Exhibit 99.02
Report of Independent Auditors
Board of Directors
Flashpoint, Inc.
We have audited the accompanying balance sheet of Flashpoint, Inc. as of
December 31, 1999, and the related statements of operations and retained
earnings (deficit) and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Flashpoint, Inc. at December
31, 1999, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
October 3, 2000
Boston, Massachusetts
FLASHPOINT, INC.
Balance Sheets
DECEMBER 31, JUNE 30
1999 2000
---------------------------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 54,800 $ -
Accounts receivable 436,613 623,243
Unbilled receivables - 64,433
Refundable income taxes 2,055 2,055
Loan to stockholder 19,796 34,095
Prepaid expenses 678 1,793
---------------------------------
Total current assets 513,942 725,619
Property and equipment, net 220,800 282,578
Deposits 33,200 25,244
---------------------------------
Total assets $767,942 $1,033,441
=================================
Liabilities and stockholder's deficit
Current liabilities:
Cash overdraft $ - $ 37,370
Lines of credit 175,000 110,000
Notes payable 87,194 118,452
Capital lease obligations, current portion 15,974 23,223
Accounts payable 39,300 66,515
Accrued expenses 257,409 277,074
Deferred revenue 189,980 377,997
---------------------------------
Total current liabilities 764,857 1,010,631
Capital lease obligations, net of current
portion 20,640 30,764
---------------------------------
Total liabilities 785,497 1,041,395
Stockholder's deficit:
Common stock, $.01 par value, 300,000 shares
authorized, 78,000 shares issued and
outstanding 780 780
Additional paid-in capital 220 220
Retained earnings (deficit) (18,555) (8,954)
---------------------------------
Total stockholder's deficit (17,555) (7,954)
---------------------------------
Total liabilities and stockholder's deficit $767,942 $1,033,441
=================================
See accompanying notes.
2
Flashpoint, Inc.
Statements of Operations and Retained Earnings (Deficit)
YEAR ENDED SIX MONTHS
DECEMBER 31 ENDED
1999 JUNE 30 2000
--------------------------------
(Unaudited)
Net revenues $3,531,649 $2,250,490
Cost of services 2,072,703 1,191,626
--------------------------------
Gross profit 1,458,946 1,058,864
Operating expenses:
Marketing and selling 196,687 93,621
General and administrative 1,489,133 937,680
--------------------------------
Total operating expenses 1,685,820 1,031,301
--------------------------------
Operating income (loss) (226,874) 27,563
Interest expense, net (24,345) (17,962)
--------------------------------
Income (loss) before income taxes (251,219) 9,601
Income tax benefit 44,378 -
--------------------------------
Net income (loss) (206,841) 9,601
Retained earnings (deficit) at beginning of
period 188,286 (18,555)
--------------------------------
Retained earnings (deficit) at end of period $ (18,555) $ (8,954)
================================
See accompanying notes.
3
Flashpoint, Inc.
Statements of Cash Flows
YEAR ENDED SIX MONTHS
DECEMBER 31 ENDED
1999 JUNE 30 2000
-----------------------------------
(Unaudited)
Operating activities:
Net income (loss) $(206,841) $ 9,601
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 126,450 53,523
Deferred income taxes (44,378) -
Changes in operating assets and liabilities:
Cash overdraft - 37,370
Accounts receivable (171,920) (186,630)
Unbilled receivables - (64,433)
Prepaid expenses - (1,115)
Loan to stockholder 14,162 (14,299)
Accounts payable (4,491) 27,215
Accrued expenses 122,359 19,665
Deferred revenue 189,980 188,017
-----------------------------------
Net cash provided by operating activities 25,321 68,914
Investing activities:
Purchases of equipment (138,602) (88,224)
(Increase) decrease in deposits (22,800) 7,956
-----------------------------------
Net cash used in investing activities (161,402) (80,268)
Financing activities:
Proceeds (repayment) of lines of credit, net 125,000 (65,000)
Proceeds from note payable 55,388 31,258
Repayment of capital lease obligations (5,347) (9,704)
-----------------------------------
Net cash provided by (used in) financing activities 175,041 (43,446)
-----------------------------------
Net increase (decrease) in cash and cash
equivalents 38,960 (54,800)
Cash and cash equivalents at beginning of period 15,840 54,800
-----------------------------------
Cash and cash equivalents at end of period $ 54,800 $ -
===================================
Cash paid for:
Interest $ 24,705 $ 18,038
===================================
Supplemental noncash investing and financing
activities:
Leased equipment financings $ 41,961 $ 27,077
===================================
See accompanying notes.
4
Flashpoint, Inc.
Notes to Financial Statements
December 31, 1999
1. THE COMPANY AND BASIS OF PRESENTATION
Flashpoint, Inc. (the Company) is engaged in the business of business
consulting, developing and marketing computer programs, software and related
information and materials, and the development of computer-driven, state-of-the-
art products and services. The Company was incorporated in the Commonwealth of
Massachusetts in 1988.
Effective August 28, 2000, the Company was acquired by Bottomline Technologies
(de), Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company currently records revenue under either a time and material basis or
fixed price arrangement. Revenue for projects and products delivered on a time
and material basis is recognized as time is incurred and materials are
purchased. Revenue is recognized on a percentage-of-completion basis when the
contract comprises fixed price arrangements with defined milestone deliveries.
Billings not recognized as revenue in the period are recorded as deferred
revenue.
STOCK-BASED COMPENSATION
The Company adopted the disclosure-only provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, for options granted to employees. As permitted by
SFAS No. 123, the Company accounts for stock options granted to employees in
accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, and has included the pro forma disclosures required
by SFAS No. 123.
5
Flashpoint, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company invests its excess cash primarily in overnight repurchase
agreements. Accordingly, these investments are subject to minimal credit and
market risk. For financial reporting purposes, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of cash, cash equivalents and accounts receivable.
The Company invests its excess cash primarily in overnight repurchase agreements
and limits the amount of credit exposure to any one financial institution. The
investment philosophy limits the Company's exposure to a concentration of credit
risk and changes in market conditions. To reduce credit risk related to
accounts receivable, credit evaluations of the financial condition of its
customers are performed. Management does not believe significant credit risk
exists at December 31, 1999. Historically, there have been no significant losses
related to collection of accounts receivables.
The Company conducts a significant amount of business with five customers that
each comprise more than 10%, or in the aggregate 91%, of net revenues in 1999
and 74% of accounts receivable at December 31, 1999.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets as
follows:
Office furniture and equipment 7 years
Computer equipment 5 years
Computer software 3 years
Leasehold improvements and capitalized leases are amortized over their useful
lives or the lease term, whichever is shorter.
6
Flashpoint, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets used in operations, such as property and equipment, are
included in impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable. If the
impairment evaluation indicates the affected asset is not recoverable, the
asset's carrying amount would be reduced to fair value. No event has occurred
that would impair the value of long-lived assets recorded in the accompanying
financial statements.
INCOME TAXES
The Company accounts for income taxes under the liability method as required by
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences of differences between the tax and
financial accounting of assets and liabilities at each year end. Deferred
income taxes are based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income. A
valuation allowance is established when necessary to reduce deferred tax assets
to the amounts expected to be realized. Income tax expense is the tax payable
for the period and the change during the period in deferred tax assets and
liabilities.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities Exchange Commission issued Staff Accounting
Bulletin 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101
summarizes the application of generally accepted accounting principles to
revenue recognition in financial statements. On March 24, 2000, the SEC issued
an Amendment to SAB 101 (SAB 101A), delaying the effective date for certain
companies. SAB 101 is effective for the quarter beginning October 1, 2000. The
Company is presently analyzing what impact, if any, SAB 101 will have on the
results of operations or financial position of the Company.
In March 2000, the Financial Accounting Standards Board issued Financial
Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving
Stock Compensation, which further clarifies the application of APB No. 25. FIN
44 is effective July 1, 2000, but certain conclusions in this interpretation
cover specific events that occur after either December 15, 1998 or January 12,
2000. Events occurring after either December 15, 1998 or January 12, 2000 are
recognized on a prospective basis from July 1, 2000. The Company does not
believe that the adoption of FIN 44 will have a significant impact on its
financial position or results of operations.
7
Flashpoint, Inc.
Notes to Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Office furniture and equipment $141,967
Computer equipment 354,307
Computer software 124,322
Leasehold improvements 95,448
--------
716,044
Less accumulated depreciation and amortization 495,244
--------
Equipment and leasehold improvements, net $220,800
========
The Company has $41,961 of equipment, at cost, under capital leases (accumulated
amortization of $7,566) at December 31, 1999.
4. ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 1999:
Employee Retirement Plan Contribution $ 85,000
Warranty 93,000
Payroll 79,409
--------
$257,409
========
5. STOCK OPTION PLANS
The 1997 Stock Option Plan and the 1990 Stock Option Plan (the Plans) provide
for the issuance of incentive stock options to key employees of the Company and
nonqualified options to directors, key employees and consultants of the Company.
Incentive stock options may not be granted at less than fair market value of the
Company's common stock at the date of the grant and for a term not to exceed ten
years. The total number of shares available for issuance under the 1997 Stock
Option Plan and the 1990 Stock Option Plan were 12,000 and 10,000 shares,
respectively, at December 31, 1999. In August 2000, the Company amended the 1997
Stock Option Plan to allow for the issuance of 41,074 options.
8
Flashpoint, Inc.
Notes to Financial Statements (continued)
5. STOCK OPTION PLANS (CONTINUED)
Information regarding the Company's stock option plans is summarized below:
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
-------------------------------
Outstanding at December 31,1998 18,000 $ 1.29
Granted 4,000 10.00
-----------
Outstanding at December 31, 1999 22,000 $ 2.88
=============================
Exercisable at December 31, 1999 15,000 $ 1.25
=============================
There were no options available for grant at December 31, 1999. The weighted-
average fair value of options granted during 1999 was $2.60 per option. The
Company has 22,000 shares of common stock reserved for the exercise of stock
options at December 31, 1999.
The following table provides certain information with respect to stock options
outstanding at December 31, 1999:
WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES STOCK OPTIONS WEIGHTED-AVERAGE REMAINING CONTRACTUAL
OUTSTANDING EXERCISE PRICE LIFE (YRS.)
- -------------------------------------------------------------------------------------------
$1.00 7,500 $ 1.00 1.9
1.50 10,500 1.50 2.8
10.00 4,000 10.00 5.9
-----------
22,000 $ 2.88 3.1
==============================================================
9
Flashpoint, Inc.
Notes to Financial Statements (continued)
5. STOCK OPTION PLANS (CONTINUED)
The following table provides certain information with respect to stock options
exercisable at December 31, 1999:
STOCK OPTIONS WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- ---------------------------------------------------------------------------------------
$1.00 7,500 $1.00
1.50 7,500 1.50
----------- -----------
15,000 $1.25
==============================================
Pro forma net loss information is required by SFAS 123 and has been determined
as if the Company had accounted for its employee stock options under the fair
value method outlined in SFAS 123. The fair value of options issued at the date
of grant was estimated using the minimum-value model. For the year ended
December 31, 1999, pro forma net loss did not differ materially from reported
net loss. The effects on the pro forma net loss of expensing the estimated fair
value of stock options is not necessarily representative of the effects on
reporting the results of operations for future years as the period presented
includes only two years of option grants under the Plans.
The fair value for these options was estimated using the following weighted-
average assumptions: risk-free interest rates of 5.54% to 7.53%; no dividend
yield; and a weighted-average expected life of the options of five years.
6. FINANCING ARRANGEMENTS
Notes payable consist of the following:
Note payable due in monthly installments of $1,667, including
interest, at bank's base rate plus 1.50% (10% at December 31,
1999) through July 2000. $21,204
Note payable in monthly installments of $1,667, including interest
at bank's base rate plus 1.50% (10% at December 31, 1999) through
April 2003. 65,990
-----------
87,194
Less current portion 87,194
-----------
Long-term debt, net of current portion $ -
===========
10
Flashpoint, Inc.
Notes to Financial Statements (continued)
6. FINANCING ARRANGEMENTS (CONTINUED)
The notes payable are secured by significantly all assets of the Company. Since
the above notes payable were repaid in August 2000, they have been classified as
current liabilities.
The Company has two lines of credit with a bank providing maximum credit
availability of $190,000. Interest is at the bank's base rate plus 1.0% (9.5%
at December 31, 1999). The lines are collateralized by equipment. At December
31, 1999, $175,000 was outstanding under the lines of credit with $140,000
payable on demand and $35,000 payable by February 15, 2000. At December 31,
1999, the Company has $15,000 available for borrowing under its lines of credit.
7. LEASE OBLIGATIONS
Certain of the Company's office and computer equipment are leased under
noncancelable operating leases. In addition, the lease agreements for office
space provide that the Company pay additional rent for excess taxes and certain
utilities on the leased premises. Following is a schedule of future minimum
lease payments under capital and operating lease obligations at December 31,
1999:
CAPITAL OPERATING
LEASES LEASES TOTAL
-------------------------------------------
2000 $20,693 $161,855 $182,548
2001 13,967 158,888 172,855
2002 10,706 156,800 167,506
2003 - 156,800 156,800
2004 - 13,067 13,067
------------------------------------------
45,366 $647,410 $692,776
==========================
Less amounts representing interest 8,752
----------
Present value of net minimum
lease payments $36,614
==========
Rent expense related to operating leases approximated $145,000 in 1999.
11
Flashpoint, Inc.
Notes to Financial Statements (continued)
8. INCOME TAXES
A reconciliation of the federal statutory rate to the effective income tax rate
for the year ended December 31, 1999 is as follows:
Benefit at federal statutory rate (34.0)%
State taxes, net of federal benefit (6.3)
Nondeductible items 0.9
Unbenefitted operating loss 21.7
---------
(17.7)%
=========
The components of the income tax benefit as of December 31, 1999 are as follows:
Current $ -
Deferred (44,378)
---------
$(44,378)
=========
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. For income tax purposes, the
Company is a cash-basis taxpayer. Significant components of the Company's net
deferred taxes as of December 31, 1999 is as follows:
Deferred tax assets:
Net operating loss carryforward $133,436
Property and equipment 10,752
Accounts payable and accrued expenses 85,256
Charitable contributions 842
---------
Total deferred tax assets 230,286
Valuation allowance (54,462)
---------
Net deferred tax assets 175,824
Deferred tax liabilities:
Accounts receivable 175,824
---------
Total deferred tax liabilities 175,824
---------
Net deferred taxes $ -
=========
12
Flashpoint, Inc.
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $54,462 valuation allowance at December 31, 1999 is necessary
to reduce the deferred tax assets to the amount that will more likely than not
be realized. The change in the valuation allowance for the current year is
$54,462. At December 31, 1999, the Company has available net operating loss
carryforwards of $331,354, which expire in the year 2019.
9. RELATED-PARTY TRANSACTIONS
At December 31, 1999, the sole stockholder of the Company owed $19,796 for
amounts advanced by the Company. The debt is unsecured, noninterest-bearing and
due on demand.
10. EMPLOYEE RETIREMENT PLAN
The Company has a defined contribution retirement plan that qualifies under
Section 401(k) of the Internal Revenue Code (IRC). Under the plan, employees
meeting certain requirements can elect to have up to 15% of their designated
salaries contributed to fully vested participant retirement accounts in lieu of
salary payments up to the maximum limits allowed by the IRC. Employees
completely vest in the employer matching contribution after four years of
service. The Company, at its discretion, may make contributions to the plan on
behalf of each eligible employee. The Company's contribution under this plan
for 1999 was $85,000.
13