EX-99.02 6 0006.txt HISTORICAL FINANCIAL STATEMENTS OF FLASHPOINT, INC. 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