Exhibit 99.2
Report of Independent Accountants
To the Board of Directors and Shareholders
of Billpoint, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Billpoint, Inc. (a company in the
development stage) at December 31, 1998 and the results of its operations and
its cash flows for the period from September 1, 1998 (date of inception) 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
July 20, 1999
BILLPOINT, INC.
(A Development Stage Company)
BALANCE SHEET
(in thousands, except share amounts)
December 31, March 31,
1998 1999
-------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 50 $ 3,134
Other current assets......................................................... -- 52
----- -------
Total current assets..................................................... 50 3,186
Property and equipment, net..................................................... 12 627
Other assets ................................................................... -- 50
----- -------
$ 62 $ 3,863
===== =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 20 $ 752
----- -------
Total current liabilities................................................ 20 752
----- -------
Shareholders' equity:
Convertible Preferred Stock, no par value; 3,723,793 shares authorized;
220,000 shares issued and outstanding at December 31, 1998 and
3,165,975 (unaudited) shares issued and outstanding at March 31, 1999........ 110 3,772
Common Stock, no par value; 20,000,000 shares authorized; 5,700,000
shares issued and outstanding at December 31, 1998 and March 31, 1999
(unaudited)................................................................. 6 6
Additional paid-in capital.................................................... -- 1,549
Unearned compensation......................................................... -- (1,396)
Deficit accumulated during the development stage.............................. (74) (820)
----- -------
Total shareholders' equity............................................... 42 3,111
----- -------
$ 62 $ 3,863
===== =======
The accompanying notes are an integral part of these financial statements.
BILLPOINT, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
(in thousands)
Period from Period from
September 1, September 1,
1998 (inception) Three months 1998 (inception)
to December 31, ended March 31, to March 31,
1998 1999 1999
----------------- ----------------- -----------------
(unaudited)
Operating expenses:
Sales and marketing.............................................. $ 3 $ 414 $ 417
Product development.............................................. 34 239 273
General and administrative....................................... 37 105 142
----- ----- -----
Total operating expenses..................................... 74 758 832
----- ----- -----
Loss from operations................................................ (74) (758) (832)
Interest income..................................................... -- 12 12
----- ----- -----
Net loss............................................................ $ (74) $(746) $(820)
===== ===== =====
The accompanying notes are an integral part of these financial statements.
BILLPOINT, INC.
(A Development Stage Company)
STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
Deficit
Accumulated Total
Convertible Additional in the Share-
Preferred Stock Common Stock Paid-in Unearned Development Holders'
Shares Amount Shares Amount Capital Compensation Stage Equity
------ ------ ------ ------ ------- ------------ ------------- -------
Issuance of Series A Convertible
Preferred Stock for cash at $0.50 per
share in October 1998, net ......... 220 $ 110 -- - $ -- $ -- $ -- $ 110
Issuance of Common Stock for cash at
$0.001 per share in October 1998 .... -- -- 5,700 6 -- -- -- 6
Net loss ............................... -- -- -- -- -- -- (74) (74)
------ ------ ------ ------ ------ ------- ------- ------
Balance at December 31, 1998 ........... 220 110 5,700 6 -- -- (74) 42
Issuance of Series A Convertible
Preferred Stock for cash at $0.50 per
share in January 1999, net
(unaudited) ......................... 100 46 -- -- -- -- -- 46
Issuance of Series B Convertible
Preferred Stock for cash at $1.28 per
share in March 1999, net
(unaudited) ......................... 2,846 3,616 -- -- -- -- -- 3,616
Issuance of Preferred Stock Warrant
(unaudited) ......................... -- -- -- -- 468 (468) -- --
Amortization of Preferred Stock
Warrant (unaudited) ................. -- -- -- -- -- 117 -- 117
Unearned stock compensation
(unaudited) ......................... -- -- -- -- 1,081 (1,081) -- --
Amortization of unearned stock
compensation (unaudited) ............ -- -- -- -- -- 36 -- 36
Net loss (unaudited) ................... -- -- -- -- -- -- (746) (746)
------ ------ ------ ------ ------ ------- ------- ------
Balance at March 31, 1999 (unaudited) .. 3,166 $3,772 5,700 $ 6 $1,549 $(1,396) $(820) $3,111
====== ====== ====== ====== ====== ======= ======= ======
The accompanying notes are an integral part of these statements.
BILLPOINT, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(in thousands)
Period from Period from
September 1, September 1,
1998 (inception) Three months 1998 (inception)
to December 31, ended March 31, to March 31,
1998 1999 1999
----------------- ----------------- -----------------
(unaudited)
Cash flows from operating activities:
Net loss ...................................................... $ (74) $ (746) $ (820)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................... -- 26 26
Amortization of unearned compensation ....................... -- 36 36
Amortization of Preferred Stock Warrant ..................... -- 117 117
Changes in assets and liabilities:
Other current assets ...................................... -- (52) (52)
Other assets .............................................. -- (50) (50)
Accounts payable .......................................... 20 732 752
----- ------ ------
Net cash provided by (used in) operating activities ............ (54) 63 9
----- ------ ------
Cash flows from investing activities:
Purchases of property and equipment ......................... (12) (641) (653)
----- ------ ------
Net cash used in investing activities .......................... (12) (641) (653)
----- ------ ------
Cash flows from financing activities:
Proceeds from issuance of Convertible Preferred Stock, net .... 110 3,662 3,772
Proceeds from issuance of Common Stock ........................ 6 -- 6
----- ------ ------
Net cash provided by financing activities ...................... 116 3,662 3,778
----- ------ ------
Net increase in cash and cash equivalents ...................... 50 3,084 3,134
Cash and cash equivalents at beginning of period ............... -- 50 --
----- ------ ------
Cash and cash equivalents at end of period ..................... $ 50 $3,134 $3,134
===== ====== ======
Supplemental non-cash financing activity:
Issuance of Preferred Stock Warrant ......................... $ -- $ 468 $ 468
The accompanying notes are an integral part of these financial statements.
BILLPOINT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share amounts)
1. The Company and Summary of Significant Accounting Policies
The Company
Billpoint, Inc. (the "Company"), began operations on September 1, 1998, and
was incorporated in California on September 24, 1998. The Company has
developed a centralized, turnkey authorization, billing and payment
fulfillment solution that permits individuals and small merchants to accept
credit cards as payment for Internet-based sales transactions. The Company's
service, which was launched in December 1998, is expected to derive revenues
based upon a variety of fee arrangements, including percentage-of-
transaction, fixed-fee per transaction and flat monthly rates.
Since its inception, the Company has been in the development stage, engaged
primarily in research and development, recruiting personnel and raising
capital. To date, no revenues have been generated from its planned
operations. Accordingly, the accompanying financial statements are not
indicative of a normal operating period.
The Company has incurred losses during all periods since inception and
expects to incur further losses related to the development of its product
and service offerings; however, management believes that existing capital
resources, including the equity financing secured subsequent to December
31, 1998, will be sufficient to fund the Company's cash requirements
through at least December 31, 1999.
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
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At
December 31, 1998 and March 31, 1999, $50 and $3,134 (unaudited),
respectively, of money market funds, the fair value of which approximates
cost, are included in cash and cash equivalents.
Concentration of credit risk
Financial instruments that potentially subject the Company to a concentration
of credit risk consist of cash and cash equivalents. The Company deposits
cash and cash equivalents with financial institutions that management
believes are of high credit quality.
Software development costs
Software development costs are included in research and development and are
expensed as incurred. After technological feasibility is established using
the working model approach, material software development costs are
capitalized. The capitalized cost is then amortized on a straight-line basis
over the estimated product life, or on the ratio of current revenues to total
projected product revenues, whichever is greater. To date, the period
between achieving technological feasibility and the general availability of
such software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally one to three years, or the lease term of the respective assets if
shorter.
Long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of." SFAS No. 121 requires recognition of impairment of long-
lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets.
Income taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Companies' financial statements or
tax returns. The measurement of current and deferred tax liabilities and
assets are based on provisions of the enacted tax law; the effects of future
changes in tax laws or rates are not anticipated. The measurement of deferred
tax assets is reduced, if necessary, by the amount of any tax benefits that,
based on available evidence, are not expected to be realized.
Research and development
Research and development costs are charged to expense as incurred.
Stock compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB Opinion No. 25, unearned compensation is based on
the difference, if any, on the date of the grant, between the fair value of
the Company's Common Stock and the exercise price of the option. The Company
accounts for stock issued to non-employees in accordance with the provisions
of SFAS No. 123 and EITF 96-18.
Comprehensive income
There were no items required to be reported in comprehensive loss for the
periods presented.
Recent accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP No.
98-1 requires that entities capitalize certain costs related to internal-use
software once certain criteria have been met. The Company does not expect
the adoption of SOP No. 98-1 to have a material impact on its financial
position, results of operations or cash flows. The Company will be required
to implement SOP No. 98-1 for the year ending December 31, 1999.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 requires that all start-up costs related
to new operations be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. The Company does not expect the adoption of SOP No. 98-5 to have a
material impact on its financial position, results of operations or cash
flows. The Company will be required to implement SOP No. 98-5 for the year
ending December 31, 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative financial
instruments and hedging activities. Because the Company currently holds no
derivative instruments and does not engage in hedging activities, the Company
does not expect the adoption of SFAS No. 133 to have a material impact on its
financial position, results of operations or cash flows. The Company will be
required to implement SFAS No. 133 for the year ending December 31, 2000.
Unaudited interim financial information
The accompanying interim financial statements as of March 31, 1999 and for
the three months then ended are unaudited. The unaudited interim financial
statements have been prepared on the same basis as the annual financial
statements, and in the opinion of management, reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly the
Company's financial position at March 31, 1999 and its results of operations
and cash flows for the three months then ended. The financial data and other
information disclosed in these notes to the financial statements related to
this period is unaudited. The results for the three months ended March 31,
1999 are not necessarily indicative of the results to be expected for the
year ending December 31, 1999.
2. Balance Sheet Components
December 31, March 31,
1998 1999
--------------- --------------
(unaudited)
Property and equipment, net:
Computer equipment........................................................... $ 12 $ 428
Software..................................................................... -- 174
Furniture and fixtures....................................................... -- 29
Leasehold improvements....................................................... -- 22
----- -----
Less: Accumulated depreciation and amortization............................... -- (26)
----- -----
$ 12 $ 627
===== =====
3. Income Taxes
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses from inception (September 1, 1998)
to December 31, 1998. As of December 31, 1998, the Company had net operating
loss carryforwards of approximately $50 for federal income tax purposes which
can be used to reduce future taxable income. These net operating loss
carryforwards begin to expire in 2014.
Under the Tax Reform Act of 1986, the amounts of and benefits from net
operating loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not
limited to, a cumulative ownership change of more than 50%, as defined, over
a three year period. As a result of this limitation, the net operating loss
carryforwards may expire prior to their utilization.
4. Commitments
Leases
The Company leases office space and equipment under noncancelable operating
leases with various expiration dates through February 2003. Rent expense for
the year ended December 31, 1998 and the period ended March 31, 1999 totaled
$2,000 and $10,000 (unaudited), respectively. The terms of the facility
lease provide for rental payments on a graduated scale. The Company
recognizes rent expense on a straight-line basis over the lease period, and
has accrued for rent expense incurred but not paid.
Future minimum lease payments under noncancelable operating leases, including
lease commitments entered into subsequent to December 31, 1998, are as
follows:
Year Ending
December 31,
1999 .......................................................... $ 96
2000 .......................................................... 133
2001 .......................................................... 25
2002 .......................................................... 3
2003 .......................................................... 1
----
Total minimum lease payments................................... $258
====
5. Shareholders' Equity
Convertible Preferred Stock
The Company's Articles of Incorporation, as amended, authorize the issuance
of 3,723,793 shares of Convertible Preferred Stock, of which 320,000 shares,
2,853,793 shares, and 550,000 shares are designated as Series A, Series B and
Series C, respectively. The holders of Convertible Preferred Stock have
various rights and preferences as follows:
Voting
Each share of Series A and B Convertible Preferred Stock has voting rights
equal to an equivalent number of shares of Common Stock into which it is
convertible and votes together as one class with the Common Stock.
As long as at least fifty percent of the Convertible Preferred Stock remain
outstanding, the Company must obtain approval from a majority of the holders
of Convertible Preferred Stock in order to amend the Articles of
Incorporation as related to Convertible Preferred Stock, change the
authorized number of shares of Convertible Preferred Stock, repurchase any
shares of Common Stock other than shares subject to the right of repurchase
by the Company, change the authorized number of Directors, authorize a
dividend for any class or series other than Convertible Preferred Stock,
create a new class of stock or effect a merger, consolidation or sale of
assets where the existing shareholders retain less than 50% of the voting
stock of the surviving entity.
Dividends
Holders of Series A and B Convertible Preferred Stock are entitled to receive
noncumulative dividends at the per annum rate of $0.04 and $0.10 per share,
respectively, when and if declared by the Board of Directors. The holders of
Series A and B Convertible Preferred Stock will also be entitled to
participate in dividends on Common Stock, when and if declared by the Board
of Directors, based on the number of shares of Common Stock held on an as-if
converted basis. No dividends on Convertible Preferred Stock or Common Stock
have been declared by the Board of Directors from inception to December 31,
1998 and March 31, 1999 (unaudited), respectively.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition, or sale of assets where the beneficial
owners of the Company's Common Stock and Convertible Preferred Stock own less
than 50% of the resulting voting power of the surviving entity, the holders
of Series A and B Convertible Preferred Stock are entitled to receive an
amount of $0.50 and $1.28 per share, respectively, plus any declared but
unpaid dividends prior to and in preference to any distribution to the
holders of Common Stock. The remaining assets, if any, shall be distributed
ratably among the holders of Common Stock according to the number of shares
of Common Stock such holders then hold. Should the Company's legally
available assets be insufficient to satisfy the liquidation preferences, the
funds will be distributed ratably among the holders of Series A and B
Convertible Preferred Stock in proportion to the full preferential amount
each such holder is entitled to receive. At December 31, 1998 the aggregate
liquidation preference of Series A Convertible Preferred Stock totaled $110.
At March 31, 1999 the aggregate liquidation preference of Series A and Series
B Convertible Preferred Stock totaled $156 and $3,616 (unaudited),
respectively.
Conversion
Each share of Series A and Series B Convertible Preferred Stock is
convertible, at the option of the holder, according to a conversion ratio
subject to adjustment for dilution. Each share of Series A and B Convertible
Preferred Stock automatically converts into the number of shares of Common
Stock into which such shares are convertible at the then effective conversion
ratio upon: (1) the closing of a public offering of Common Stock at a price
of at least $3.00 per share with gross proceeds of at least $15,000 (2) a
merger sale of substantially all of the assets of the Company, or other
transactions which result in a change in control or (3) the consent of the
holders of the majority of Convertible Preferred Stock.
At December 31, 1998, the Company reserved 3,173,793 shares of Common Stock
for the conversion of Series A and B Convertible Preferred Stock.
Preferred Stock Warrant (unaudited)
On March 18, 1999, as consideration for entering into an agreement to develop
a co-branded transaction processing service for individual users on the
Internet, the Company granted Excite, Inc. a warrant to purchase 550,000
shares of the Company's Preferred Stock. The warrant has an exercise price of
$2.60 per share, was fully vested on the grant date and has a term of one
year from the date of the agreement. Using the Black-Scholes option pricing
model, the estimated fair value of the warrant totaled $468 which was
recorded as unearned stock compensation and is being recognized ratably over
the one year term of the agreement as a charge to sales and marketing
expense. Amortization of the fair value of the Preferred Stock warrant
totaled $117 (unaudited) for the three months ended March 31, 1999.
Common Stock
The Company's Articles of Incorporation, as amended, authorize the Company to
issue 20,000,000 shares of Common Stock. A portion of the shares outstanding
are subject to repurchase by the Company over a four-year period from the
earlier of the issue date or employee hire date, as applicable. At December
31, 1998 and March 31, 1999 there were 5,344,750 and 4,987,500 (unaudited)
shares, respectively, were subject to repurchase rights.
6. Stock Option Plans (unaudited)
During 1999, the Company adopted the Employee Stock Option Plan (the "Plan").
The Plan provides for the granting of stock options to employees and
consultants of the Company. Options granted under the Plan may be either
incentive stock options ("ISO") or nonqualified stock options ("NSO"). ISOs
may be granted only to Company employees, including officers and directors
who are also employees. NSOs may be granted to Company employees and
consultants. The Company has reserved 2,189,091 shares of Common Stock for
issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the
date of grant as determined by the Board of Directors, provided, however,
that (i) the exercise price of an ISO and NSO shall not be less than 100%
and 85% of the estimated fair value of the shares on the date of grant,
respectively, and (ii) the exercise price of an ISO and NSO granted to a
10% shareholder shall not be less than 110% of the estimated fair value of
the shares on the date of grant. Options are exercisable based on a vesting
schedule which provides a 25% vest one year after the date of grant and the
remaining options thereafter in monthly installments over the remaining 36
months. To date, options granted generally vest over four years. Activity
under the Plan is as follows:
Options Outstanding
-----------------------------------
Weighted
Average
Shares Exercise
available for price per
grant Shares share
----------------- --------------- ---------------
Shares reserved at Plan inception................................... 2,189,091 -- $ --
Options granted .................................................. (537,096) 537,096 0.13
Options exercised ................................................ -- -- --
Options canceled ................................................. -- -- --
--------- ------------
Balance at March 31, 1999........................................... 1,651,995 537,096 0.13
========= ============
Options exercisable at March 31, 1999............................... --
============
Options outstanding and exercisable at March 31, 1999 (unaudited) are as
follows:
Options Outstanding at Options Exercisable at
March 31, 1999 March 31, 1999
------------------------------------------------------------------- ----------------------------
Weighted Weighted
Average Average Weighted
Range of Number of Remaining Exercise Number of Average
Exercise Price Shares Contractual Life Price Shares Exercise Price
-------------- ----------- ---------------- -------- ----------- --------------
$ 0.13 537,096 9.71 years $0.13 -- $0.13
Fair value disclosures (unaudited)
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
Three Months Ended
March 31, 1999
---------------------
(unaudited)
Net Loss:
As reported....................................................................... $746
====
Pro forma......................................................................... $750
====
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes pricing method with the following assumptions:
volatility 0%; dividend yield at 0%; weighted average expected option term of
four years; risk free interest rate of 6% for the three months ended March
31, 1999. The weighted average fair value of options granted during March
1999 was $0.06.
Unearned stock compensation (unaudited)
In connection with certain stock option grants during the three months ended
March 31, 1999, the Company recorded unearned stock compensation totaling
$1,081,000, which is being amortized over the four year vesting period of the
related option. Amortization of unearned stock compensation totaled $36,000
for the three months ended March 31, 1999.
7. Employee Benefit Plans
The Company sponsors a 401(k) defined contribution plan covering all
employees. Contributions made by the Company are determined annually by the
Board of Directors. No employer contributions were made during the period
from inception to December 31, 1998 or during the three months ended March
31, 1999 (unaudited), respectively.
8. Subsequent Events (unaudited)
Stock compensation
In April 1999, in connection with certain stock option grants, the Company
recorded unearned stock compensation totaling $4,740, which will be
amortized over the four year vesting period of the related options.
Acquisition
On May 25, 1999, eBay Inc. acquired all of the Company's outstanding capital
stock at which time the Company became a wholly-owned subsidiary of eBay Inc.