EXHIBIT 99.1 BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) FINANCIAL STATEMENTS DECEMBER 31, 1998 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Bright Tiger Technologies, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of changes in redeemable convertible preferred stock and stockholders' deficit and of cash flows present fairly, in all material respects, the financial position of Bright Tiger Technologies, Inc. (a development stage enterprise) (the "Company") at December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended, and for the period from inception (June 6, 1996) through December 31, 1996 and for the period from inception (June 6, 1996) through December 31, 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 Boston, Massachusetts April 15, 1999 BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEET - -------------------------------------------------------------------------------- December 31, March 31, 1997 1998 1999 ----------- ------------ ------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,666,100 $ 1,313,800 $ 662,100 Short term investments 4,717,400 495,700 -- Accounts receivable, net 17,700 101,400 202,900 Prepaid expenses -- 31,500 38,500 Total current assets 6,401,200 1,942,400 903,500 Fixed assets, net 898,100 701,200 595,800 Other assets 13,400 15,000 15,000 ----------- ------------ ------------- Total assets $ 7,312,700 $ 2,658,600 $ 1,514,300 ----------- ------------ ------------- ----------- ------------ ------------- LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Promissory notes $ $ 1,500,000 1,500,000 Current portion of long-term debt 123,200 1,145,900 1,073,000 Accounts payable 211,600 107,600 117,000 Accrued employee compensation and benefits 80,800 35,400 79,000 Accrued marketing expenses 47,000 17,000 18,000 Other accrued expenses 54,300 84,500 96,600 Deferred revenues 28,900 47,200 Total current liabilities 516,900 2,919,300 2,930,800 Long-term debt 751,800 ----------- ------------ ------------- Total liabilities 1,268,700 2,919,300 2,930,800 Redeemable convertible preferred stock: Series C, $.01 par value; 1,333,334 shares authorized, issued and outstanding at December 31, 1997 and 1998 and March 31, 1999 (unaudited) (liquidating preference of $6,000,000) 6,000,000 6,000,000 6,000,000 Series B, $.01 par value; 1,634,500 shares authorized, issued and outstanding at December 31, 1997 and 1998 and March 31, 1999 (unaudited) (liquidating preference of $4,086,200) 4,086,200 4,086,200 4,086,200 Series A, $.01 par value; 350,000 shares authorized, issued and outstanding at December 31, 1997 and 1998 and March 31, 1999 (unaudited) (liquidating preference of $350,000) 350,000 350,000 350,000 ----------- ------------ ------------- Total redeemable convertible preferred stock 10,436,200 10,436,200 10,436,200 ----------- ------------ ------------- Stockholders' deficit: Common stock, $.01 par value; 10,000,000 shares authorized, 1,782,123 shares issued and 1,748,823 shares outstanding at December 31, 1997; 1,828,073 shares issued and 1,397,448 shares outstanding at December 31, 1998; 1,845,240 shares issued and 1,414,615 shares outstanding at March 31, 1999 (unaudited) 17,800 18,300 18,500 Additional paid-in capital 51,800 57,300 60,100 Deficit accumulated during the development stage (4,461,600) (10,733,600) (11,892,400) ----------- ------------ ------------- (4,392,000) (10,658,000) (11,813,800) Treasury stock at cost: 33,300, 430,625 and 430,625 shares at December 31, 1997 and 1998 and March 31, 1999 (unaudited), respectively (200) (38,900) (38,900) Total stockholders' deficit (4,392,200) (10,696,900) (11,852,700) ----------- ------------ ------------- ----------- ------------ ------------- Total redeemable convertible preferred stock and stockholders' deficit 6,044,000 (260,700) (1,416,500) Commitments (Note 8) -- -- -- ----------- ------------ ------------- Total liabilities, redeemable convertible preferred stock and stockholders' deficit $ 7,312,700 $ 2,658,600 $ 1,514,300 ----------- ------------ ------------- ----------- ------------ ------------- The accompanying notes are an integral part of these financial statements. BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- PERIOD FROM PERIOD FROM PERIOD FROM INCEPTION INCEPTION INCEPTION (JUNE 6, 1996) YEAR ENDED DECEMBER 31, (JUNE 6, 1996) THREE MONTHS ENDED MARCH 31, (JUNE 6, 1996) THROUGH THROUGH ---------------------------- THROUGH DECEMBER 31, ------------------------ DECEMBER 31, 1998 1999 MARCH 31, 1996 1997 1998 1998 (UNAUDITED) (UNAUDITED) 1999 -------------- ----------- ----------- -------------- ------------ ------------ -------------- Revenues $ -- $ 17,700 $ 492,700 $ 510,400 $ 32,900 $ 207,800 $ 718,200 -------------- ----------- ----------- -------------- ------------ ------------ -------------- Costs and expenses: Cost of Revenues -- 11,800 22,300 34,100 -- 2,400 36,500 Research and development 235,700 2,180,800 3,032,700 5,449,200 750,800 659,200 6,108,400 Sales and marketing 42,700 1,546,000 3,000,900 4,589,600 988,900 487,000 5,076,600 General and administrative 49,700 529,100 755,700 1,334,500 186,200 177,600 1,512,100 -------------- ----------- ----------- -------------- ------------ ------------ -------------- 328,100 4,267,700 6,811,600 11,407,400 1,925,900 1,326,200 12,733,600 -------------- ----------- ----------- -------------- ------------ ------------ -------------- Loss from operations (328,100) (4,250,000) (6,318,900) (10,897,000) (1,893,000) (1,118,400) (12,015,400) -------------- ----------- ----------- -------------- ------------ ------------ -------------- Other income (expense): Interest income -- 156,100 161,800 317,900 67,000 13,000 330,900 Interest expense (700) (29,000) (114,900) (144,600) (20,500) (53,400) (198,000) -------------- ----------- ----------- -------------- ------------ ------------ -------------- (700) 127,100 46,900 173,300 46,500 (40,400) 132,900 -------------- ----------- ----------- -------------- ------------ ------------ -------------- Net loss $(328,800) $(4,122,900) $(6,272,000) $(10,723,700) $(1,846,500) $(1,158,800) $(11,882,500) -------------- ----------- ----------- -------------- ------------ ------------ -------------- -------------- ----------- ----------- -------------- ------------ ------------ -------------- The accompanying notes are an integral part of these financial statements. BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT For the Period from Inception (June 6, 1996) through December 31, 1998 - -------------------------------------------------------------------------------- REDEEMABLE DEFICIT CONVERTIBLE ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE TREASURY STOCK --------------------- ------------------- PAID-IN DEVELOPMENT ------------------ SHARES AMOUNT SHARES PAR VALUE CAPITAL STAGE SHARES AMOUNT TOTAL --------- ----------- --------- --------- ---------- ------------- --------- --------- ---------- Issuance of restricted common stock to founders -- $ -- 1,000,137 $10,000 $ -- $ (9,900) -- $ -- $ 100 Issuance of Series A redeemable convertible preferred stock 350,000 350,000 Net loss (328,800) (328,800) --------- ----------- --------- --------- ---------- ------------- --------- --------- ----------- Balance at December 31, 1996 350,000 350,000 1,000,137 10,000 -- (338,700) -- -- (328,700) Issuance of restricted common stock 781,986 7,800 51,800 59,600 Issuance of Series B redeemable convertible preferred stock 1,634,500 4,086,200 Issuance of Series C redeemable convertible preferred stock 1,333,334 6,000,000 Repurchase of common stock (33,300) (200) (200) Net loss (4,122,900) (4,122,900) --------- ----------- --------- --------- ---------- ------------- --------- --------- ----------- Balance at December 31, 1997 3,317,834 10,436,200 1,782,123 17,800 51,800 (4,461,600) (33,300) (200) (4,392,200) Issuance of common stock 45,950 500 5,500 6,000 Repurchase of common stock (397,325) (38,700) (38,700) Net loss (6,272,000) (6,272,000) --------- ----------- --------- --------- ---------- ------------- --------- --------- ---------- Balance at December 31, 1998 3,317,834 10,436,200 1,828,073 18,300 57,300 (10,733,600) (430,625) (38,900) (10,696,900) Issuance of common stock (unaudited) 17,167 200 2,800 3,000 Net loss (unaudited) (1,158,800) (1,158,800) --------- ----------- --------- --------- ---------- ------------- --------- --------- ----------- Balance at March 31, 1999 3,317,834 $10,436,200 1,845,240 $ 18,500 $ 60,100 $(11,892,400) (430,625) $(38,900) $11,852,700 (unaudited) --------- ----------- --------- --------- ---------- ------------- --------- --------- ----------- --------- ----------- --------- --------- ---------- ------------- --------- --------- ----------- The accompanying notes are an integral part of these financial statements. BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF CASH FLOWS - -------------------------------------------------------------------------------- PERIOD FROM PERIOD FROM PERIOD FROM INCEPTION INCEPTION INCEPTION (JUNE 6, 1996) YEAR ENDED DECEMBER 31, (JUNE 6, 1996) THREE MONTHS ENDED MARCH 31, (JUNE 6, 1996) THROUGH THROUGH ---------------------------- THROUGH DECEMBER 31, ------------------------ DECEMBER 31, 1998 1999 MARCH 31, 1996 1997 1998 1998 (UNAUDITED) (UNAUDITED) 1999 -------------- ----------- ----------- -------------- ------------ ------------ -------------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net loss $(328,800) $(4,122,900) $(6,272,000) $(10,723,700) $(1,846,500) $(1,158,800) $(11,882,500) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 7,800 148,200 405,500 561,500 94,800 105,400 666,900 Increase (decrease) resulting from operating assets and liabilities: Accounts receivable -- (17,700) (83,700) (101,400) (21,600) (101,500) (202,900) Prepaid expenses -- -- (31,500) (31,500) (6,300) (7,000) (38,500) Other assets (400) (13,000) (1,600) (15,000) (2,300) -- (15,000) Accounts payable 16,600 195,000 (104,000) 107,600 277,600 9,400 117,000 Accrued employee compensation and benefits 19,000 61,800 (45,400) 35,400 4,600 43,600 79,000 Accrued marketing expenses -- 47,000 (30,000) 17,000 30,300 1,000 18,000 Other accrued expenses -- 54,300 30,200 84,500 (47,000) 12,100 96,600 Deferred revenue -- -- 28,900 28,900 -- 18,300 47,200 -------------- ----------- ----------- -------------- ------------ ------------ -------------- Net cash used in operating activities (285,800) (3,647,300) (6,103,600) (10,036,700) (1,516,400) (1,077,500) (11,114,200) -------------- ----------- ----------- -------------- ------------ ------------ -------------- -------------- ----------- ----------- -------------- ------------ ------------ -------------- Cash flow from investing activities: Purchase of short term investments -- (8,817,400) (6,282,600) (15,100,000) (292,500) -- (15,100,000) Sale of short term investments -- 4,100,000 10,504,300 14,604,300 831,600 495,700 15,100,000 Purchases of fixed assets (61,700) (992,400) (208,600) (1,262,700) (178,800) -- (1,262,700) -------------- ----------- ----------- -------------- ------------ ------------ -------------- Net cash provided by (used in) investing activities (61,700) (5,709,800) 4,013,100 (1,758,400) 360,300 495,700 (1,262,700) -------------- ----------- ----------- -------------- ------------ ------------ -------------- -------------- ----------- ----------- -------------- ------------ ------------ -------------- Cash flows from financing activities: Proceeds from issuance of promissory notes -- -- 1,500,000 1,500,000 -- -- 1,500,000 Proceeds from issuance of long-term debt 66,500 808,500 270,900 1,145,900 -- -- 1,145,900 Proceeds from issuance of redeemable convertible preferred stock 350,000 10,086,200 -- 10,436,200 -- -- 10,436,200 Proceeds from issuance of common stock 100 59,600 6,000 65,700 -- 3,000 68,700 Repurchase of common stock -- (200) (38,700) (38,900) -- -- (38,900) Repayment of long-term debt -- -- -- -- -- (72,900) (72,900) -------------- ----------- ----------- -------------- ------------ ------------ -------------- Net cash provided by (used in) financing activities 416,600 10,954,100 1,738,200 13,108,900 -- (69,900) 13,039,000 -------------- ----------- ----------- -------------- ------------ ------------ -------------- Net increase (decrease) in cash and cash equivalents 69,100 1,597,000 (352,300) 1,313,800 (1,156,100) (651,700) 662,100 Cash and cash equivalents, beginning of period -- 69,100 1,666,100 -- 1,666,100 1,313,800 -- -------------- ----------- ----------- -------------- ------------ ------------ -------------- Cash and cash equivalents, end of period $ 69,100 $ 1,666,100 $ 1,313,800 $ 1,313,800 $ 510,000 $ 662,100 $ 662,100 -------------- ----------- ----------- -------------- ------------ ------------ -------------- -------------- ----------- ----------- -------------- ------------ ------------ -------------- Supplement disclosure of cash flow information: Cash paid for interest $ 700 $ 29,000 $ 95,800 $ 125,500 $ 20,459 $ 23,845 $ 149,345 -------------- ----------- ----------- -------------- ------------ ------------ -------------- -------------- ----------- ----------- -------------- ------------ ------------ -------------- The accompanying notes are an integral part of these financial statements. BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION Bright Tiger Technologies, Inc. (the "Company") develops and markets Web site resource management software designed to help organizations build and manage fast, reliable Web sites. Although the Company has commenced planned principal operations, revenues are not yet significant. Accordingly, the Company is considered to be in the development stage and the accompanying financial statements represent those of a development stage enterprise, as defined in Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises." On April 12, 1999, the Company was acquired by Allaire Corporation ("Allaire"). This transaction was accounted for as a pooling of interests and was effected through the exchange of shares of Allaire's common stock for all of the issued and outstanding shares of the Company. Prior to the transaction, all of the issued and outstanding shares of the Company's Series A preferred stock converted to common stock of the Company. Pursuant to the transaction, each outstanding share of the Company's capital stock was converted into the right to receive shares of Allaire's common stock as follows: Common stock 0.02824 Series B preferred stock 0.06271 Series C preferred stock 0.09847 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies followed in the preparation of the financial statements are as follows: CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company invests excess cash primarily in a money market fund at a major financial institution and U.S. Treasury bills which are subject to minimal credit and market risk. The Company's cash equivalents at December 31, 1997 consisted of approximately $47,500 in money market funds and $1,595,600 in U.S. Treasury bills. Short-term investments at December 31, 1997 consisted of U.S. Treasury bills. The Company's cash equivalents at December 31, 1998 consisted of approximately $296,600 in money market funds and $1,493,000 in U.S. Treasury bills. All securities are classified as available-for-sale and are recorded at cost which approximates fair value. Any unrealized gains or losses are recorded as a separate component of stockholders' equity. Gross unrealized and realized gains and losses on sales of securities as of December 31, 1996, 1997 and 1998 and for the period from inception (June 6, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998 were not significant. FIXED ASSETS Fixed assets are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Repair and maintenance costs are expensed as incurred. BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- REVENUE RECOGNITION Revenue for software licenses is recognized when an agreement has been executed, delivery has occurred, no significant vendor obligations remain and collection of the related receivable is probable. Revenue from maintenance and post-contract support contracts are recognized ratably over the contractual periods for which services are performed. Revenue from consulting and service contracts are recognized over the term of the contract using the percentage of completion method of accounting, based upon the proportion that costs incurred bear to total estimated costs at completion. 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 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. During the period from inception (June 6, 1996) through December 31, 1998, no software development costs have been capitalized. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for stock-based awards to its employees using the intrinsic value based method as prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations and has adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", through disclosure only (Note 6). ADVERTISING EXPENSE The Company recognizes advertising expense as incurred. Advertising expense was $0, $141,400 and $213,200 for the period from inception (June 6, 1996) through December 31, 1996 and for the years ended December 31, 1997 and 1998, respectively. INCOME TAXES The Company utilizes the liability method of accounting for income taxes, as set forth in SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. 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 amount of expenses during the reporting period. Actual results could differ from those estimates. UNAUDITED INTERIM FINANCIAL DATA The interim financial data as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 and for the period from inception (June 6, 1996) through March 31, 1999 are unaudited; however, in the opinion of management, the interim financial data include all adjustments, consisting only of BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- normal recurring adjustments, necessary for a fair presentation of the results of operations for these interim periods. The interim financial data are not necessarily indicative of the results of operations for a full fiscal year. 3. FIXED ASSETS Fixed assets consist of the following: DECEMBER 31, USEFUL LIFE IN -------------------- YEARS 1998 1997 ----------------- --------- --------- Computer equipment and software 3 $1,018,900 $ 845,300 Furniture and fixtures 3 228,800 193,400 Leasehold improvements 3 15,000 15,400 --------- --------- 1,262,700 1,054,100 Less -- accumulated depreciation 561,500 156,000 --------- --------- $ 701,200 $ 898,100 --------- --------- --------- --------- BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTESW TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 4. LONG-TERM DEBT AND LINE OF CREDIT In December 1996, the Company entered into, and in July 1997 amended and restated, a loan agreement with a bank for a line of credit under which the Company may borrow up to $875,000 for purchases of equipment, subject to certain limitations. In June 1998, the Company entered into a second agreement with the bank for an additional line of credit of $500,000 for purchases of equipment, subject to the same limitations. All borrowings under these lines of credit are collateralized by substantially all of the Company's assets and bear interest at the bank's prime rate plus 3/4% (8.50% at December 31, 1998). The terms of the lines of credit include certain covenants requiring the maintenance of specified financial ratios and restrictions on the Company's ability to sell or transfer fixed assets and to declare or pay dividends to its stockholders. As of December 31, 1998, the Company was not in compliance with the covenants relating to maintenance of certain financial ratios. Accordingly, the outstanding balance under the lines of credit was immediately callable by the bank and has been classified as a current liability in its entirety. At December 31, 1998, $1,145,900 was outstanding under the aforementioned lines of credit. In November 1998, the Company issued promissory notes to existing investors of the Company in exchange for $1,500,000 in cash proceeds. These notes bear interest at 8% per year, and the principal and accrued interest of the notes are payable upon demand by their holders. These notes contain conversion rights whereby the holders of the notes may apply the unpaid principal and interest under the notes to the purchase of equity securities of the Company. The line of credit and promissory notes were paid in full in April 1999. 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY REDEEMABLE CONVERTIBLE PREFERRED STOCK The Preferred Stock has the following characteristics: CONVERSION Each share of the Series A Preferred Stock and Series B Preferred Stock are convertible at any time at the option of the holder into one and one-half shares of common stock, subject to certain anti-dilution adjustments. Each share of the Series C Preferred Stock is convertible at any time at the option of the holder into one share of common stock, subject to certain anti-dilution adjustments. The Preferred Stock automatically converts into common stock upon the closing of an underwritten public offering of the Company's common stock involving net proceeds to the Company of at least $10 million and a price of not less than $3.67, $6.67 and $13.50 per share, subject to certain anti-dilution adjustments, for the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, respectively. BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The Company has reserved 525,000, 2,451,750 and 1,333,334 shares of its common stock for issuance upon the conversion of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, respectively. DIVIDENDS Holders of the Preferred Stock are only entitled to receive dividends when, as and if declared by the Board of Directors, subject to certain limitations. Through December 31, 1998, no dividends have been declared or paid by the Company. REDEMPTION At the request of the holders of a majority of the then outstanding shares of Preferred Stock, in November 2002, 2003 and 2004, the Company shall redeem up to 33 1/3%, 50% and 100%, respectively, of the then outstanding shares of Preferred Stock at a per share price of $1.00, $2.50 and $4.50 for the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, respectively, plus any and all declared but unpaid dividends, subject to certain anti-dilution adjustments. The redemption value of the Preferred Stock issued and outstanding at December 31, 1998 is equal to its issuance price. LIQUIDATION, DISSOLUTION OR WINDING-UP OF THE COMPANY In the event of any liquidation, dissolution or winding-up of the affairs of the Company, the holders of the then outstanding Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock will be entitled to receive, in preference to the holders of the common stock, a per share payment of $1.00, $2.50 and $4.50, respectively, plus any declared but unpaid dividends. If the remaining assets of the Company are insufficient to pay the Preferred Stockholders the full amount to which they are entitled, any distribution of the remaining assets will be in proportion to the respective amounts which would otherwise be payable if all amounts payable were paid in full. Any assets remaining following the distribution to the holders of the Preferred Stock will be distributed ratably among the common stockholders and the holders of the Series B and Series C Preferred Stock, subject to certain limitations on the aggregate amount payable of $7.50 and $13.50 per share, respectively, as adjusted for certain anti-dilution adjustments. VOTING RIGHTS Each holder of the Preferred Stock is entitled to the number of votes equal to the number of shares of common stock into which such holder's shares are convertible at the record date for such vote. COMMON STOCK SPLITS In connection with the issuance of the Series A Preferred Stock in August 1996, the Board of Directors authorized a 666.76-for-1 common stock split. In April 1997, the Board of Directors authorized a 3-for-2 common stock split effected in the form of a 50% stock dividend. All common share and per share amounts have been retroactively adjusted to reflect both of these stock splits. BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- STOCK RESTRICTION AGREEMENTS At December 31, 1998, 502,940 of the Company's outstanding shares of common stock were subject to stock restriction agreements. Under each of these agreements, the Company has the option to repurchase any or all unvested shares of common stock in the event of a restricted stockholder's voluntary resignation or termination of employment by the Company at a repurchase price between $0.0001 and $0.10 per share. The number of shares that may be repurchased by the Company is reduced over a five-year period. TREASURY STOCK During 1997 and 1998, in connection with the resignation of founding stockholders and executives of the Company that were party to stock restriction agreements, the Company repurchased 33,300 and 397,325 shares of unvested common stock for $200 and $38,700, respectively. 6. 1996 STOCK OPTION PLAN During 1996, the Company adopted the 1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan provides for the granting of incentive and non-qualified stock options to management, other key employees, consultants and directors of the Company. The total number of shares of common stock that may be issued pursuant to awards granted under the 1996 Plan is 1,293,840. The exercise price under each stock option shall be specified by the Board of Directors at the time of grant. However, incentive stock options may not be granted at less than fair market value of the Company's common stock at the date of grant or for a term in excess of ten years. For holders of more than 10% of the Company's total combined voting power of all classes of stock, incentive stock options may not be granted at less than 110% of the fair market value of the Company's common stock at the date of grant and for a term not to exceed five years. At December 31, 1998, there were 528,463 shares available for future grant under the 1996 Plan. BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The following table summarizes stock option activity under the 1996 Plan: PERIOD FROM INCEPTION (JUNE 6, 1996) THROUGH DECEMBER 31, YEAR ENDED DECEMBER 31, 1996 1997 1998 ---------------------- ----------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- ---------- --------- ----------- --------- --------- Outstanding at beginning of year -- -- 210,750 0.03 470,325 0.11 Granted 210,750 0.03 462,075 0.11 491,000 0.45 Cancelled -- -- (12,000) 0.10 (386,448) 0.28 Exercised -- -- (190,500) 0.04 (45,950) 0.13 Outstanding at end of year 210,750 0.03 470,325 0.11 528,927 0.30 ------- ------- ------- Options exercisable -- 13,906 136,473 ------- ------- ------- Weighted average fair value of option grants .01 .01 .09 ------- ------- ------- The following table summarizes information about stock options outstanding at December 31, 1998: OUTSTANDING EXERCISABLE -------------------------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE NUMBER OF AVERAGE NUMBER OF CONTRACTUAL EXERCISE OPTIONS EXERCISE RANGE OF EXERCISE PRICES OPTIONS LIFE (YEARS) PRICE EXERCISABLE PRICE - ------------------------ --------- ------------ -------- ----------- --------- $0.03 10,175 7.9 $0.03 2,157 0.03 $0.10 197,200 8.4 $0.10 72,514 0.10 $0.45 321,552 9.5 $0.45 61,802 0.45 -------- ------- $0.03-$0.45 528,927 9.1 $0.30 136,473 $0.26 -------- ------- BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- There was no compensation expense recorded in the Company's statement of operations for the period from inception (June 6, 1996) through December 31, 1996 and for the years ended December 31, 1997 and 1998. Had compensation cost for awards of stock options been determined based on the fair value of these options at their date of grant, consistent with the method prescribed by SFAS No. 123, the Company's net loss would have been as follows: PERIOD FROM INCEPTION (JUNE 6, 1996) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------- 1996 1997 1998 --------------- ------------ ------------ Net loss: As reported $(328,800) $(4,122,900) $(6,272,000) Pro forma $(328,900) $(4,123,700) $(6,278,000) Because additional option grants are expected to be made in future years and options vest over several years, the above pro forma effects may not be indicative of pro forma effects 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 period from inception (June 6, 1996) through December 31, 1996 and for the years ended December 31, 1997 and 1998: PERIOD FROM INCEPTION (JUNE 6, 1996) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ----------------------- 1996 1997 1998 --------------- ---------- ---------- Expected option term (years) 5 5 5 Risk-free interest rate 6.40% 6.30% 4.56% Dividend yield 0.00% 0.00% 0.00% BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 7. INCOME TAXES Deferred tax assets and liabilities consist of the following: DECEMBER 31, -------------------- 1997 1998 --------- --------- Deferred tax assets: Net operating loss carryforwards $1,970,000 $ 4,416,000 Research and development tax credit carryforwards 143,000 335,000 Bad debt write-offs -- 1,000 Accrued expenses 22,000 22,000 ---------- ---------- Gross deferred tax assets 2,135,000 4,774,000 Deferred tax liability Depreciation (29,000) (42,000) ---------- ---------- Net deferred tax assets 2,106,000 4,732,000 Deferred tax asset valuation allowance (2,106,000) (4,732,000) ---------- ---------- $ -- $ -- ---------- ---------- ---------- ---------- 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. At December 31, 1998, the Company has net operating loss carryforwards of approximately $10,683,000 and $10,913,000 for federal and state income tax reporting purposes, respectively. At December 31, 1998, the Company had research and development credit carryforwards of $231,000 and $160,000 available to offset future federal and state taxes, respectively. If not used, these carryforwards will expire in 2011 through 2012. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company's ownership may limit the amount of net operating loss and tax credit carryforwards which could be utilized annually to offset future taxable income and tax liabilities. BRIGHT TIGER TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 8. COMMITMENTS The Company leases its office space under a noncancellable operating lease which expires on March 31, 2000. Rent expense for the period from inception (June 6, 1996) through December 31, 1996 and for the years ended December 31, 1997 and 1998 was approximately $15,000, $138,800 and $168,000, respectively. Future minimum payments due under the aforementioned lease as of December 31, 1998 are as follows: YEAR ENDING DECEMBER 31, - --------------- 1999 $ 162,800 2000 40,100 --------- $ 202,900 --------- ---------