executive officers and other members of senior management to work effectively as a team. Allaire does not have employment agreements with any of its executive officers, and does not have any key person life insurance other than for Mr. Allaire and Mr. Orfao. ALLAIRE MUST HIRE AND RETAIN SKILLED PERSONNEL IN A TIGHT LABOR MARKET Qualified personnel are in great demand throughout the software industry. Allaire's success depends in large part upon Allaire's ability to attract, train, motivate and retain highly skilled employees, particularly sales and marketing personnel, software engineers and other senior personnel. Allaire's failure to attract and retain the highly trained technical personnel that are integral to its direct sales, product development, service and support teams may limit the rate at which Allaire can generate sales and develop new products or product enhancements. This could have a material adverse effect on Allaire's business, operating results and financial condition. ALLAIRE'S SUCCESS DEPENDS ON ITS ABILITY TO PROTECT ITS PROPRIETARY TECHNOLOGY Allaire's success depends to a significant degree upon the protection of its software and other proprietary technology. The unauthorized reproduction or other misappropriation of Allaire's proprietary technology could enable third parties to benefit from Allaire's technology without paying Allaire for it. This could have a material adverse effect on Allaire's business, operating results and financial condition. Although Allaire has taken steps to protect its proprietary technology, they may be inadequate. Existing trade secret, copyright and trademark laws offer only limited protection. In addition, Allaire relys in part on "shrinkwrap" and "clickwrap" licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions. Moreover, the laws of other countries in which Allaire markets its products may afford little or no effective protection of Allaire's intellectual property. If Allaire resorts to legal proceedings to enforce its intellectual property rights, the proceedings could be burdensome and expensive and could involve a high degree of risk. OTHER COMPANIES MAY CLAIM THAT ALLAIRE INFRINGES THEIR PROPRIETARY TECHNOLOGY Although Allaire attempts to avoid infringing known proprietary rights of third parties, Allaire is subject to the risk of claims alleging infringement of third party proprietary rights. If Allaire were to discover that any of its products violated third party proprietary rights, there can be no assurance that Allaire 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. Allaire does not conduct comprehensive patent searches to determine whether the technology used in its products infringes patents held by third parties. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies. Any claim of infringement could cause Allaire to incur substantial costs defending against the claim, even if the claim is invalid, and could distract Allaire's management from Allaire's business. Furthermore, a party making such a claim could secure a judgment that requires Allaire to pay substantial damages. A judgment could also include an injunction or other court order that could prevent Allaire from selling its products. Any of these events could have a material adverse effect on Allaire's business, operating results and financial condition. 15 ALLAIRE'S BUSINESS COULD BE ADVERSELY AFFECTED IF ALLAIRE'S PRODUCTS CONTAIN ERRORS Software products as complex as Allaire's may contain undetected errors or "bugs," which result in product failures. Errors in certain of Allaire's products have been detected after commercial release of the products. The occurrence of errors could result in loss of or delay in revenue, loss of market share, failure to achieve market acceptance, diversion of development resources, injury to Allaire's reputation, or damage to Allaire's efforts to build brand awareness, any of which could have a material adverse effect on Allaire's business, operating results and financial condition. ALLAIRE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS RELATING TO ITS CUSTOMERS' CRITICAL BUSINESS OPERATIONS Many of the Web applications developed and deployed with Allaire's products are critical to the operations of Allaire's customers' businesses. Any failure in a customer's Web application could result in a claim for substantial damages against Allaire, regardless of Allaire's responsibility for such failure. Although Allaire maintains 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. ALLAIRE MAY BE SUBJECT TO RISKS ASSOCIATED WITH FUTURE ACQUISITIONS From time to time, Allaire may pursue acquisitions to obtain complementary products, services and technologies. An acquisition may not produce the revenue, earnings or business synergies that Allaire anticipated, and an acquired product, service or technology might not perform as Allaire expected. If Allaire pursues any acquisition, Allaire's management could spend a significant amount of time and effort in identifying and completing the acquisition. If it completes an acquisition, Allaire would probably have to devote a significant amount of management resources to integrating the acquired business with Allaire's existing business. To pay for an acquisition, Allaire might use capital stock or cash, including proceeds of the initial public offering. Alternatively, Allaire might borrow money from a bank or other lender. If Allaire uses capital stock, Allaire's stockholders would experience dilution of their ownership interests. If Allaire uses cash or debt financing, Allaire's financial liquidity will be reduced. ALLAIRE MAY BE AFFECTED BY UNEXPECTED YEAR 2000 PROBLEMS Many existing computer systems and software products do not properly recognize dates after December 31, 1999. This "Year 2000" problem could result in miscalculations, data corruption, system failures or disruptions of operations. Allaire is subject to potential Year 2000 problems affecting its products, internal systems and the systems of its vendors and distributors, any of which could have a material adverse effect on Allaire's business, operating results and financial condition. Because ColdFusion does not involve data storage, the ability of a Web application built with ColdFusion to comply with Year 2000 requirements is largely dependent on whether the database underlying the application is Year 2000 compliant. Therefore, there can be no assurance that Web applications developed using Allaire products will comply with Year 2000 requirements. For example, if ColdFusion is connected to a database that is not Year 2000 compliant, the information received by a ColdFusion application may be incorrect. Changing purchasing patterns of customers impacted by Year 2000 issues may result in reduced funds available for Web development activities. In addition, there can be no assurance that Year 2000 errors or defects will not be discovered in Allaire's internal software systems and, if such errors or defects are discovered, there can be no assurance that the costs of making such systems Year 2000 compliant will not be material. Year 2000 errors or defects in the internal systems maintained by Allaire's vendors or distributors could require Allaire to incur significant unanticipated expenses to remedy any problems or replace affected vendors and could reduce Allaire's revenue from its indirect distribution channel. ALLAIRE'S EXISTING STOCKHOLDERS WILL EXERCISE SIGNIFICANT CONTROL OVER ALLAIRE Allaire's officers, directors and greater than 10 percent stockholders together control approximately 49% of the outstanding common stock as of March 2, 1999. As a result, these stockholders, if they act together, are able to influence Allaire's management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preveting a change in control of Allaire that may affect the market price of the common stock. 16 CERTAIN PROVISIONS OF ALLAIRE'S CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF ALLAIRE MORE DIFFICULT Allaire's corporate documents and Delaware law contain provisions that might enable its management to resist a takeover of Allaire. These provisions might discourage, delay or prevent a change in the control of Allaire or a change in Allaire's management. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of common stock. FUTURE SALES BY EXISTING SECURITY HOLDERS COULD DEPRESS THE MARKET PRICE OF THE COMMON STOCK Immediately after the initial public offering in January 1999, the public market for the common stock included only the 2,875,000 shares that Allaire sold in the offering. At that time, there were an additional 7,958,260 shares of common stock outstanding. The persons that hold these shares are able to sell some of them in the public market following the offering. If these stockholders sell a large number of shares, the market price of the common stock could decline significantly. Moreover, the perception in the public market that these stockholders might sell shares of common stock could depress the market price of the common stock. Of the 7,958,260 additional shares held by Allaire's existing stockholders, 7,860,524 shares are subject to "lock-up" agreements with the representatives of the underwriters. When the 180-day "lock-up" period expires (or earlier with the consent of Credit Suisse First Boston), Allaire's existing stockholders and optionholders will be able to sell approximately an additional 7,525,000 shares in the public market. Some of Allaire's existing stockholders have the right to force Allaire to register their shares of common stock with the Securities and Exchange Commission. If Allaire registers their shares of common stock, they can sell those shares in the public market. Allaire has registered approximately 2,900,000 shares of common stock and intends to register 2,100,000 shares of common stock that Allaire has issued or may issue under Allaire's stock plans. Once Allaire registers these shares, they can be sold in the public market upon issuance, subject to the "lock-up" agreements described above. ALLAIRE WILL HAVE BROAD DISCRETION IN USING THE PROCEEDS FROM THE INITIAL PUBLIC OFFERING Allaire has not identified specific uses for the majority of the proceeds from the offering, and Allaire will have broad discretion in how it uses them. Investors will not have an opportunity to evaluate the economic, financial or other information on which Allaire bases its decisions on how to use the proceeds. INVESTORS WILL BE SUBJECT TO MARKET RISKS The stock market in general has recently experienced extreme price and volume fluctuations. 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 Allaire's stockholders brought such a lawsuit against Allaire, Allaire could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of Allaire management. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CASH AND CASH EQUIVALENTS As of March 31, 1999, Allaire is exposed to market risks which primarily include changes in U.S. interest rates. Allaire maintains a significant portion of its cash and cash equivalents in financial instruments with purchased maturities of three months or less. These financial instruments are subject to interest rate risk and will decline in value if interest rates increase. Due to the short duration of these financial instruments, an immediate increase in interest rates would not have a material effect on Allaire's financial condition or results of operations. 17 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Allaire is furnishing the following information with respect to the use of proceeds from its initial public offering of common stock, $0.01 par value per share, in January 1999: (1) The effective date of the registration statement of the offering and the commission file number were January 22, 1999 and 333-68639, respectively. (4)(v) Underwriting discount................... 4,025,000 Other offering expenses................. 1,175,000 ----------- Total ......................... 5,200,000 Payment of expenses were to persons other than directors, officers, general partners of the Company or their associates, persons owning 10% or more of the equity securities of the Company or affiliates of the Company. (4)(vi) The net offering proceeds to the Company after expenses were approximately $ 52,300,000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. By a written consent of stockholders dated January 15, 1999, the stockholders of Allaire consented to the following actions: 1. To amend Article Fourth of the Company's Certificate of Incorporation to increase the Company's authorized capital stock; 2. To amend and restate the Company's Certificate of Incorporation to, among other things, effect certain changes relating to corporate governance and other matters; 3. To approve and adopt the Company's 1998 Stock Incentive Plan; and 4. To approve and adopt the Company's 1998 Employee Stock Purchase Plan. Holders representing 6,158,766 shares of Allaire capital stock out of 7,994,110 shares outstanding signed the written consent. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 11. Statement re computation of unaudited net loss per share and pro forma net loss per share (filed herewith) Exhibit 27. Financial Data Schedule (filed herewith) (b) No reports were filed on Form 8-K by the Company during the quarter ended March 31, 1999. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: May 17, 1999 Allaire Corporation By: /S/ DAVID A. GERTH -------------------- David A. Gerth Vice President, Finance and Operations, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT INDEX Exhibit 11. Statement re computation of unaudited net loss per share and pro forma net loss per share (filed herewith) Exhibit 27. Financial Data Schedule (filed herewith) 18 EX-11 2 STMNT RE COMPU OF UNAUDITED NET LOSS PER SHARE ALLAIRE CORPORATION EXHIBIT 11 STATEMENT RE: COMPUTATION OF UNAUDITED NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA) - -----------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1999 1998 ---- ------ Basic and diluted net loss per share: Net loss $(1,684) $(2,211) ------- ------- ------- ------- Basic and diluted weighted average common shares outstanding 8,819 2,477 ------- ------- ------- ------- Basic and diluted net loss per share $ (0.19) $ (0.89) ------- ------- ------- -------
THREE MONTHS ENDED MARCH 31, 1999 1998 ----- ------ Pro forma basic and diluted net loss per share: Net loss $(1,684) $(2,211) ------- ------- ------- ------- Pro forma basic and diluted weighted average shares outstanding Shares attributable to common stock (1) 8,859 2,987 Shares attributable to the assumed conversion of convertible preferred stock upon closing of the initial public offering 898 3,817 ------- ------- Pro forma basic and diluted weighted average shares outstanding 9,757 6,804 ------- ------- ------- ------- Pro Forma basic and diluted loss per share $ (0.17) $ (0.32) ------- ------- ------- -------
(1) Includes outstanding common stock subject to repurchase under a stock restriction agreement which lapsed upon the consummation of the initial public offering in January 1999. EX-27 3 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLAIRE CORPORATION FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 MAR-31-1999 53,246 0 3,422 (440) 104 56,876 6,118 (2,026) 61,373 15,448 0 0 0 109 44,827 61,373 6,124 7,836 454 1,959 7,887 0 87 (1,684) 0 (1,684) 0 0 0 (1,684) (0.19) (0.19)
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