UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
|X| AMENDMENT NO. 2 TO Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
OR
|_| Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File No. 0-30152
Billserv, Inc.
(Exact name of registrant as specified in its charter)
Nevada 98-0190072
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
211 North Loop 1604, Suite 200, San Antonio, Texas 78232
(Address of principal executive offices, including Zip Code)
(210) 402-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.001 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 20, 2002, was $21,404,371. As of March 20, 2002,
20,581,126 shares of the registrant's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Registrant's Annual Meeting
of Stockholders to be held May 23, 2002, are incorporated by reference in Part
III of this Report.
Billserv, Inc.
FORM 10-K/A
For the Year Ended December 31, 2001
INDEX
Page
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PART I
Item 1. Business ............................................................ 3
Item 2. Properties ..........................................................12
Item 3. Legal Proceedings ...................................................12
Item 4. Submission of Matters to a Vote of Security Holders .................12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters .............................................................13
Item 6. Selected Financial Data .............................................14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...............................................15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..........25
Item 8. Financial Statements and Supplementary Data .........................26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................45
PART III
Item 10. Directors and Executive Officers of the Registrant ..................46
Item 11. Executive Compensation ..............................................46
Item 12. Security Ownership of Certain Beneficial Owners and Management ......46
Item 13. Certain Relationships and Related Transactions ......................46
Item 14. Controls and Procedures .............................................47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ............................................................48
Signatures ...................................................................49
Certifications ...............................................................50
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K/A and the documents incorporated herein by
reference contains certain forward-looking statements within the meaning of the
Federal Securities Laws. Specifically, all statements other than statements of
historical facts included in this Annual Report on Form 10-K/A regarding our
financial performance, business strategy and plans and objectives of management
for future operations are forward-looking statements and based on our beliefs
and assumptions. If used in this report, the words "anticipate," "believe,"
"estimate", "expect," "intend," and words or phrases of similar import are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties, and assumptions, including but without limitation,
those risks and uncertainties contained in the Risk Factors section of Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of this Annual Report on Form 10-K/A. Although we believe that our
expectations are reasonable, we can give no assurance that such expectations
will prove to be correct. Based upon changing conditions, any one or more of
these events described herein as anticipated, believed, estimated, expected or
intended may not occur. All prior and subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this cautionary statement.
This Amendment No. 2 to the Annual Report on Form 10-K filed with the Securities
and Exchange Commission on April 1, 2002, is being filed to amend Items 1, 7 and
8 to provide certain additional disclosures to and clarification of the
description of the Company's business, the discussion and analysis of the
Company's financial condition and results of operations, and the footnotes to
the Company's financial statements. There were no adjustments made to the
previously reported results of operations or financial position of the Company
for any of the periods presented.
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PART I
ITEM 1. BUSINESS
All references to "we," "us," "our," "Billserv" or the "Company" in this Annual
Report on Form 10-K/A mean Billserv, Inc. and its consolidated subsidiaries. All
references to "billers", "billing customers" or "customers" in this Annual
Report on Form 10-K/A mean the companies that have contracted with us to receive
services from us. All references to "consumers" in this Annual Report on Form
10-K/A mean the persons that are receiving bills from companies, including the
companies that are billing customers of Billserv.
General
Billserv provides Electronic Bill Presentment and Payment ("EBPP") and related
services to companies that generate recurring paper-based bills. EBPP is the
process of sending bills to consumers securely through the Internet and
processing Internet payment of bills utilizing an electronic transfer of funds.
Our service offering allows companies to outsource their electronic billing
process, providing them a single point of contact for developing, implementing
and managing their EBPP process. Billserv offers services to consolidate billing
information and then securely deliver an electronic bill to the biller's own
Billserv-hosted payment Web site, the consumer's e-mail inbox and numerous
Internet bill consolidation Web sites, such as those sponsored by financial
institutions. Our EBPP services allow billers to establish an interactive,
online relationship with their consumers by integrating Internet customer care
and direct marketing with the electronic bill. We provide professional services
to assist with the implementation and maintenance of an electronic bill
offering. In addition, we offer consumer marketing support to assist billers in
encouraging their consumers to switch from paper to electronic billing.
Billserv generates revenue by charging volume-based fees fixed under long-term
contracts for transactions processed through its system, such as loading,
delivering, viewing and paying bills, customer care interactions, handling
payment returns and consolidating remittances. In certain instances, Billserv
receives a fixed amount per e-bill delivered and made available to consumers
regardless of whether they pay the e-bill using our services. Billserv also
typically receives an up-front fee from a customer to cover the initial basic
implementation of the contracted services. Billserv charges customers that
contract for professional consulting services on a time and materials basis and
charges license fees for the use of its proprietary gateway services technology
and the CheckFree iSolutions software that is resold by Billserv as an
authorized reseller in Australia only.
Our service offerings are supported by our systems infrastructure that
integrates certain proprietary components with third party hardware and software
platforms to offer our customers a scalable, branded and secure EBPP process.
Our systems infrastructure utilizes IBM Netfinity file servers for processing
and stores critical billing data on Network Appliance F760 external disk arrays.
The operating software architecture of our system combines Microsoft Windows NT
with IBM's DB2 database management system. We license software from CheckFree
iSolutions, Inc. that we use to parse the detail of our customers' billing data
print streams and create the electronic bill to be presented and also license
software from ACI Worldwide that allows us to securely deliver electronic bills
via e-mail. We have designed our systems infrastructure so that it is reliable,
flexible, and expandable to meet growth demands without significant cost or
changes. Our systems infrastructure allows us to work with our customers to
build a customized EBPP service offering tailored to their specific needs.
We currently market our services through a direct sales force and through
organizations that resell our services to their customers and prospects. As of
December 31, 2001, we have signed 101 billers who generate approximately 1.3
billion paper-based bills annually (or approximately 7% of the total annual
bills produced in the United States). Of these billers, 84 are in a full
production environment which means that the electronic billing services being
provided are available to their target consumers and 17 are in various stages of
implementation which means that the electronic billing product is still being
developed and is not yet ready for general release to the billers' consumers.
For the years ended 2001 and 2000, Billserv processed approximately 2,045,000
and 448,000 transactions, respectively, for its billing customers. We processed
our first transactions for billing customers during the fourth quarter of 1999
so the number of transactions processed in 1999 was insignificant. Billserv's
customers include companies operating in the insurance, student loan financing,
energy, waste management, telecommunications and cable industries. The Company
was founded in July 1998 and is incorporated in the State of Nevada. Billserv
operates primarily in the United States as a single operating segment, although
it also operates in Australia and Canada on a limited basis. Foreign operations
began in 2000; however, the impact financially of expanding internationally is
not significant as of December 31, 2001.
Industry Background
As a paper-based process, bill presentment and payment are the most regular and
critical functions in which most businesses engage. For many companies,
particularly those generating recurring bills, the bill represents a critical
touch point for maintaining and improving customer loyalty, and a valuable
opportunity to increase revenues through up- and cross-selling. However, the
paper-based bill delivery and payment process is expensive and less efficient
for both businesses and consumers. Additionally, paper-based bills are limited
in their functionality. The potential for personalization is limited, and there
are few
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opportunities for companies to engage in interactive communication with their
consumers through the paper-based bill payment experience.
The majority of paper-based bills are recurring monthly or quarterly invoices
mailed to consumers by communications companies (such as telephone and cable
companies), utilities, newspapers and financial institutions such as banks and
other lenders. Paper bills are prepared either by the company itself or by an
outsourced bill fulfillment vendor. Creating and distributing a paper bill is a
costly, multiple-step process that includes extracting relevant data from the
internal accounts receivable system of the company, organizing the data into a
billing format, printing and separating the bills, inserting the bills into
envelopes, applying postage and mailing the bill to the consumer. This paper
bill process is less efficient than electronic bill delivery, which eliminates
many of these steps. Similarly, the paper-based payment process is
time-consuming and can be costly for the consumer.
Our Market Opportunity
Growth of the Internet and Electronic Commerce
The Internet has emerged as a significant global medium for communication,
information and commerce. According to the U.S. Commerce Department in a
February 2002 report, 143 million Americans, or 54% of the country, were using
the Internet as of September 2001, and the number was growing at the rate of 2
million per month. Because of the Internet's increasing adoption rate,
businesses have a growing opportunity to conduct commerce and communicate with
their consumers and business partners over the Internet.
One of the consequences of the widespread growth and acceptance of Web use is
that consumers are rapidly embracing the ability to conduct financial and other
personal business over the Internet. Gartner Group, an independent market
research firm, projects in a December 2001 report that by the end of 2003, 64
million Americans will be viewing their credit card and other billing statements
electronically, which is a 100% increase from the estimated 32 million that were
doing so at the end of 2001. Accordingly, we believe there is a substantial
potential for growth in EBPP and related services.
The growth in the use of the Internet has also transformed the competitive
landscape in many industries. To remain competitive, many companies are seeking
to leverage the Internet to provide operational efficiencies, create new revenue
opportunities and maximize the longevity and profitability of their customer
relationships. Many companies, particularly those generating recurring
paper-based bills, such as utilities and telecommunications providers, are
increasingly recognizing that an Internet-based offering to the bill presentment
and payment process can serve as the foundation for their broader Internet and
customer relationship management strategies.
These companies currently recognize the bill as the critical touch point for
maintaining and improving their customer relationships as well as providing the
opportunity to increase revenue streams. EBPP enables companies to enhance this
touch point by leveraging the capabilities of the Internet to promote customer
loyalty, provide enhanced customer service, increase control over the critical
billing process, enhance up- and cross-selling opportunities by utilizing the
direct marketing and interactive capabilities of the Internet and improve the
effectiveness of customer marketing by providing real-time market intelligence
on consumers. Companies can also realize significant cost savings by moving to
an electronic billing process from a paper-based system, especially given the
recent trend of steadily rising postal rates.
Challenges for Companies in Adopting EBPP
While companies may recognize the critical role that EBPP will play in their
mission critical Internet and customer relationship management strategies, they
face significant challenges in the development, implementation and management of
their EBPP offering. To execute a successful EBPP strategy, companies should
purchase, successfully implement and maintain:
o Software that enables the company to parse and decode bill data print
streams
o In-house servers that update and display bill content
o Automated clearinghouse software that enables the company to instruct its
bank to electronically debit consumer accounts
o Messaging software that enables the company to communicate with multiple
aggregators
o A dedicated interface with a major bank that enables the company to
receive funds and data through automated clearinghouse transactions
o Lockbox software that enables the company to update internal accounts
receivable files
o Customer support software and technical infrastructure that enables a
company to support the EBPP process with Internet- enabled customer care
In addition, if companies want to be able to provide their consumers with wider
access to their bills, they must make arrangements with multiple EBPP
aggregators, such as CheckFree, Spectrum, Mastercard RPPS, Paytrust and
Metavante, or front ends, such as Internet portals or financial institutions'
Web sites that present bills to consumers in a consolidated manner, and manage
those multiple relationships on an ongoing basis. EBPP aggregators are companies
that have access to Web sites that
4
function as portals to allow multiple bills generated by different billers to be
delivered to and/or paid by consumers that access these sites. Such aggregators
enhance the convenience of payment and management of e-bills via the Internet
for consumers by giving them access to multiple bills at one secure site versus
having to visit multiple biller-specific Web sites to view or pay each
individual bill. Many companies lack the resources, expertise and/or inclination
to develop, implement and manage their own EBPP offering in a cost-effective
manner. These issues are compounded by the current state of the EBPP industry,
which can be characterized by rapid technological change, disparate standards
and competing business models.
The Billserv Service Offering
Our services provide a comprehensive and cost-effective outsourced offering that
enables any company producing recurring paper-based bills to offer EBPP services
to their consumers and to utilize the electronic delivery and payment of bills
to enhance business and customer relationship management strategies. Our
offering allows our customers to provide EBPP services to their consumers,
support the EBPP process with Internet customer care, and utilize the electronic
delivery and payment of bills to reduce costs, create additional revenue
streams, increase branding opportunities, enhance customer service and provide
competitive differentiation. These service offerings are supported by our
systems infrastructure that integrates certain proprietary components with third
party hardware and software platforms to offer our customers a scalable, branded
and secure EBPP process. By outsourcing the development, implementation and
management of their entire EBPP process, our customers can realize the following
benefits:
o Single Point of Contact - Our services offers a one-stop, comprehensive
and cost-effective outsourced process for our customers' entire EBPP
offering. We become our customers' single point of contact for
implementing, developing and managing their entire EBPP offering.
o Speed to Market - Our services allows our customers to establish an EBPP
offering in as little as 90 days, without diverting critical time and
financial resources from their core competencies. The time-to-market of an
EBPP offering is important to our customers because it enables them to
rapidly address the opportunities presented by electronic delivery and
payment of bills.
o Reduced Capital Requirements and Technology Risk - Outsourcing the design,
development, installation and management of their entire EBPP process
reduces the costs and administrative burden on our customers by
eliminating the need to develop and manage an in-house system and by
capitalizing on our economies of scale and implementation expertise.
o Broad Distribution - Our relationships with multiple EBPP aggregators and
other front-ends enable our customers to publish their bills through
multiple presenters and our Direct Delivery product enables the
presentment of bills straight to the consumer's email inbox. These
distribution channels provide our customers with the ability to offer
their consumerss numerous options of where and when to access and pay
their bills.
o Enhanced Customer Service - Our services provide Internet-enabled customer
support for the EBPP process and enables our customers to utilize the
electronic delivery and payment of bills to improve customer retention,
increase customer loyalty and enhance customer relationships.
o Open System Architecture - Our systems infrastruce supports all of the
data standards currently employed by aggregators and front-ends today,
including Open Financial eXchange (OFX), eXtensible Markup Language (XML),
Electronic Data Interchange (EDI) and others. This allows our customers to
present their bills to any Internet bill presenters, regardless of the
standard used.
o Scalability - We use IBM Netfinity line of servers that have the ability
to handle large volumes of transactions with an upward growth path and
clustering technology. Our current infrastructure has excess capacity to
support new billers and increasing transaction volumes.
o Increased Revenue Streams - We believe that our EBPP strategy provides our
customers with the potential for increased revenue opportunities by
leveraging the capabilities of the Internet to support direct marketing
and enable cross- and up-selling opportunities.
o Transparency - Our services are transparent to the consumer at all times,
allowing our customers to maintain and build upon their brand recognition.
o Security - Our services enable our customers to have total control over
their billing data at all times. In addition, we use digital certificates,
data encryption, NT authentication and firewalls to protect billing data.
o Transaction-Based Pricing - Our customers typically pay an up-front fee
that covers basic implementation of the contracted services. After the
customer is in production, we assess transaction-based fees based on the
number of electronic bills presented to and/or paid by their consumers,
depending on the specific services that have been contracted by the
customer. In virtually all cases, these transaction-based fees are
significantly less than the cost to our customers of processing
paper-based bills.
Our Strategy
Our goal is to be the leading outsourced service provider of EBPP and related
services. In order to achieve this goal, we are implementing a strategy
consisting of the following key elements:
5
Acquire Additional Billing Customers
We believe that establishing a large customer base that distributes a
significant number of recurring paper-based bills is critical to the long-term
success of our business. We intend to continue expanding our customer base,
targeting those companies with a high likelihood of generating significant
revenue. We focus our sales efforts on local billers that deliver the majority
of paper-based bills in selected metropolitan areas in the country (based upon
the number of online households), as well as those regional and national billers
that deliver bills to these same consumers. We are also actively building
relationships with organizations that resell our services to their clients and
prospects. Our partners leverage relationships with existing and prospective
clients, using our EBPP capabilities as a means to retain or obtain new
accounts, as well as enhance profit margins. This strategy allows us to take
advantage of a matrix of opportunities that arise from the sales activities of
our resellers in conjunction with our direct sales efforts.
We qualify potential resellers based on their market orientation, national
presence, account base, and sales capabilities. To date, we have signed
multi-year agreements with several companies that have a national presence to
resell our services on either a direct or referral basis. The reseller
agreements generally provide for either wholesale pricing or commissions based
on referred and qualified sales. If our services are resold on a direct basis,
the reseller receives wholesale pricing from us for our services and negotiates
terms with the biller directly. If our services are resold on a referral basis,
we negotiate terms with the biller directly and the reseller earns a specified
commission. These agreements vary in length from 5 to 7 years and the earliest
expiration of any of these agreements is February 2005. Our reselling partners
are generally leaders in their industries, with a strategic commitment to EBPP
and electronic commerce. We will continue to add select partners when
advantageous to us to expand horizontal and vertical coverage. Our direct sales
staff promotes business with our partners on both the corporate level and a
localized basis. The direct sales staff coordinates their development efforts
with resellers to achieve comprehensive coverage of targeted markets.
Positively Influence Consumer Adoption Rates
We believe that the rate at which consumers begin utilizing EBPP services,
commonly referred to as the "consumer adoption rate," is a critical factor to
the long-term success of our business. A major component of our growth strategy
involves not only obtaining additional customers, but also actively assisting
contracted billers in developing a strategy designed to encourage the highest
possible acceptance of EBPP services by their consumers. This includes
incorporating our adoption-building Preferred Enrollment Program as part of a
customized EBPP offering purchased by our direct billing customers. This program
consists of process and service offerings that build adoption at the time of new
account acquisition and facilitate the accelerated conversion of existing
paper-based consumers to EBPP services. Program components include Auto
Enrollment of our customers' new customers, Online Demonstrations that walk
consumers through the client's bill presentment and payment site, Online
Enrollment Assistance to provide instant online help to consumers, and Instant
Activation that allows consumers immediate access to view and pay bills online
upon enrollment.
Additionally, we assign a dedicated Account Manager to each of our customers to
assist them in maximizing consumer adoption of their EBPP services and help them
realize a higher return on their investment. Our Account Managers work with
their customers to develop a tailored marketing strategy designed to increase
the EBPP adoption rate of their consumers. We assist our customers in carefully
planning and strategizing on all facets of the marketing process that are funded
by customers, including:
o Developing consumer enrollment materials, such as bill messages, bill
inserts, direct mail letters and enrollment feedback letters
o Developing public relations materials regarding their EBPP services
o Planning an effective advertising campaign regarding their EBPP services,
including broadcast and print advertisements
o Planning an Internet marketing campaign, including banner advertisements,
online promotional tactics and cost analysis
o Assisting in the customer launch process
o Assisting in the development of a regional marketing strategy
o Developing cross-marketing and co-marketing opportunities with other
billers, banks and bill payment Web sites
Another adoption-driving program we provide is our branded EPI-Center strategy,
which stands for Electronic Payment Innovation CENTER. Our EPI-Center strategy's
objective is to positively influence consumer adoption rates within specific
metropolitan areas by working with local, regional and national billers to
deliver cooperative adoption marketing messages to volumes of households.
Through our EPI-Center strategy, we provide local billers the plan and
communications to allow them to partner with other local, regional and national
billers (e.g., utilities, telecommunications companies, cable companies, etc.)
and Consumer Service Providers (i.e., financial institutions, Web portals, or
any site where consumers go to view and pay their bills), thereby communicating
the availability of a critical mass of bills and positively affecting consumer
adoption rates. Consumers are not able to fully adopt electronic billing and
abandon traditional paper methods until a critical mass of bills are presented
electronically. We believe that consumers will be more likely to adopt once they
can continue to receive all their bills in one location instead of visiting
multiple Web sites or receiving some bills online and some traditional paper
bills.
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To date, we have seen positive results from marketing programs designed to
enhance adoption rates. Billers that are marketing aggressively to their
consumer base or have favorable consumer demographics, such as high Internet
usage, are experiencing adoption rates of between 3.5% and 15.0%. These adoption
rates are calculated by dividing the number of transactions for a given period
such as a month by the total population of a billing customer's bills that are
eligible for electronic presentment or payment during that same period. We do
not differentiate between initial customer transactions and repeat customer
transactions for purposes of calculating these adoption percentages and are
therefore unable to measure customer adoption or attrition rates over time.
Although an increase in the number of transactions does not necessarily mean
that more individual consumers are using the EBPP services that we provide
through our billing customers, it provides an indication of adoption growth
since a low percentage of consumers would be expected to make multiple
transactions during a month to pay a bill delivered monthly, for example. During
2001, we presented over 2 million electronic bills up from 448,000 in 2000. New
consumer enrollments rose to over 316,000 for the year 2001 from 101,000 in
2000.
Finally, connecting companies to customers through the widest array of Web sites
from which to receive, view, pay and manage bills is also an important step
towards realizing increased customer adoption. In this regard, the Company
recently announced that it was the first company to deliver e-bills on behalf of
a biller to MasterCard RPPS, which is one of the newest aggregators in the EBPP
industry. This accomplishment demonstrates our commitment to proactively offer
billers increased opportunities for their consumers to pay and manage their
bills via the Internet. Our efforts to provide customers with distribution to
all major aggregators will be a continuing focus for the Company.
Expand and Leverage Strategic Relationships and Partnerships
An important element of the Company's strategy is to strengthen and expand its
relationships with strategic allies and partners to increase the market
awareness, demand and acceptance of EBPP and value of Billserv's services. We
have formed strategic relationships and partnerships with key technology
providers and companies serving the EBPP industry to enable us to offer a high
quality of service to our customers. Our key partners include:
o Technology providers, such as International Business Machines Corporation
("IBM"), CheckFree i-Solutions and ACI Worldwide, that provide various
hardware and software components of our service offering. We have a sales
referral agreement with IBM that provides for commissions based on sales
leads referred to us and we utilize IBM servers and software in our system
infrastructure. We have an electronic billing services agreement with
CheckFree licensing us to use their CheckFree i-Solutions software and are
also a certified reseller of this software in Australia. CheckFree also
owns approximately 5% of the Company and holds warrants to purchase
additional shares of the Company's common stock. We have a license
agreement with ACI for the use of their software and a referral agent
agreement with ACI qualifying them as an authorized agent to earn
commissions based on referring billers to us.
o Billing distribution partners, or aggregators, that provide the ability to
distribute electronic bills to various Internet sites where consumers can
receive, view, pay and manage bills as well as provide electronic payments
and remittance information back to our billing customers. We have
multi-year distribution agreements with all major EBPP aggregators
including CheckFree, Spectrum, MasterCard RPPS, Paytrust and Metavante
that call for us to pay volume-based fees to the aggregators for bills
delivered through the aggregators' networks. The terms of the distribution
agreements vary from 2 years to 5 years. The aggregators help us to
generate revenue by allowing us to provide our billing customers with
access to a greater number of Web sites from which their consumers can
view, pay and manage their bills, thus making our services more attractive
and beneficial to billing customers. We charge our billing customers a
transaction fee for bills delivered to their consumers through these
aggregators.
o Payment processing partners, such as Bank One and Paymentech, Inc., that
allow us access to the ACH and credit card clearing network, respectively,
to facilitate the electronic transfer of funds between our billing
customers and their consumers who utilize a biller direct Web site.
Billserv has an agreement with Bank One to process ACH payments that has
an unspecified term and can be terminated upon 30-day written notice.
Billserv has an agreement with Paymentech, Inc. to process credit card
payments that automatically renews annually unless 60-day notice is given
prior to the end of the term. Through its contractual relationships with
Bank One and Paymentech, Billserv is able to process ACH and credit card
payment transactions on behalf of its billing customers. Billserv pays
volume-based fees for debit and credit transactions initiated through
these partners, and pays fees for other transactions such as returns,
notices of change to bank accounts, test debits, file transmission and
depository fees. Some of our billing customers do not rely exclusively on
our services to process their electronic payments.
o Reselling partners which resell our EBPP services to their billing
customer base under contractual agreements that provide for wholesale
pricing or commissions based on referred sales. Under these agreements,
these resellers are obligated to resell our EBPP services on a preferred
basis.
A strategic ally can also provide our customers with additional resources and
expertise, especially in vertical or geographic markets in which the partner has
expertise, to help meet our customers' system definition and application
development requirements. We intend to enhance the quality of our services by
continuing to pursue and enter into strategic relationships and partnerships
with companies that offer us the opportunity to benefit from the relationship.
7
Accelerate the Time to Market for our Customers
We believe that an important element of our service offering is our ability to
assist our customers in accelerating the time to market of their EBPP services,
thereby increasing the return on their investment. In order to help achieve this
objective, we assign a dedicated Account Manager and technical project team from
the beginning of the planning and implementation process for each customer to
ensure that the project implementation is completed effectively and on time. The
design of our service offering also contributes to an efficient and timely
deployment. Our core system consists of four major proprietary gateways:
financial, aggregator, biller and email, which support a variety of emerging
standards for data exchange and enable us to offer a quick implementation. These
interfaces give us the ability to integrate with our customers' legacy
applications, without disrupting or changing their internal systems, as well as
external software applications. The modular design and integrative features of
our products and services allows our customers to choose from a menu of
components and still have a system implemented in as little as 90 days. We
believe that our system design and approach utilizing a dedicated team has a
positive influence on the timing and effectiveness of the implementation of our
EBPP services for our customers.
Pursue International Market Opportunities
We believe our services can be adapted for international customers. Although we
have historically focused our marketing efforts in the United States, we also
market our services in Canada and Australia. We plan on continuing to market our
services outside the United States in the future. However, that expansion will
take place in a fashion that brings strength of local country partnerships and
minimizes the capital investment made by us to expand into these countries. For
example, during 2001, the Company acquired a 50% interest in a corporate joint
venture operating in Australia to provide EBPP services. The equal partner in
this venture is Salmat, a customer communications company in Australia
specializing in document management services, letterbox delivery, data
solutions, teleservices, fulfilment and customer targeting. The venture recently
presented the first live electronic bill through a banking Web site in Australia
for payment through BPAY, Australia's leading electronic bill payment service.
We believe the demand for EBPP services is developing in Australia and presents
a viable market opportunity through our partnership with Salmat.
Expand Service Offerings
We have recently begun marketing a more comprehensive offering that delivers a
single, outsourced capability for developing customer relationships utilizing
the electronic bill as a dynamic communication medium. By integrating our
electronic billing capabilities with Internet-enabled direct marketing and
communication ("IDMC") services and online real-time customer care support
provided by our Internet Interaction Center ("IIC"), Billserv puts billers in
direct, interactive contact with their consumers. We refer to this as a
"Customer Communication Network". We are actively promoting our Customer
Communication Networks to qualified prospective billers as well as converting
existing customers to this enhanced service. In addition to the current
components integrated into our service offering, we intend to add enhanced
products and services that could further broaden the capabilities and
revenue-generating potential of our offering. These enhanced offerings will
primarily be in the areas of IDMC and customer relationship management services.
We believe that customer relationships can be enhanced through the effective use
of our comprehensive EBPP services. Specifically, each time a consumer receives
and pays a bill online or utilizes our customer care service, valuable data
about the interaction is obtained and stored in a database. Critical information
such as customer case histories, account balances and product configuration
details is presented or "popped" onto the service representative's screen at the
exact moment the consumer makes contact. As such, representatives are able to
provide better service more quickly, and consumers feel as though our customer
knows them individually and understands their particular needs. We are also able
to utilize this information to better anticipate the needs of a consumer in
advance of the next consumer contact. This information may also be used to
assist our customers in identifying specific consumer needs and possible
consumer segments that could be used to provide differentiated services such as
direct marketing or specific product offers.
Components of the Billserv Service Offering
One of the key advantages of our service offering is that we have integrated
certain proprietary components third party software and hardware platforms that
cover a wide variety of services and functionality. This integration enables us
to be the single point of contact for all of our customers' needs for designing,
developing, implementing and managing their entire EBPP process. Our menu
approach to offering our integrated products and services also allows us to
tailor our customers' EBPP services to their business and marketing objectives.
The components of our service offering, all of which are currently available to
customers and have generated revenue to date, include:
eServ
eServ is our flagship product and the foundation for our comprehensive EBPP
services. eServ provides our customers with a single offering for developing and
managing their entire EBPP capabilities. With eServ we manage, on behalf of our
customers,
8
the multiple systems, delivery channels and relationships necessary for a
successful EBPP offering. Our eServ product provides outsourced creation and
management of presentment and payment processes for a biller direct site and all
aggregator sites, as well as payment processing and full reporting and
reconciliation capabilities. An optional service that our customers can utilize
is Direct Delivery, which offers a delivery medium whereby the electronic bill
is "pushed" directly to the consumer's email inbox. This service gives consumers
the opportunity to view their bill and make payments directly from the email by
clicking the "pay" button found within. In conjunction with our eServ offering,
customers may also choose to employ other optional services such as eInsert, our
IDMC product that provides a targeted messaging medium that interacts with
consumers individually by dynamically presenting customized communication
campaigns directly on the electronic bill statement.
eCare
eCare is our Internet-enabled customer care service supporting the EBPP process.
We currently offer eCare in two separate models, eCare View and eCare Connect.
eCare View is a proprietary, multi-function, Web-based desktop browser product
that provides access to the consumer's bill detail stored on our servers. We
provide a tool for our client's customer service representatives ("CSRs") to
deliver customer service to all consumers, including those not using the
Internet. eCare Connect provides enhanced capabilities by utilizing licensed
Internet collaboration software to enable interaction with consumers over the
Internet in a variety of ways, such as email, Web collaboration (Web-chat) and
voice-over Internet protocol (VoIP), and also provides capabilities for extended
Customer Relationship Management ("CRM") services. We have developed proprietary
customer relationship management software applications that enable us to
intelligently and efficiently analyze data obtained through the EBPP process,
including eServ and eCare interactions. eCare Outsourced is available through
our Internet Interaction Center ("IIC") to provide the client with essentially
the same functionality as eCare Connect, using our employees to perform customer
service on behalf of the client. This service can be a fully outsourced model in
which our client chooses not to provide direct in-house services. Alternatively,
this service model may be used as an after-hours support function that
supplements and extends our client's existing service center hours of operation.
eConsulting
eConsulting is Billserv's professional services group that offers electronic
billing, customer care, project management, and IT consulting services to both
existing billing customers and the EBPP industry in general. Billserv's
eConsulting group offers servicess ranging from project monitoring to complete
turnkey project development and implementation. In addition, customers can gain
access to Billserv's extensive and successful team to acquire data-centric
(Internet-based) customer care knowledge.
ASP Gateway Services
Billserv's ASP Gateway Services offers billers who are already participating in
EBPP a single distribution point to virtually all bill presentment and payment
locations across the World Wide Web. The ASP Gateway Service is designed to
improve a biller's existing EBPP system, whether an in-house offering, biller
direct site or limited distribution channel, by expanding the range of
distribution partners. Billserv serves as the single point of contact to the
numerous distribution channels which gives billers a cost-effective means to
make bills more accessible to consumers. Billserv's unique ASP Gateway
specifications may also be embedded as an OEM (Original Equipment Manufacturer)
component within companies' software or service offerings, affording such
vendors a cost-effective, proven method to give their clients and consumers the
ability to make online payments, and view and pay bills anytime, anywhere
through bank and internet payment portals.
bills.com
Billserv operates a consumer Web site, or portal, focused on providing bill
presentment and payment services under the domain name www.bills.com. The
bills.com strategy is to provide the consumer with an efficient and secure
interface for viewing, paying and managing bills via the Internet. We have
recently begun to market this portal service to online financial services
providers looking to provide EBPP capabilities as part of their service
offering.
Product Development
Our total research and development expenses were $760,082, $767,751 and $906,532
for 2001, 2000 and 1999, respectively. We have created a proprietary technology
infrastructure to support all of the components of our service offering. Our
systems consist primarily of proprietary software applications that we have
integrated with third party hardware and software platforms. We have designed
our system so that it is reliable, flexible, and expandable to meet growth
demands without significant cost or change. The combination of Microsoft Windows
NT and IBM's DB2 database management system and use of redundant IBM Netfinity
file servers provides for a reliable environment which is further enhanced by
security measures taken such as the use of digital certificates, data
encryption, NT authentication and firewalls to protect billing data. The IBM
Netfinity line of servers have the ability to handle large volumes of
transactions with an upward growth path and clustering technology that readily
allows for expansion and scalability. Our support for open standards allows us
to integrate with any third party print-stream parser, as well as in-house EBPP
services. In addition, these widely used object oriented standards have provided
us with a highly reusable and
9
flexible modular system. Because of this reusability and flexibility, the
business components can be constructed and modified to adapt to the rapidly
developing EBPP industry without affecting the underlying software development.
The Company believes that its success will depend in part upon its ability to
enhance existing products and develop or acquire new products that meet the
needs of the rapidly evolving EBPP market. The Company intends to continue to
devote resources to expanding its product offerings, introducing new products
and services, and offering higher levels of integration among its products. We
also intend to continue to evaluate and enhance our systems as new technology is
developed to maintain a competitive advantage.
Sales and Marketing
Our sales strategy targets both direct and indirect sales. Leads for sales are
obtained through resellers, direct contact by our sales personnel, and our
marketing efforts to existing customers led by our Account Management team. We
have a direct sales staff consisting of two dedicated salespersons providing
national coverage and several other employees who function in limited sales
capacities. We also market our services through organizations that have
exclusive reseller agreements with us to sell our EBPP services such as Bank One
and Sallie Mae Solutions. The percentage of sales generated by resellers was
approximately 24% in 2001. Reselling partners generate and qualify sales leads,
make initial contacts, assess client needs and recommend use of Billserv
services when appropriate, and introduce Billserv at high levels within the
customer organization.
Our marketing efforts are primarily EBPP adoption-focused. Our professional
staff of Account Managers actively assists our customers in creating programs to
encourage their consumers to utilize EBPP. The shared knowledge of our staff,
combined with the cumulative experience of our entire customer base, enables
them to provide valuable leadership as we work to build consumer adoption rates.
We also participate in limited corporate marketing that promotes the Billserv
brand and provides leads to our sales staff for qualifying and follow-up.
Our EPI-Center strategy was developed to positively influence consumer adoption
rates through the coordination of sales and marketing efforts in select
metropolitan areas. We are working to attain our adoption rate objectives in
each market primarily by focusing sales efforts on those local, regional and
national billers that deliver the majority of bills to local consumers, and
working with the community of billers to deliver coordinated marketing messages
to volumes of households. The billers that we target include media partners
(newspapers, cable operators), service providers (utilities,
telecommunications), cross-markets (ISP's), and affinity providers (local
governments, universities). The Billserv-sponsored EPI-Center Web site may be
viewed at www.ebillepicenter.com.
Customers
Our primary market focus will be on both top-tier and middle-market companies
generating recurring (usually monthly) paper-based bills within a specific
geographical market. Through our geographic sales focus, we look to capture
significant companies (i.e., utilities, telephone providers, cable operators,
etc.) generating recurring paper-based bills in each targeted geographic region,
thereby achieving the necessary critical mass and driving consumer adoption
rates. An additional market focus will be on larger companies in select vertical
markets, such as the insurance industry and the financial services industry,
that are generating a significant amount of recurring paper-based bills, as well
as traditional outsourced print and mail enterprises whose customers could
benefit from an EBPP services.
All of our billing customers have signed long-term contracts, with generally
three to five year terms, that provide for set-up fees in certain cases and
volume-based transaction fees. The number of customers served by Billserv for
the three years ended December 31, 2001, including additions and attrition, was
as follows:
Number at beginning of period Additions Attrition Number at end of period
----------------------------- --------- --------- -----------------------
Year ended December 31, 1999 0 14 0 14
Year ended December 31, 2000 14 36 1 49
Year ended December 31, 2001 49 53 1 101
EBPP services provided to Reliant Energy accounted for approximately 23% and 40%
of total consolidated revenues for the years ended December 31, 2001 and 2000,
respectively. This customer is planning to develop an in-house EBPP offering
during 2002 utilizing Billserv's transition plan that allows a customer to move
from an outsourced offering provided by Billserv to an in-house offering of the
customer's choosing. We expect the resulting loss of transaction revenues to be
mitigated by fees generated from consulting services provided to Reliant Energy
related to the transition of their EBPP capabilities to an in-house offering as
well as transaction revenues for that portion of 2002 during which we are still
providing this customer transaction services. We estimate that total revenues
generated by this customer in 2002 will be approximately equal to those in 2001
based on actual amounts invoiced to this customer through November 2002 for both
consulting and transaction services. We do not expect any significant revenues
to be generated by Reliant Energy in 2003 and beyond. Also, 27% of total
consolidated revenues for 2000
10
were attributable to a single customer for which we are no longer providing
services. Total consolidated revenues in 1999 were not significant, as the
Company did not begin generating revenue until the fourth quarter of 1999.
Competition
The market for EBPP services is highly competitive. We compete primarily with
companies that provide turnkey outsourced EBPP servicess for customers. These
companies include Metavante, Princeton eCom Corporation and DST Output (formerly
YourAccounts.com). In addition, we expect that other companies, such as
traditional information technology services companies and systems integrators,
may introduce services that compete with us. Remaining competitive in the EBPP
market will require a continued investment in new technologies, marketing and a
high level of customer service. We believe that the principal competitive
factors in our market include:
o System reliability and performance
o Ability to provide a CRM component
o Price and other financial terms
o Technological support and customer service
o Time-to-market of implemented servicess
o Strategic relationships with aggregators, front-ends and technology
providers
o Compliance with industry and technological standards
We also face potential competition from a number of other companies that compete
with us indirectly. These include aggregators, such as CheckFree Corporation;
EBPP front-ends, such as financial institutions and Internet portals; EBPP
software providers, such as eDocs and Avolent; and traditional bill printing
companies, such as Electronic Data Systems Corporation, CSG Interactive LLC, and
Cable Data. In addition, several companies are addressing the emergence of the
Internet banking industry with service bureau offerings, which could include
electronic bill presentment. These competitors have significant market presence
and financial resources. If they enter our market, we may not have sufficient
resources to continue to make the investments or achieve the technological
advances necessary to compete successfully.
Trademarks
We own federally registered trademarks of the following marks: Billserv, Inc.,
Billserv, Inc. and design, Bills.com, Bills.com and design, eServ, and Click
your bills goodbye. eCare is a federally registered trademark of Nebo Systems,
Inc. and is being used by permission. In addition, we have filed trademark
applications for the following marks: eServ Express, eServ Select, eInsert,
eConsulting, EPI-Center, and Connecting Companies to Customers.
We have also secured the following domain name registrations:
bills.com ebillepicenter.com
billserv.com mybillers.com
billserv.cc mypaymentbook.com
billserv.inc mypaymentbook.org
billserv.org mypaymentbook.net
billserv.law payb2bbill.com
billserv.tech securebills.com
billerregistry.com securebills.cc
b2bpayserv.com securebills.net
ebillcare.com
We rely on a combination of copyright, trademark and trade secret laws, employee
and third party nondisclosure agreements and other intellectual property
protection methods to protect our services and related products.
11
Employees
As of December 31, 2001, we had 108 employees. We are not a party to any
collective bargaining agreements. We believe that our relations with our
employees are good.
ITEM 2. PROPERTIES
As of December 31, 2001, our headquarters and operations were housed in
approximately 63,000 square feet of leased office space in San Antonio, Texas.
The Company believes its existing facilities will be adequate to meet its
anticipated needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation currently pending. We are not aware of any
disputes that may lead to material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's stockholders during
the fourth quarter of fiscal year 2001.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock was traded on the National Association of Securities Dealers
("NASD") Over the Counter Bulletin Board ("OTC BB") through March 13, 2000 at
which time our common stock was approved for trading on the NASDAQ Small Cap
Market. Subsequently, our stock was approved for trading on the NASDAQ National
Market on July 31, 2000 under the symbol "BLLS."
The following table sets forth for the quarterly periods indicated the range of
high and low closing prices of the common stock as reported.
High Low
------- -------
2001
----
First Quarter $ 5.38 $ 2.16
Second Quarter $ 3.05 $ 1.88
Third Quarter $ 2.20 $ 0.73
Fourth Quarter $ 1.55 $ 0.80
2000
----
First Quarter $ 31.88 $ 7.63
Second Quarter $ 19.50 $ 9.13
Third Quarter $ 9.19 $ 6.25
Fourth Quarter $ 7.75 $ 2.06
Holders
As of March 20, 2002, 20,581,126 shares of common stock are outstanding, $.001
par value. As of March 5, 2002, there were approximately 6,002 stockholders of
record of the common stock.
Dividend Policy
We have never declared or paid cash or stock dividends and have no present plan
to pay any such dividends in the foreseeable future, intending instead to
reinvest our earnings, if any.
13
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data is that of a development
stage company and should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this Form
10-K/A.
Consolidated Statement Of Operations Data
From Inception From Inception
(July 30, (July 30,
Year Ended Year Ended Year Ended 1998) To 1998) To
December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 (1) 1998 (1) 2001 (1)
---------------------------------------------------------------------------------
Revenues $ 2,968,678 $ 650,023 $ 55,438 $ -- $ 3,674,139
Cost of revenues 4,995,161 3,690,843 127,345 -- 8,813,349
Operating expenses:
Research and development 760,082 767,751 906,532 -- 2,434,365
Selling, general and
administrative 6,423,315 8,264,657 3,737,922 289,211 18,715,105
Depreciation and
amortization 1,555,626 940,995 270,908 559 2,768,088
Non-cash expense related
to the issuance of warrants -- 7,488,000 491,428 -- 7,979,428
---------------------------------------------------------------------------------
Total operating expenses 8,739,023 17,461,403 5,406,790 289,770 31,896,986
Other income, net 359,800 546,173 5,749 -- 911,722
Cumulative effect of a change in accounting
principle -- (52,273) -- -- (52,273)
---------------------------------------------------------------------------------
Net loss $ (10,405,706) $ (20,008,323) $ (5,472,948) $ (289,770) $ (36,176,747)
=================================================================================
Per share information:
Net loss - basic and diluted $ (0.58) $ (1.35) $ (0.50) $ (0.03)
Weighted average common shares outstanding -
basic and diluted 18,017,051 14,793,622 10,876,096 10,030,000
Consolidated Balance Sheet Data
December 31,
---------------------------------------------------------------
2001 2000 1999 (1) 1998 (1)
---------------------------------------------------------------
Working capital (deficit) $ 5,750,354 $ 5,291,006 $ 6,293,217 $ (303,926)
Current assets $ 7,255,124 $ 8,848,543 $ 7,490,648 $ 387,980
Total assets $ 11,415,136 $ 15,290,542 $ 9,398,168 $ 407,530
Long-term obligations, net of current portion $ -- $ 148,428 $ 259,694 $ --
Deficit accumulated during the development stage $(36,181,383) $(25,775,677) $ (5,767,354) $ (294,406)
Total stockholders' equity (deficit) $ 9,748,566 $ 11,011,410 $ 7,936,043 $ (289,676)
(1) The accounting change related to SAB 101 has not been reflected in the
financials prior to its adoption on January 1, 2000.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and other financial
information included elsewhere in this Form 10-K/A. This report contains
forward-looking statements that involve risks and uncertainties. Actual results
in future periods may differ materially from those expressed or implied in such
forward-looking statements as a result of a number of factors, including, but
not limited to, the risks discussed under the heading "Risk Factors" and
elsewhere in this Form 10-K/A.
Overview
Billserv is a development stage enterprise with a limited operating history on
which to base an evaluation of our businesses and prospects. The Company's
principal activities since inception have included research and development,
raising of capital and organizational activities. The Company has recently
increased its activities in the areas of obtaining billing customers and
implementing Electronic Bill Presentment and Payment ("EBPP") capabilities for
those billers. Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets such as
electronic commerce. Such risks include, but are not limited to, an evolving and
unpredictable business model and our ability to manage growth. To address these
risks, we must, among other things, maintain and increase our customer base;
implement and successfully execute our business and marketing strategy; continue
to develop and upgrade our technology and transaction-processing systems;
provide superior customer service; respond to competitive developments; attract,
retain and motivate qualified personnel; and respond to unforeseen industry
developments and other factors. We cannot assure you that we will be successful
in addressing such risks, and the failure to do so could have a material adverse
effect on our business, prospects, financial condition and results of
operations.
Since inception, we have incurred operating losses each quarter, and as of
December 31, 2001, we have an accumulated deficit of $36.2 million. The Company
expects to continue to incur losses during the next several quarters of
operations as efforts to achieve profitability continue. We believe that our
success will depend in large part on our ability to (a) drive the consumer
adoption rate of EBPP, (b) continue to add quality billers to our significant
client base, (c) meet evolving customer requirements and (d) adapt to
technological changes in an emerging market. Accordingly, we intend to focus on
activities that serve to encourage EBPP adoption by consumers and billers as
well as continue to invest in product research and development, technology and
infrastructure as required to remain competitive.
In keeping with this strategy, our sales focus has shifted to a more
comprehensive offering that delivers a single, outsourced service offering for
developing customer relationships utilizing the electronic bill as a dynamic
communication medium. By integrating our electronic billing capabilities with
online real-time customer care support provided by our Internet Interaction
Center ("IIC") and Internet-enabled direct marketing and communication ("IDMC"),
Billserv puts billers in direct, interactive contact with their consumers. We
are actively promoting our Customer Communication Networks to qualified
prospective billers as well as converting existing customers to this enhanced
service. Our selling strategy is a targeted approach with an emphasis on
complementary marketing initiatives within key geographic areas in an attempt to
drive EBPP adoption rates. The approach begins with targeting local and regional
billers in selected metropolitan areas with high Internet usage that have the
willingness and ability to market EBPP access to their consumers. Additionally,
we will continue to target national billers to offer complete coverage of all
recurring bills in each targeted region. New accounts are obtained through both
direct sales and by working with our valued reseller and referral partners in
order to maximize our leverage in the marketplace.
The Company also provides professional marketing consultations as a key element
of its account management group to actively assist billers in creating programs
to move their consumers to EBPP. Because growth of our revenues is dependent
upon consumer acceptance of EBPP, we work directly and regularly with a client's
marketing department to spur adoption rates and increase the number of EBPP
transactions. Since we have a significant amount of investment in infrastructure
and a certain level of fixed operating expenses, achieving profitability depends
on the volume of transactions we process and the revenue we generate from these
transactions, as well as other services performed for our customers. Other
sources of revenue, all of which have generated revenue to date, include:
o eConsulting - Provides value-added professional services for EBPP
billers or software vendors needing dedicated resources to deliver
customized EBPP capabilities.
o eInsert - Provides a targeted messaging medium that interacts with
consumers individually by dynamically presenting customized
communication campaigns directly on the electronic bill statement.
o Direct Delivery - Offers a distribution medium whereby the
electronic bill is delivered directly to the consumer's email inbox,
giving them the opportunity to make payments directly from it by
accessing the link to the appropriate biller direct site.
o Preferred Enrollment - Offers billers services that encourage
consumer adoption of EBPP such as Online Demonstrations, Online
Enrollment Assistance, Instant Activation of new consumers by
warehousing bill records, and Auto Enrollment, which streamlines the
enrollment process for new consumers.
15
o ASP Gateway Services - Offers billers who are already participating
in EBPP using in-house software a single distribution point to
virtually any bill presentment and payment location across the World
Wide Web in addition to their existing distribution points or biller
direct site. ASP Gateway may also be used by vendors to provide a
cost-effective, proven method to give their clients and consumers
the ability to make online payments, and view and pay bills anytime,
anywhere through bank and Internet payment portals.
o bills.com - Provides an EBPP Internet portal for complete receipt,
management and payment of all bills.
As a result of our limited operating history and the emerging nature of the
markets in which we compete, we are unable to precisely forecast our revenues.
Our current and future expense levels are based largely on our investment plans
and estimates of future revenues. Revenue and operating results will depend on
the volume of transactions processed and related services rendered. The timing
of such services and transactions and our ability to fulfill a customer's
demands are difficult to forecast. Although we systematically budget for planned
outlays and maintain tight controls on our expenditures, we may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in revenues in relation to our
planned expenditures could have a material adverse effect on our business,
prospects, financial condition and results of operations. Further, we may make
certain pricing, service, marketing or acquisition decisions that could have a
material adverse effect on each or all of these areas.
Critical Accounting Policies
General
Billserv's discussion and analysis of its financial condition and results of
operations are based upon Billserv's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
Billserv to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, Billserv evaluates its estimates,
including those related to the reported amounts of revenues and expenses, bad
debt, investments, intangible assets, income taxes, and contingencies and
litigation. Billserv bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results could differ from these estimates under different
assumptions or conditions.
Revenue Recognition
Prior to December 31, 1999, we recognized revenue generated from up-front fees
upon completion of an implementation project. These up-front fees are charged
for the work involved in implementing the basic functionality required to
provide EBPP services to customers. These set-up procedures include tasks such
as establishing connectivity, design and construction of the hosted Web site,
and conversion of the paper bill print stream to an electronic format. In
December 1999, the SEC issued SAB 101, which requires that revenue generated
from up-front implementation fees that do not represent a separate earnings
process to be recognized over the term of the related service contract. We
adopted SAB 101 on January 1, 2000, and accordingly, revised our implementation
fee revenue recognition policy to defer this type of revenue, while the related
costs will be expensed as incurred. The cumulative effect of this accounting
change totaled $52,273 and was recognized as a non-cash after-tax charge during
the first quarter of 2000. The cumulative effect has been recorded as deferred
revenue to be recognized as revenue over the remaining contractual service
periods, which are primarily three to five years in length. At December 30,
2001, deferred revenue was $652,629. We anticipate that transaction fees and
other services will make up a larger percentage of total revenue in future
periods, which will reduce the effect that deferring implementation fee revenue
has on our current operating results. However, the volume of transactions and
amount of related revenue we will generate in future periods is dependent upon,
among other things, the rate at which consumers utilize EBPP.
Bad Debt
Billserv maintains an allowance for doubtful accounts for estimated losses
resulting from the inability or failure of its customers to make required
payments. The Company recorded bad debt expense of $21,000 and $10,000 for 2001
and 2000, respectively, and recorded bad debt write-offs of $12,069 to its
allowance for doubtful accounts in 2001. There were no provisions made for bad
debt expense in 1999 or write-offs recorded to the allowance for doubtful
accounts in 2000. At December 31, 2001 and 2000, the balance of the allowance
for doubtful accounts was $18,931 and $10,000, respectively. If the financial
condition of the Billserv's customers were to deteriorate, resulting in an
impairment of their ability to make contractual payments, additional allowances
may be required.
16
Results of Operations
Billserv's revenues are principally derived from fees for implementing EBPP
capabilities, processing EBPP transactions and providing related customer care,
and consulting services. Revenues by type for the three years in the period
ended December 31, 2001, are as follows:
2001 2000 1999
---------- ---------- ----------
Service revenues:
Implementation revenues $ 502,753 $ 93,013 $ 55,000
Transaction revenues 1,163,214 285,741 438
eConsulting revenues 1,302,711 271,269 --
---------- ---------- ----------
Total revenues $2,968,678 $ 650,023 $ 55,438
========== ========== ==========
Total revenues increased 357% to $2,968,678 in 2001 from $650,023 in 2000. Of
the increase from the prior year, 44% was attributable to the addition of a full
year of eConsulting revenue in 2001 (eConsulting services were first offered to
customers in the fourth quarter of 2000) with the remaining increase
attributable to growth in transaction and related implementation fee revenue due
to an increase in the number of implemented billers and volume of transactions.
As of December 31, 2001, we had 101 billers under contract who were in various
stages of development, including 84 billers that were in full production or
pilot stages, as compared to 31 billers in full production or pilot stages at
December 31, 2000. Although revenue from transaction fees increased
significantly from 2000, transaction fees are not likely to become a major
revenue source until consumer adoption rates increase. While consumer adoption
rates cannot be controlled, we are working with our customers and partners to
promote EBPP through consumer education and marketing programs.
One billing customer accounted for approximately 23% and 40% of total
consolidated revenues for the years ended December 31, 2001 and 2000,
respectively. This customer is planning to develop an in-house EBPP offering
during 2002 utilizing Billserv's transition plan that allows the customer to
move from an outsourced offering with Billserv to an in-house offering. We
expect the resulting loss of transaction revenues to be mitigated by fees
generated from consulting services provided to this customer related to
transitioning their EBPP capabilities to an in-house offering and estimate that
total revenues generated by this customer in 2002 will be approximately equal to
those in 2001. We do not expect any significant revenues to be generated by this
customer in 2003 and beyond. In addition, the Company recognized $173,000 of
non-recurring revenue in 2000 attributable to a single customer for which we are
no longer providing services.
We generated our first revenues totaling $55,438, excluding the impact of
adopting SAB 101, during the fourth quarter of 1999. Revenue for 1999 was
comprised principally of design and implementation fees, but also included
transaction fees for the first electronic bills presented for our customers.
Cost of revenues includes the cost of personnel dedicated to the design of
electronic bill templates, creation of connections to third-party aggregators
and payment processors, testing and quality assurance processes related to
implementation and presentment, as well as professional staff dedicated to
providing contracted services to EBPP customers under consulting arrangements.
Cost of revenues also includes fees paid for presentation of consumer bills on
Web sites powered by aggregators and processing of payments for EBPP
transactions by third party providers. We have multi-year distribution
agreements with all major EBPP aggregators including CheckFree, Spectrum,
MasterCard RPPS, Paytrust and Metavante that call for volume-based fees for
bills delivered through the aggregators' networks. Through its contractual
relationships with its payment processors, Billserv is able to process ACH and
credit card payment transactions on behalf of its customers and their consumers.
Billserv pays volume-based fees for debit and credit transactions initiated
through these processors, and pays fees for other transactions such as returns,
notices of change to bank accounts, test debits, file transmission and
depository fees. Cost of revenues increased 35% to $4,995,161 in 2001 from
$3,690,843 for 2000. The increase from 2000 is primarily due to an increase in
personnel costs of $1.3 million due to the number of personnel employed to
provide revenue-producing services growing from an average of 54 such employees
for 2000 to 79 in 2001. Cost of revenues was only $127,345 for 1999 as this was
the first year that revenues were generated.
Research and development expenses consist primarily of the cost of personnel
devoted to the design of new processes that will improve our electronic
presentment and payment abilities and capacities, integration of third-party
applications, new customer care services, additional business-to-consumer
applications, business-to-business applications and services for direct
marketing opportunities. These expenses remained relatively flat in 2001 and
2000 at $760,082 and $767,751, respectively, after decreasing from $906,532 in
1999. During the earlier stages of our Company, we applied additional resources
to design and develop our base technology infrastructure and operating systems.
All research and development costs are expensed as incurred. We will continue to
invest in research and development efforts in the foreseeable future, as we
believe this is critical in order to remain competitive.
17
Selling and marketing expenses consist primarily of payroll and related expenses
for personnel engaged in marketing and selling activities, as well as
advertising services. The decrease in such expenses to $2,084,941 in 2001 from
$4,586,823 in 2000 was primarily the result of lower advertising media costs
related to promotion of the bills.com Web site as well as lower corporate
marketing expenses, which contributed 66% to the decrease, and reductions in
personnel and travel expenses, which contributed 27% to the decline in expenses
in total. During the second quarter of 2000, bills.com was re-launched with a
focus on making the Web site simpler and more secure for consumers to view, pay
and manage their bills online. As part of this re-launch, we incurred
approximately $1.2 million of expense in 2000 to develop and market the payment
portal. The increase in selling and marketing expenses in 2000 from $1,750,615
in 1999 was the result of the development and expansion initiatives of our sales
and marketing departments as well as the advertising media costs associated with
our bills.com promotion. We will continue to analyze our sales and marketing
efforts in order to control costs, increase the effectiveness of our sales
force, and broaden our reach through reseller initiatives and advantageous
alliances. As we have increased our focus on using strategic partners to provide
sales opportunities related to the deployment and use of our EBPP services, we
have experienced a decrease in the amount of expenses related to our direct
sales force.
General and administrative expenses include costs for the Company's human
resources, finance, legal, facilities and executive management functions. These
expenses increased to $4,338,374 in 2001 from $3,677,834 for 2000 and $1,987,307
for 1999. The increase in such expenses from 2000 to 2001 is principally due to
increased facilities costs resulting from our move to new corporate
headquarters. Total rent expense in 2000 was $681,000, and in 2001, the
aggregate rent expense was approximately $1.2 million. The increase from 1999 to
2000 is attributable to the expansion of the Company's support infrastructure,
including costs associated with additional general and administrative personnel
hired to manage our growth. During the third quarter of 2001, the Company
downsized and realigned its organization to make more efficient use of its
resources and better match the Company's infrastructure to market conditions and
the current business environment since the overall growth of the economy and
rate of technology spending by businesses had slowed. This realignment included
the layoff of certain employees and reassignment of other employees to different
functions to reduce our cash outflows and allow us to utilize our limited
resources more prudently by eliminating functions that did not directly
contribute to our goal of profitability. It also involved reorganizing the
company to promote better communication with customers and improve customer
service. We expect total general and administrative expenses to remain
relatively flat in subsequent periods as a result of the recent realignment.
Depreciation and amortization was $1,555,626, $940,995 and $270,908 for 2001,
2000 and 1999, respectively. The increases from prior years are due to
depreciation related to the capital expenditures made for infrastructure and
operating systems in support of our growth strategy. We purchased approximately
$723,000, $3.7 million and $1.1 million of property and equipment during 2001,
2000 and 1999, respectively, and anticipate making capital expenditures of
approximately $1.0 million in 2002.
Non-cash expense related to the issuance of warrants relates to expenses
recognized for warrants issued in consideration for services. In accordance with
accounting principles generally accepted in the United States, we expensed the
fair value of these warrant issuances, which was calculated using the
Black-Scholes option-pricing model, and recorded the related credit to paid-in
capital. During 2000, we recognized $7.5 million of expense associated with the
issuance of 1.3 million warrants to CheckFree as consideration for entering into
an extended biller service provider agreement. Under this agreement, which
expires in February 2005, CheckFree provides us with electronic bill presentment
services for volume-based fees. The related warrant expense was recognized
immediately instead of being deferred and recognized over the life of the
agreement because the warrants were fully vested at the date of grant and
CheckFree did not have to perform under the agreement to earn the warrants. We
may also recognize warrant costs in future periods based on CheckFree's ability
to earn incentive warrants on up to 2,801,903 additional shares, of which
1,000,000 are exercisable at $11.375 per share and 1,801,903 are exercisable at
$14.219 per share. The incentive warrants vest pro rata upon the achievement of
a target level of 200 referred billers, each generating approximately 500,000
paper-based bills per month, to the Company by CheckFree and will occur on the
first through fifth anniversaries of the agreement. All incentive warrants that
are not vested by the fifth anniversary will expire at that time. As of December
31, 2001, none of these incentive warrants were vested and management of the
Company is unable to assess the likelihood of whether or when any of these
incentive warrants will be earned by CheckFree and the related expenses
incurred. During the second and third quarters of 1999, we recognized $356,583
of warrant expense for 111,085 warrants issued in exchange for strategic and
financial advisory services rendered by our private placement agent and $134,845
related to the issuance of warrants associated with debt, respectively.
Net other income was $359,800 in 2001 compared to $546,173 for 2000 and $5,749
for 1999. The decrease from 2000 to 2001 is primarily attributable to lower
interest income earned in 2001 as a result of lower invested balances and market
interest rates. The increase from 1999 to 2000 was the result of investing the
proceeds of the equity investments made in the Company during the fourth quarter
of 1999 and throughout 2000.
The decrease in net loss to $10,405,706 in 2001 from $20,008,323 in 2000 was
primarily due to $7.5 million of expenses recognized in 2000 related to the
issuance of warrants to CheckFree as consideration for entering into an extended
biller service provider agreement. The increase in net loss in 2000 from
$5,472,948 in 1999 was due to the warrant expense in 2000 as well as an overall
increase in expenses as a result of employee growth from 50 employees at
December 31, 1999 to 141 at December 31, 2000 and expansion of the Company's
operations.
18
Liquidity and Capital Resources
At December 31, 2001, the Company's principal source of liquidity consisted of
$4.2 million of cash and cash equivalents and $237,000 in short-term
investments, compared to $5.2 million of cash and cash equivalents and $1.0
million in short-term investments at December 31, 2000. Additionally, the
Company had $1.0 million of long-term investments at December 31, 2000. The
Company had net working capital of $5.8 million and $5.3 million at December 31,
2001 and 2000, respectively.
During December 2000 and May 2001, the Company pledged $1.0 million and
$960,000, respectively, held as money market funds and certificates of deposit
to collateralize margin loans of four officers of the Company. These funds are
classified as Cash pledged as collateral for related party obligations on the
Company's balance sheets at December 31, 2001 and 2000. The margin loans are
from an institutional lender and are secured by shares of the Company's common
stock held by these officers, one of whom was no longer employed by the Company
at December 31, 2001. The Company's purpose in collateralizing the margin loans
was to enhance the Company's ability to raise additional capital through private
equity placements. The sale of the Company's common stock by these officers may
have hindered the Company's ability to raise capital in such a manner and
compromised the Company's continuing efforts to secure additional financing. The
total balance of the margin loans guaranteed by the Company was approximately
$2.0 million at December 31, 2001. The Company believes it has the unrestricted
legal right to use the pledged funds for its operations if necessary based on
(i) its interpretation of the loan guarantee agreements, (ii) the market price
of the Company's stock at the time of the pledge, and (iii) assurances the
Company received from one of the institutional lenders that funds would be made
available if needed. The agreements provide for the Company to terminate its
guarantees at its sole discretion, and at the time the Company entered into
these agreements, the value of the stock pledged by the officers to secure their
margin loans exceeded the balance of the loans in the aggregate.
Net cash used in operating activities was $9.0 million, $11.0 million and $4.4
million for 2001, 2000 and 1999, respectively. Net cash used in operating
activities was primarily attributable to operating net losses generated by
development stage activities and overhead costs. Through revenue growth and
realignment of its costs to address current market conditions, the Company
succeeded in lowering its average monthly net cash outflows, or cash burn rate,
by 57% from approximately $1.1 million in the first quarter of 2001 to
approximately $466,000 for the fourth quarter of 2001. We plan to continue to
focus on expending our resources prudently and expect to achieve positive cash
flow by the end of 2002 as a result of anticipated revenue growth. The Company
believes that positive cash flow will be realized before achieving profitability
due to the Company's history of collecting up-front fees for certain work
performed in implementing services for new customers and the expectation of
future new service contracts and collection of similar fees related to them.
Since these up-front implementation fees are deferred and recognized over the
term of the related service contract while the related costs are expensed as
incurred, cash receipts related to a new service contract that includes an
up-front fee will typically exceed the amount of related revenue that is
recognized during the implementation period following inception of such a
contract. If sales of future new service contracts with up-front implementation
fees do not occur as expected, the realization of positive cash flow may be
delayed.
Net cash provided by investing activities for 2001 was $1.5 million and
reflected sales and maturities of marketable securities of $2.0 million and
purchases of property and equipment of $723,000. Net cash used in investing
activities was $6.4 million and $1.5 million used in 2000 and 1999,
respectively, and was primarily used for purchases of investments and equipment
and to make deposits for leases. We anticipate making capital expenditures of
approximately $1.0 million in 2002.
Net cash provided by financing activities of $7.5 million for 2001 resulted from
proceeds, net of issuance costs, of $9.2 million from the issuance of common
stock private placement offerings in March and November 2001. The $1.5 million
repayment of the outstanding line of credit in January 2001 reduced the amount
of net cash provided by financing activities. Net cash provided by financing
activities of $16.6 million for 2000 resulted from proceeds, net of issuance
costs, of $9.5 million from the purchase of common stock by CheckFree and $6.1
million from the exercise of warrants issued in the October and December 1999
private equity placements. In addition, the Company drew $1.5 million on its
line of credit in 2000. Net cash provided by financing activities of $12.6
million for 1999 largely resulted from the issuance of common stock in the
October and December 1999 private placements.
In June 2000, the Company executed a working capital line of credit agreement
with a bank in the amount of $1,500,000. Advances under the line of credit
accrued interest at the prime rate minus 0.25%, with repayment terms of monthly
interest-only payments and principal due in July 2001. The line of credit was
secured by certain investments of the Company. The Company borrowed $1,500,000
on this line of credit for the security deposit and leasehold improvements for
the Company's corporate headquarters and repaid the entire outstanding balance
in January 2001. The line of credit expired in July 2001 and was not renewed. In
March 2002, the Company executed a working capital line of credit agreement with
a bank in the amount of $700,000. Advances under the line of credit accrue
interest at the prime rate minus 0.25%, with repayment terms of monthly
interest-only payments and principal due in June 2003. The line of credit is
secured by certain investments of the Company.
19
Our capital requirements depend on several factors, including:
o The rate of consumer acceptance of the Internet, Internet technology,
electronic commerce and our online services;
o The ability to adapt quickly to rapid changes in technology and
competition in electronic commerce and related financial services;
o The ability to expand our customer base and increase revenues;
o The level of expenditures for marketing and sales;
o The level of purchases of computer equipment and software;
o Possible acquisitions of or investments in complementary businesses,
products, services and technologies; and
o The need to respond to unforeseen industry developments and other factors.
The Company currently plans to meet its capital requirements primarily through
issuance of equity securities or new borrowing arrangements, and in the longer
term, revenue from operations. Due to a material shortfall from anticipated
revenues and the inability to access its funds held as collateral to guarantee
certain executive margin loans, the Company believes that its current available
cash and cash equivalents and investment balances along with anticipated
revenues may be insufficient to meet its anticipated cash needs for the
foreseeable future. Accordingly, the Company reduced its workforce by 36
employees in November 2002 and is currently aggressively pursuing strategic
alternatives, including investment in or sale of the Company. The sale of
additional equity or convertible debt securities would result in additional
dilution to the Company's stockholders, and debt financing, if available, may
involve restrictive covenants which could restrict operations or finances. There
can be no assurance that financing will be available in amounts or on terms
acceptable to the Company, if at all. If the Company cannot raise funds, on
acceptable terms, or achieve positive cash flow, it may not be able to continue
to exist, conduct operations, grow market share, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements,
any of which would negatively impact its business, operating results and
financial condition.
Effect of New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations",
which addresses the initial recognition of goodwill and other intangible assets
acquired in a business combination and requires that all future business
combinations be accounted for under the purchase method of accounting. In July
2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets",
which addresses the recognition and measurement of other intangible assets
acquired outside of a business combination whether acquired individually or with
a group of assets. In accordance with these statements, goodwill and certain
intangible assets are no longer amortized, but are subject to at least an annual
assessment of impairment. The Company will adopt these statements on a
prospective basis on January 1, 2002. Management does not believe the adoption
of these statements will have an adverse impact on the financial statements of
the Company.
Risk Factors
There are many factors that affect the Company's business and the results of its
operations, some of which are beyond its control. The following is a description
of some of the important factors that may cause the actual results of the
Company's operations in future periods to differ materially from those currently
expected or desired.
Future Capital Needs; Uncertainty of Additional Financing
The Company currently plans to meet its capital requirements primarily through
issuance of equity securities or new borrowing arrangements, and in the longer
term, revenue from operations. Due to a material shortfall from anticipated
revenues and the inability to access its funds held as collateral to guarantee
certain executive margin loans, the Company believes that its current available
cash and cash equivalents and investment balances along with anticipated
revenues may be insufficient to meet its anticipated cash needs for the
foreseeable future. Accordingly, the Company reduced its workforce by 36
employees in November 2002 and is currently aggressively pursuing strategic
alternatives, including investment in or sale of the Company. The sale of
additional equity or convertible debt securities would result in additional
dilution to our shareholders, and debt financing, if available, may involve
restrictive covenants that could restrict our operations or finances. There can
be no assurance that financing will be available in amounts or on terms
acceptable to the Company, if at all. If the Company cannot raise funds on
acceptable terms, or achieve positive cash flow, it may not be able to continue
to exist, conduct operations, grow market share, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements,
any of which would negatively impact its business, operating results and
financial condition.
Lack of Profitability; Uncertainty of Future Profitability
The Company was organized in 1998 and began operations as a public company in
1999 offering electronic billing services to other companies. The Company has
not been profitable since inception and may never achieve profitability. As of
December 31, 2001, the Company's accumulated deficit was $36.2 million. Because
we have a relatively limited history in a rapidly evolving
20
and dynamic market, it is difficult to predict our future operating results.
Therefore, all historical information included herein may not necessarily be
indicative of the results of operations, financial position and cash flows of
the Company in the future.
Uncertain Reliability, Growth and Consumer Acceptance of the Internet, Internet
Technology, and Electronic Commerce
The electronic commerce market is a relatively new and growing service industry.
If the electronic commerce market fails to grow or grows slower than
anticipated, or if the Company, despite an investment of significant resources,
is unable to adapt to meet changing customer requirements or technological
changes in this emerging market, or if the Company's services and related
products do not maintain a proportionate degree of acceptance in this growing
market, the Company's business, operating results, and financial condition could
be materially adversely affected. Additionally, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
electronic commerce market in general, and the Company's customer base and
revenues in particular. Similar to the emergence of the credit card and
automatic teller machine ("ATM") industries, the Company and other organizations
serving the electronic commerce market must educate users that electronic
transactions use encryption technology and other electronic security measures
that make electronic transactions more secure than paper-based transactions.
While the Company believes that it is utilizing proven applications designed for
premium data security and integrity to process electronic transactions, there
can be no assurance that the Company's use of such applications will be
sufficient to address the changing market conditions or the security and privacy
concerns of existing and potential customers. Adverse publicity raising concerns
about the safety or privacy of electronic transactions, or widely reported
breaches of the Company's or another provider's security, have the potential to
undermine consumer confidence in the technology and thereby have a materially
adverse effect on the Company's business. In addition, there can be no guarantee
that the Internet will continue to grow in acceptance or maintain its
reliability, or that new technologies will not supplant the Internet in part or
in whole.
Uncertain Growth of Proportion of Electronic Remittances
The Company's future financial performance will be materially affected by the
percentage of bill payments that can be cleared electronically. As compared with
making payment by paper check or by draft, the Company believes that electronic
payments: (i) cost much less to complete; (ii) give rise to fewer errors, which
are costly to resolve; and (iii) generate far fewer customer inquiries and
therefore consume fewer customer care resources. Accordingly, the Company's
inability to continue to decrease the percentage of remittances effected by
paper documents would result in flat or decreased margins, and a reversal of the
current trend toward a smaller proportion of paper-based payments would have a
material adverse effect upon the Company's business, operating results, and
financial condition.
Risk of Inability to Adapt to Rapid Technological Change; Risk of Delays
The Company's success is highly dependent on its ability to develop new and
enhanced services, and related products that meet changing customer
requirements. The market for the Company's services, however, is characterized
by rapidly changing technology, evolving industry standards, emerging
competition and frequent new and enhanced software, service and related product
introductions. In addition, the software market is subject to rapid and
substantial technological change. The Company, to remain successful, must be
responsive to new developments in hardware and semiconductor technology,
operating systems, programming technology and computer capabilities. In many
instances, the new and enhanced services, products, and technologies are in the
emerging stages of development and marketing, and are subject to the risks
inherent in the development and marketing of new software, services, and
products. The Company may not successfully identify new service opportunities,
and develop and bring new and enhanced services and related products to market
in a timely manner; there can be no assurance that any such services, products
or technologies will develop or will be commercially successful, that the
Company will benefit from such developments or that services, products or
technologies developed by others will not render the Company's services and
related products noncompetitive or obsolete. If the Company is unable, for
technological or other reasons, to develop and introduce new services and
products in a timely manner in response to changing market conditions or
customer requirements, or if new or enhanced software, services and related
products do not achieve a significant degree of market acceptance, the Company's
business, operating results and financial condition would be materially
adversely affected.
Changes in Regulation of Electronic Commerce and Related Financial Services
Management believes that the Company is not required to be licensed by the
Office of the Comptroller of the Currency, the Federal Reserve Board, or other
federal or state agencies that regulate or monitor banks or other types of
providers of electronic commerce services. There can be no assurance that a
federal or state agency will not attempt to regulate providers of electronic
commerce services, such as the Company, which could impede the Company's ability
to do business in the regulator's jurisdiction. The Company is subject to
various laws and regulations relating to commercial transactions generally, such
as the Uniform Commercial Code, and may be subject to the electronic funds
transfer rules embodied in Regulation E, promulgated by the Federal Reserve
Board. Given the expansion of the electronic commerce market, the Federal
Reserve Board might revise Regulation E or adopt new rules for electronic funds
transfer affecting users other than consumers. Because of growth in the
electronic commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the electronic commerce market, and it
is possible that Congress or individual states could enact laws regulating the
electronic
21
commerce market. If enacted, such laws, rules and regulations could be imposed
on the Company's business and industry and could have a material adverse effect
on the Company's business, operating results and financial condition.
Uncertainty of ACH Access
Billserv has a contractual relationship with Bank One, which is an Originating
Depository Financial Institution ("ODFI") in the Automated Clearinghouse (ACH)
Network. The ACH Network is a nationwide batch-oriented electronic funds
transfer system that provides for the interbank clearing of electronic payments
for participating financial institutions. An ODFI is a participating financial
institution that must abide by the provisions of the ACH Operating Rules and
Guidelines. Through its relationship with Bank One, Billserv is able to process
payment transactions on behalf of its customers and their consumers by
submitting payment instructions to Bank One in a prescribed ACH format. Billserv
pays volume-based fees to Bank One for debit and credit transactions processed
through Bank One each month, and pays fees for other transactions such as
returns, notices of change to bank accounts, test debits, file transmission and
depository fees. These fees are part of Billserv's cost structure. If the
Federal Reserve rules were to change to further restrict or modify access to the
ACH, the Company's business could be materially adversely affected.
Competition in Electronic Commerce and Related Financial Services
Portions of the electronic commerce market are becoming increasingly
competitive. The Company expects to face growing competition in certain areas of
the EBPP market. Although few companies have focused their efforts as service
bureau consolidators in the EBPP industry, new service bureau companies could
emerge and compete for billers of all sizes. The Company believes that software
providers, consumer front ends, banks and Internet portals may provide
increasingly competitive billing services for billers of all sizes. In addition,
a number of banks have developed, and others in the future may develop, home
banking services in-house. The Company believes that banks may also compete for
the EBPP business of billers. The Company expects competition to increase from
both established and emerging companies and that such increased competition
could materially adversely affect the Company's business, operating results and
financial condition. Moreover, the Company's current and potential competitors,
many of whom have greater financial, technical, marketing and other resources
than the Company, may respond more quickly than the Company to new or emerging
technologies or could expand to compete directly against the Company in any or
all of its target markets. Accordingly, it is possible that current or potential
competitors could rapidly acquire market share. There can be no assurance that
the Company will be able to compete against current or future competitors
successfully or that competitive pressures faced by the Company will not have a
material adverse effect on its business, operating results and financial
condition.
Dependence on Key Personnel
The Company's success depends to a significant degree upon the continued
contributions of its key management, marketing, service and related product
development and operational personnel, including its Chairman and Chief
Executive Officer, Michael R. Long; its President and Chief Operating Officer,
Louis A. Hoch; its Executive Vice President and Chief Financial Officer, Terri
A. Hunter; and its Senior Vice President of Sales and Marketing, Tony L.
Diamond. The Company's operations could be affected adversely if, for any
reason, any of these officers ceased to be active in the Company's management.
The Company maintains proprietary nondisclosure and non-compete agreements with
all of its key employees. The success of the Company depends to a large extent
upon its ability to retain and continue to attract highly skilled personnel.
Competition for employees in the electronic commerce industry is intense, and
there can be no assurance that the Company will be able to attract and retain
enough qualified employees. If the Company experiences significant growth, it
may become increasingly difficult to hire, train and assimilate the new
employees needed. The Company's potential inability to retain and attract key
employees could have a material adverse effect on the Company's business,
operating results and financial condition.
Potential Fluctuations in Quarterly Results
The Company's quarterly results of operations may fluctuate significantly as a
result of a number of factors, including changes in the Company's pricing
policies or those of its competitors, relative rates of acquisition of new
customers, delays in the introduction of new or enhanced services, software and
related products by the Company or by its competitors or market acceptance of
such services and products, other changes in operating expenses, personnel
changes and general economic conditions. These factors will impact the Company's
operating results. Fluctuations in operating results could result in volatility
in the price of the Company's common stock.
Risk of Product Defects
The software products utilized by the Company could contain errors or "bugs"
that could adversely affect the performance of services or damage a user's data.
In addition, as the Company increases its share of the electronic commerce
services market, software reliability and security demands will increase. The
Company attempts to limit its potential liability for warranty claims through
technical audits and limitation-of-liability provisions in its customer
agreements. There can be no assurance that the
22
measures taken by the Company will prove effective in limiting the Company's
exposure to warranty claims. Despite the existence of various security
precautions, the Company's computer infrastructure may also be vulnerable to
viruses or similar disruptive problems caused by its customers or third parties
gaining access to the Company's processing system.
Erosion of Revenue from Services
One of the Company's customers that accounted for approximately 23% and 40% of
total consolidated revenues for the years ended December 31, 2001 and 2000,
respectively, is planning to develop an in-house EBPP offering during 2002. To
the extent that this potential loss of revenue is not mitigated by fees
generated from consulting services provided to this customer related to the
transition of their EBPP capabilities to an in-house offering, the Company's
revenues and profits will be adversely affected. The profitability of the
Company's business depends, to a substantial degree, upon billers electing to
continue to periodically renew contracts and receive services under existing
contracts. In the event that a substantial number of these customers were to
decline to renew these contracts or choose to discontinue receiving services for
any reason, the Company's revenues and profits would be adversely affected.
Sales of the Company's services are dependent upon customer demand for the
services, which is affected by pricing decisions, the competition of similar
products and services, and reputation of the products and services for
performance. Most of the Company's services are likely to be sold within the
utilities and financial services industries, and poor performance by the Company
in performing its services would have the potential to undermine the Company's
reputation and affect future sales of other services. A substantial decrease in
revenue from services would have a material adverse effect upon the Company's
business, operating results and financial condition.
Risk of Loss from Returned Transactions, Merchant Fraud or Erroneous
Transmissions
The Company relies upon the Federal Reserve's ACH for electronic fund transfers
and conventional paper check and draft clearing systems for settlement of
payments by check or drafts. In its use of these established payment clearance
systems, the Company generally bears the same credit risks normally assumed by
other users of these systems arising from returned transactions caused by
insufficient funds, stop payment orders, closed accounts, frozen accounts,
unauthorized use, disputes, theft or fraud. In addition, the Company also
assumes the risk of merchant fraud and transmission errors when it is unable to
have erroneously transmitted funds returned by an unintended recipient. Merchant
fraud includes such actions as inputting false sales transactions or false
credits.
Risk of System Failure
The Company's operations are dependent on its ability to protect its computer
equipment against damage from fire, earthquake, power loss, telecommunications
failure or similar event. Any damage or failure that causes interruptions in the
Company's operations could have a material adverse effect on the Company's
business, operating results and financial condition. The Company's property and
business interruption insurance may not be adequate to compensate the Company
for all losses that may occur.
Limited Protection of Proprietary Services
The Company regards some of its services as proprietary and relies primarily on
a combination of trademark and trade secret laws, employee and third party
non-disclosure agreements, and other intellectual property protection methods to
protect its services. Existing intellectual property laws afford only limited
protection, and it may be possible for unauthorized third parties to copy the
Company's services and related products or to reverse engineer or obtain and use
information that the Company regards as proprietary. There can be no assurance
that the Company's competitors will not independently develop services and
related products that are substantially equivalent or superior to those of the
Company.
Volatility of Stock Price
The market price of the Company's common stock is subject to significant
fluctuations in response to variations in quarterly operating results, the
failure of the Company to achieve operating results consistent with securities
analysts' projections of the Company's performance, and other factors. The stock
market has experienced extreme price and volume fluctuations and volatility that
has particularly affected the market prices of many technology, emerging growth
and developmental stage companies. Such fluctuations and volatility have often
been unrelated or disproportionate to the operating performance of such
companies. Factors such as announcements of the introduction of new or enhanced
services or related products by the Company or its competitors, announcements of
joint development efforts or corporate partnerships in the electronic commerce
market, market conditions in the technology, banking, telecommunications and
other emerging growth sectors, and rumors relating to the Company or its
competitors may have a significant impact on the market price of the Company's
common stock.
23
Control by Principal Stockholders
As of December 31, 2001, the directors and officers of the Company and their
affiliates collectively own approximately 12% of the outstanding shares of the
Company's common stock. As a result, these stockholders are able to exercise
significant influence over matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
Shares Eligible for Future Sale; Possible Adverse Effect on Market Price
As of December 31, 2001, the Company had 20,538,526 shares of common stock
outstanding. The Company anticipates that it may need future equity financing to
meet certain operational and strategic requirements. Such future equity
financing may have a significant dilutive effect on the Company's stock price.
Anti-Takeover Provisions; Certain Provisions of Nevada Law; Certificate of
Incorporation, Bylaws, and Stockholder Rights Plan
On October 4, 2000, the Company approved a stockholder rights plan to protect
stockholders in the event of an unsolicited attempt to acquire the Company in a
manner that would not be in the best interests of its stockholders. This
stockholder rights plan could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, control of the Company. The Company's Board of Directors is also
classified into three classes of directors serving staggered three-year terms.
Such classification of the Board of Directors expands the time required to
change the composition of a majority of directors and may tend to discourage a
proxy contest or other takeover bid for the Company. The issuance of common
stock under a stockholder rights plan could decrease the amount of earnings and
assets available for distribution to the holders of the Company's common stock
or could adversely affect the rights and powers, including voting rights, of the
holders of the Company's common stock. In certain circumstances, such issuance
could have the effect of decreasing the market price of the Company's common
stock.
Difficulty in Management of Growth
The Company may experience a period of rapid growth that could place a
significant strain on its resources. The Company's ability to manage growth
successfully will require the Company to continue to improve its operational,
management and financial systems and controls as well as to expand its work
force. A significant increase in the Company's customer base would necessitate
the hiring of a significant number of additional customer care and technical
support personnel as well as computer software developers and technicians,
qualified candidates for which, at the time needed, may be in short supply. In
addition, the expansion and adaptation of the Company's computer and
administrative infrastructure will require substantial operational, management
and financial resources. Although the Company believes that its current
infrastructure is adequate to meet the needs of its customers in the foreseeable
future, there can be no assurance that the Company will be able to expand and
adapt its infrastructure to meet additional demand on a timely basis, at a
commercially reasonable cost, or at all. If the Company's management is unable
to manage growth effectively, hire needed personnel, expand and adapt its
computer infrastructure or improve its operational, management, and financial
systems and controls, the Company's business, operating results, and financial
condition could be materially adversely affected.
Acquisition-Related Risks
In the future, the Company may pursue acquisitions of complementary service or
product lines, technologies or businesses. Future acquisitions by the Company
could result in potentially dilutive issuance of equity securities, the
incurrence of debt and contingent liabilities, and amortization expenses related
to goodwill and other intangible assets, any of which could materially adversely
affect the Company's business, operating results and financial condition. In
addition, acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies, services and products of the
acquired companies, the diversion of management's attention from other business
concerns, risks of entering markets in which the Company has no or limited
direct prior experience, and the potential loss of key employees of the acquired
company. From time to time, the Company evaluates potential acquisitions of
businesses, services, products or technologies. The Company has no present
commitments or agreements with respect to any material acquisition of other
businesses, services, products or technologies. In the event that such an
acquisition were to occur, however, there can be no assurance that the Company's
business, operating results and financial condition would not be materially
adversely affected.
Unlikely Payment of Dividends
The Company has paid no cash dividends and has no present plan to pay cash
dividends, intending instead to reinvest its earnings, if any. However, payment
of future cash dividends will be determined from time to time by its Board of
Directors, based upon its future earnings, financial condition, capital
requirements and other factors. The Company is not presently subject to any
restriction on its present or future ability to pay such dividends.
24
Dependence Upon Contracts with Billers
The Company's business is dependent upon performing under the terms of
agreements with billers. Although the Company is unaware of any circumstance
that would prevent the operational ability to perform these agreements, there
can be no assurance that the Company might not be able to fully perform under
these agreements or that other factors may prevent billers from processing
billing information through the Company.
Dependence Upon Contracts with Trading Partners
The Company's business is dependent upon executing and maintaining agreements
with distribution and payment partners, such as CheckFree Services Corporation
and Paymentech, Inc., to provide dependable financial services for consumers of
billers. Such financial services include ACH processing through the client's
bank and delivery of good funds to the Company for remittance to the billers.
There can be no assurance that any of the distribution or payment partners will
be able to perform under these agreements in the future.
Anticipated Billing System Expenditures
To facilitate and support the growth anticipated in its business, the Company
plans to make certain expenditures in its operations over the next one to three
years. These expenditures are expected to be made in the areas of software
development, licensing, hardware and related staffing. The Company believes that
it will be able to fund these expenditures with internally generated funds and
financing, but there can be no assurance that such funds will be generated or
spent in these areas.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's current investment portfolio. Certain of the
Company's marketable securities are designated as "available for sale" and
accordingly are presented at fair value on the balance sheets. The Company
generally invests its excess cash in high-quality short-term fixed income
securities. Fixed-rate securities may have their fair market value adversely
impacted by a rise in interest rates, and the Company may suffer losses in
principal if forced to sell securities that have declined in market value due to
changes in interest rates.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors ............................................. 27
Consolidated Balance Sheets as of December 31, 2001 and 2000 ............... 28
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 and
from inception to December 31, 2001 ...................................... 29
Consolidated Statement of Changes in Shareholders' Equity
from inception to December 31, 2001 ...................................... 30
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 and
from inception to December 31, 2001 ...................................... 33
Notes to Consolidated Financial Statements ................................. 34
26
REPORT OF INDEPENDENT AUDITORS
To Board of Directors and Shareholders of Billserv, Inc.
We have audited the accompanying consolidated balance sheets of Billserv, Inc.
and subsidiaries (a development stage company) as of December 31, 2001 and 2000,
and the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the three years in the period ended December 31, 2001
and the period from inception (July 30, 1998 through December 31, 2001). 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 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Billserv, Inc. and
subsidiaries at December 31, 2001 and 2000, and the consolidated results of
their operations and their cash flows for the three years in the period ended
December 31, 2001, and the period from inception (July 30, 1998 through December
31, 2001), in conformity with accounting principles generally accepted in the
United States.
As discussed in Note 18 to the financial statements, since the date of
completion of our audit on the accompanying financial statements for the year
ended December 31, 2001, the Company has experienced a material shortfall in
anticipated revenues which has led to a cash position that may be insufficient
to meet anticipated cash needs in the foreseeable future, which raises
substantial doubt about its ability to continue as a going concern. The 2001
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
San Antonio, Texas
February 5, 2002, except for Note 18, as to
which the date is November 14, 2002
27
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2001 2000
------------ ------------
Assets:
Cash and cash equivalents $ 4,173,599 $ 5,171,822
Cash pledged as collateral for related party obligations 2,018,951 1,000,000
Investments -- 1,013,900
Investments restricted as collateral for capital leases 236,948 --
Accounts receivable, net 437,677 782,537
Prepaid expenses and other 225,795 596,546
Related party notes receivable 162,154 283,738
------------ ------------
Total current assets 7,255,124 8,848,543
Property and equipment, net of accumulated
depreciation and amortization of $2,718,953
and $1,178,813 for 2001 and 2000, respectively 3,701,205 4,518,347
Intangible asset, net of accumulated amortization of
$37,500 and $22,500 for 2001 and 2000, respectively 37,500 52,500
Long-term investments -- 1,000,920
Investments restricted as collateral for capital leases -- 335,000
Other assets 421,307 535,232
------------ ------------
Total assets $ 11,415,136 $ 15,290,542
============ ============
Liabilities & shareholders' equity:
Current liabilities:
Accounts payable $ 201,513 $ 726,804
Accrued expenses and other current liabilities 664,200 896,772
Current portion of obligations under capital leases 148,228 181,128
Current portion of deferred revenue 490,829 252,833
Short-term borrowings -- 1,500,000
------------ ------------
Total current liabilities 1,504,770 3,557,537
Obligations under capital leases, less current portion -- 148,428
Deferred revenue, less current portion 161,800 573,167
Shareholders' equity:
Common stock, $.001 par value, 200,000,000 shares authorized; 20,538,526
issued and outstanding at December 31, 2001, 15,527,870 issued and
outstanding at December 31, 2000 20,539 15,528
Additional paid-in capital 45,909,410 36,758,450
Accumulated other comprehensive income -- 13,109
Deficit accumulated during the development stage (36,181,383) (25,775,677)
------------ ------------
Total shareholders' equity 9,748,566 11,011,410
------------ ------------
Total liabilities and shareholders' equity $ 11,415,136 $ 15,290,542
============ ============
See notes to consolidated financial statements.
28
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
July 30, 1998
Year ended Year ended Year ended (Inception) to
December 31, December 31, December 31, December 31,
2001 2000 1999 2001
------------ ------------ ------------ ------------
Revenues $ 2,968,678 $ 650,023 $ 55,438 $ 3,674,139
Cost of revenues 4,995,161 3,690,843 127,345 8,813,349
------------ ------------ ------------ ------------
Gross margin (2,026,483) (3,040,820) (71,907) (5,139,210)
Operating expenses:
Research and development 760,082 767,751 906,532 2,434,365
Selling and marketing 2,084,941 4,586,823 1,750,615 8,510,677
General and administrative 4,338,374 3,677,834 1,987,307 10,204,428
Depreciation and amortization 1,555,626 940,995 270,908 2,768,088
Non-cash expense related to the issuance of warrants 7,488,000 491,428 7,979,428 --
------------ ------------ ------------ ------------
Total operating expenses 8,739,023 17,461,403 5,406,790 31,896,986
------------ ------------ ------------ ------------
Operating loss (10,765,506) (20,502,223) (5,478,697) (37,036,196)
Other income (expense), net:
Interest income 355,262 687,724 73,270 1,116,256
Interest expense (40,079) (140,651) (67,521) (247,564)
Equity in earnings of unconsolidated subsidiary 7,676 -- -- 7,676
Other income (expense) 36,941 (900) -- 35,354
------------ ------------ ------------ ------------
Total other income (expense), net 359,800 546,173 5,749 911,722
Loss before income taxes and cumulative
effect of accounting change (10,405,706) (19,956,050) (5,472,948) (36,124,474)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss before cumulative effect of
accounting change (10,405,706) (19,956,050) (5,472,948) (36,124,474)
Cumulative effect of a change in accounting
principle, net of taxes -- (52,273) -- (52,273)
------------ ------------ ------------ ------------
Net loss $(10,405,706) $(20,008,323) $ (5,472,948) $(36,176,747)
============ ============ ============ ============
Net loss per common share before
cumulative effect of accounting change-
basic and diluted $ (0.58) $ (1.35) $ (0.50)
Cumulative effect of accounting change-
basic and diluted -- -- --
------------ ------------ ------------
Net loss per common share - basic and
diluted $ (0.58) $ (1.35) $ (0.50)
============ ============ ============
Weighted average common shares
outstanding - basic and diluted 18,017,051 14,793,622 10,876,096
============ ============ ============
See notes to consolidated financial statements.
29
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Deficit
Accumulated
Common Stock Additional During the Other Total
------------------------ Paid - In Development Comprehensive Shareholders'
Shares Amount Capital Stage Income Equity
---------- ------------ ------------ ------------ ------------ ------------
Balance at July 30, 1998 (date of inception) 1,000 $ -- $ -- $ -- $ -- $ --
Acquisition of Shares and Reverse Merger,
December 9, 1998 10,029,000 10,030 -- (4,636) -- 5,394
Net Loss From Inception (July 30, 1998)
to December 31, 1998 -- -- -- (289,770) -- (289,770)
---------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 10,030,000 10,030 -- (294,406) -- (284,376)
Shares issued under Reg. S,
June 1999 ($5.60 per share) 946,428 946 5,299,054 -- -- 5,300,000
Issuance of Common Stock Warrants,
May 1999 -- -- 356,583 -- -- 356,583
Issuance of Common Stock Warrants,
August 1999 -- -- 134,845 -- -- 134,845
Issuance of Common Stock, net of issuance
costs, October 1999 ($3.25 per share) 1,250,791 1,251 3,725,173 -- -- 3,726,424
Issuance of Common Stock, net of issuance
costs, October 1999, in Exchange for Debt
($3.25 per share) 153,846 154 490,057 -- -- 490,211
Issuance of Common Stock, net issuance
costs, December 1999 ($5.50 per share) 732,000 732 3,689,872 -- -- 3,690,604
Net Loss for the Year Ended
December 31, 1999 -- -- -- (5,472,948) -- (5,472,948)
---------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 13,113,065 13,113 13,695,584 (5,767,354) -- 7,941,343
Equity Issuance Costs -- -- (8,465) -- -- (8,465)
Exercise of Warrants, January 2000
($3.75 per share) 15,400 15 57,735 -- -- 57,750
Exercise of Warrants, February 2000
($3.75 per share) 126,969 127 476,007 -- -- 476,134
30
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Deficit
Accumulated
Common Stock Additional During the Other Total
--------------------------- Paid - In Development Comprehensive Shareholders'
Shares Amount Capital Stage Income Equity
------------ ------------ ------------ ------------ ------------ ------------
Exercise of Warrants, February 2000
($4.45 per share) 52,426 $ 53 $ 232,984 $ -- $ -- $ 233,037
Exercise of Warrants, March 2000
($3.25 per share) 22,515 23 73,147 -- -- 73,170
Exercise of Warrants, March 2000
($6.86 per share) 11,032 11 75,648 -- -- 75,659
Exercise of Warrants, March 2000
($6.18 per share) 145,054 145 895,911 -- -- 896,056
Exercise of Warrants, March 2000
($6.73 per share) 2,318 2 15,607 -- -- 15,609
Exercise of Warrants, March 2000
($3.75 per share) 138,385 138 518,806 -- -- 518,944
Stock Option Exercise, March 2000
($2.81 per share) 900 1 2,530 -- -- 2,531
Exercise of Warrants, March 2000
($3.75 per share) 673,076 673 2,523,362 -- -- 2,524,035
Exercise of Warrants, April 2000
($3.75 per share) 326,961 327 1,225,777 -- -- 1,226,104
Issuance of Common Stock, Net of Issuance
Costs, June 2000 ($11.375 per share) 879,121 879 9,564,621 -- -- 9,565,500
Value of Common Stock Warrants granted in
Connection with Issuance of Common Stock -- -- 7,488,000 -- -- 7,488,000
Stock Option Exercise, June 2000
($2.81 per share) 500 1 1,405 -- -- 1,406
Issuance of Common Stock, July 2000
($6.56 per share) 17,848 18 117,075 -- -- 117,093
Equity Issuance Costs -- -- (56,876) -- -- (56,876)
Stock Option Exercise, August 2000
($2.81 per share) 300 -- 844 -- -- 844
Stock Option Exercise, September 2000
($4.37 per share) 2,000 2 8,748 -- -- 8,750
Equity Issuance Costs -- -- (150,000) -- -- (150,000)
Comprehensive Loss:
Unrealized Gain on Investments -- -- -- -- 13,109 13,109
Net Loss for the Year Ended
December 31, 2000 -- -- -- (20,008,323) -- (20,008,323)
------------
Comprehensive Loss (19,995,214)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 15,527,870 15,528 36,758,450 (25,775,677) 13,109 11,011,410
31
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Deficit
Accumulated
Common Stock Additional During the Other Total
--------------------------- Paid - In Development Comprehensive Shareholders'
Shares Amount Capital Stage Income Equity
------------ ------------ ------------ ------------ ------- ------------
Issuance of Common Stock, January 2, 2001
($2.18 per share) 69,299 $ 69 $ 150,866 $ -- $ -- $ 150,935
Stock Option Exercise, January 31, 2001
($4.38 per share) 8,000 8 34,992 -- -- 35,000
Issuance of Common Stock, net of issuance
costs, March 28, 2001 ($2.50 per share) 2,885,462 2,885 6,594,746 -- -- 6,597,631
Issuance of Common Stock, July 6, 2001
($1.74 per share) 47,895 49 83,406 -- -- 83,455
Issuance of Common Stock, net of issuance
costs, November 27, 2001 ($1.25 per share) 2,000,000 2,000 2,286,950 -- -- 2,288,950
Comprehensive Loss:
Unrealized Gain on Investments -- -- -- -- (13,109) (13,109)
Net Loss for the Year Ended
December 31, 2001 -- -- -- (10,405,706) -- (10,405,706)
------------
Comprehensive Loss (10,418,815)
------------ ------------ ------------ ------------ ------- ------------
Balance at December 31, 2001 20,538,526 $ 20,539 $ 45,909,410 $(36,181,383) $ -- $ 9,748,566
============ ============ ============ ============ ======= ============
See notes to consolidated financial statements.
32
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
July 30, 1998
(Inception) to
December 31,
2001 2000 1999 2001
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss $(10,405,706) $(20,008,323) $ (5,472,948) $(36,176,747)
Adjustments to reconcile net loss to net
cash used in operating activities:
Issuance of common stock warrants -- 7,488,000 491,428 7,979,428
Depreciation and amortization 1,555,626 940,955 270,908 2,768,048
Gain on sale of investments (36,070) -- -- (36,070)
Equity in earnings of unconsolidated subsidiary (7,676) -- -- (7,676)
Cumulative effect of change in accounting principle -- 52,273 -- 52,273
Changes in current assets and current liabilities:
(Increase) decrease in accounts receivable 344,860 (772,310) (10,227) (437,677)
(Increase) decrease in related party notes
receivable 121,584 (253,516) (6,222) (162,154)
(Increase) decrease in prepaid expenses
and other 377,551 5,004 (346,414) 1,779
Increase (decrease) in accounts payable and
accrued expenses and other current liabilities (757,863) 735,458 851,212 1,020,713
Decrease in related party accounts payable -- -- (150,000) (150,000)
Increase (decrease) in deferred revenue (173,371) 768,727 -- 595,356
------------ ------------ ------------ ------------
Net cash used in operating activities (8,981,065) (11,043,732) (4,372,263) (24,552,727)
Cash flows from investing activities:
Purchase of property and equipment (722,748) (3,652,712) (1,052,459) (5,448,028)
Purchase of investments -- (7,864,759) (275,496) (8,140,255)
Proceeds from sales and maturities of investments 2,028,680 5,863,048 -- 7,891,728
Long-term deposits, net 218,641 (764,496) (45,041) (590,896)
Other investing activities 2,577 -- (86,884) (78,913)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 1,527,150 (6,418,919) (1,459,880) (6,366,364)
Cash flows from financing activities:
Advance from shareholders -- -- 1,500,000 2,000,000
Repayment to shareholders -- -- (2,000,000) (2,000,000)
Proceeds from notes payable and short-term borrowings -- 1,500,000 1,000,000 2,500,000
Principal payments for notes payable (1,500,000) -- (500,000) (2,000,000)
Principal payments for capital lease obligations (181,328) (512,231) (135,291) (828,850)
Exercise of warrants -- 6,096,498 -- 6,096,498
Cash pledged as collateral for related party obligations (1,018,951) (1,000,000) -- (2,018,951)
Issuance of common stock, net of issuance costs 9,155,971 9,480,783 12,707,239 31,343,993
------------ ------------ ------------ ------------
Net cash provided by financing activities 6,455,692 15,565,050 12,571,948 35,092,690
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (998,223) (1,897,601) 6,739,805 4,173,599
Cash and cash equivalents, beginning of period 5,171,822 7,069,423 329,618 --
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 4,173,599 $ 5,171,822 $ 7,069,423 $ 4,173,599
============ ============ ============ ============
Supplemental information:
Cash paid for interest $ 52,027 $ 139,755 $ 28,933 $ 220,715
Non-cash investing and financing activities:
Purchases of equipment under capital leases $ -- $ 278,080 $ 563,707 $ 841,787
Conversion of debt to equity $ -- $ -- $ 500,000 $ 500,000
See notes to consolidated financial statements
33
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
NOTE 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Billserv, Inc., formerly known as billserv.com, Inc., and its subsidiaries
(collectively, "Billserv" or "the Company"), provide electronic bill presentment
and payment ("EBPP") services to companies generating recurring bills, primarily
in the United States. The Company also provides related consulting and
Internet-based customer care interaction services. In addition, the Company
operates an Internet bill presentment and payment portal for consumers under the
domain name www.bills.com.
Basis of Presentation
The Company's principal activities since inception have included research and
development, raising of capital and organizational activities. The Company has
recently increased its activities in the areas of obtaining billing customers
and implementing EBPP capabilities for those billers. The Company remained a
development stage company through 2001, as recurring revenue related to EBPP
activity had not reached a significant level. The Company expects to continue to
incur losses during the next several quarters of operations as it works toward
achieving profitability. The Company plans to meet its future capital
requirements primarily through revenues from operations. Management believes
that there will be adequate liquidity to fund its operations and anticipated
cash needs for fiscal 2002. However, material shortfalls or variances from
anticipated performance or unforeseen expenditures could require the Company to
seek alternative sources of capital or to limit expenditures for operating or
capital requirements. If such a shortfall in liquidity should occur, the Company
believes it has both the intent and the ability to take the necessary actions to
preserve its liquidity through the reduction of expenditures.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation. These reclassifications had no impact on operating loss as
previously reported.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, bills.com, Inc. and
billserv.com-canada, Inc. All significant intercompany accounts and transactions
have been eliminated.
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with maturities of
three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to credit risk consist
of cash and cash equivalents, investments and accounts receivable. The Company
is exposed to credit risk on its cash, cash equivalents and investments in the
event of default by the financial institutions or the issuers of these
investments to the extent of the amounts recorded on the balance sheet in excess
of amounts that are insured by the FDIC. Trade receivables potentially subject
the Company to concentrations of credit risk. The Company's customer base
operates in a variety of industries and is geographically dispersed, however,
the relatively small number of customers increases the risk. The Company closely
monitors extensions of credit and has not experienced significant credit losses
in the past. Credit losses have been provided for in the consolidated financial
statements and have been within management's expectations. The Company recorded
bad debt expense of $21,000 and $10,000 for 2001 and 2000, respectively, and
recorded bad debt write-offs of $12,069 to its allowance for doubtful accounts
in 2001. There were no provisions made for bad debt expense in 1999 or
write-offs recorded to the allowance for doubtful accounts in 2000. At December
31, 2001 and 2000, the balance of the allowance for doubtful accounts was
$18,931 and $10,000, respectively.
34
One billing customer accounted for approximately 23% and 40% of total
consolidated revenues for the years ended December 31, 2001 and 2000,
respectively. This customer is planning to develop an in-house EBPP offering
during 2002 utilizing Billserv's transition plan that allows the customer to
move from an outsourced offering with Billserv to an in-house offering. The
resulting loss of transaction revenues is expected to be mitigated by fees
generated from consulting services provided to this customer related to
transitioning their EBPP capabilities to an in-house offering. In addition, the
Company recognized $173,000 of non-recurring revenue in 2000 attributable to a
single customer for which we are no longer providing services. Concentration of
credit was not a significant risk in 1999 as total revenues were only $55,438.
Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities are reflected in the accompanying consolidated financial statements
at cost, which approximates fair value because of the short-term maturity of
these instruments.
Investments
The Company's investments consist primarily of commercial paper, repurchase
agreements and investment-grade corporate bonds. The Company classifies these
investments as "available-for-sale," "trading" or "held-to-maturity" securities
in accordance with Statement of Financial Accounting Standards ("SFAS") 115,
"Accounting for Certain Investments in Debt and Equity Securities." The Company
has not had any investments classified as "trading" or "held-to-maturity"
securities. Investments classified as "available-for-sale" securities are
carried at fair value, with unrealized holding gains and losses reported as a
separate component of shareholders' equity (See Note 2). Realized gains and
losses on sales of available-for-sale securities are determined based on the
amortized cost of such securities using the specific identification method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed on a straight-line method over the estimated useful lives of the
related assets, ranging from three to seven years. Leasehold improvements are
amortized over the lesser of the estimated useful lives or remaining lease
period. Expenditures for maintenance and repairs are charged to expense as
incurred. The Company periodically assesses the impairment of long-lived assets,
including acquired intangible assets, in accordance with the provisions of
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". An impairment review is performed whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
the Company considers important which could trigger an impairment review
include, but are not limited to, significant under-performance relative to
historical or projected future operating results, significant changes in the
manner of use of the acquired assets or the strategy for the Company's overall
business, and significant industry or economic trends. When the Company
determines that the carrying value of the intangible assets may not be
recoverable based upon the existence of one or more of the above indicators, the
Company measures any impairment based on a discounted future cash flow method
using a discount rate commensurate with the risk inherent in its current
business model. Effective January 1, 2002, impairment of long-lived assets will
be assessed according to new accounting guidelines (see Note 1-- Recent
Accounting Pronouncements).
Intangible Asset
The cost of the intangible asset is being amortized on a straight-line basis
over a five-year period.
Revenue Recognition
Revenue consists of implementation fees, hosting and transaction fees, fees for
consulting services and license revenue from the resale of third party software.
The Company typically receives an up-front fee for the work involved in
implementing the basic functionality required to provide electronic bill
presentment and payment services to a customer. Revenue from such implementation
fees is recognized over the term of the related service contract, generally
three to five years. Hosting and transaction fees are generated through the
electronic presentment of bills, processing of bill payments, and handling of
customer care interactions for billing customers and are recognized as revenue
as the related services are provided. Consulting fees are earned for
professional services provided to EBPP billers or vendors and are recognized as
services are rendered. Revenue from the resale of software licenses is
recognized when persuasive evidence of an agreement exists, delivery of the
product has occurred, the fee is fixed or determinable, and collection is
probable.
Research and Development Costs
Research and development costs are expensed as incurred.
35
Advertising Costs
The cost of advertising is expensed as incurred. The Company incurred $19,000,
$1,394,000 and $439,000 in advertising costs for the years ended December 31,
2001, 2000 and 1999, respectively.
Foreign Operations
Foreign operations began in 2000, however the impact financially of expanding
internationally is not material to the Company's financial position or results
of operations as of December 31, 2001. Australia and Canada are the only foreign
countries in which the Company is currently operating. The Company's Australia
operations include a 50% interest in a corporate joint venture to provide EBPP
services. The Company accounts for this investment under the equity method. At
December 31, 2001, the investment in this joint venture was $7,728, which was
included in Other assets on the balance sheet. The Company has no material
additional contractual commitments to this joint venture and no dividends have
been received from this joint venture. Gains and losses resulting from foreign
currency transactions denominated in a currency other than the functional
currency are included in income and have not been significant to the Company's
consolidated operating results in any year.
Income Taxes
Income taxes are determined using the liability method (see Note 12). Under this
method, deferred tax assets and liabilities are recorded based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Comprehensive Loss
The Company's comprehensive loss is comprised of net loss and unrealized gains
and losses on investments classified as available-for-sale.
Stock-Based Compensation
The Company applies the intrinsic value method in accounting for its stock
option and stock purchase plans. Accordingly, no compensation expense has been
recognized for options granted with an exercise price equal to market value at
the date of grant or in connection with the employee stock purchase plan. The
pro forma effects of fair value accounting for stock-based compensation costs on
net loss and loss per share are disclosed in Note 13.
Net Loss Per Share
Basic and diluted losses per common share are calculated by dividing net loss by
the weighted average number of common shares outstanding during the period.
Common stock equivalents, which consist of stock options and warrants, were
excluded from the computation of the weighted average number of common shares
outstanding for purposes of calculating diluted loss per common share because
their effect was antidilutive. See Notes 13 and 14 for disclosure of securities
that could potentially dilute basic EPS in the future that were not included in
the computation of diluted EPS because to do so would have been antidilutive for
the periods presented.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations", which addresses the initial recognition of
goodwill and other intangible assets acquired in a business combination and
requires that all future business combinations be accounted for under the
purchase method of accounting. In July 2001, the FASB also issued SFAS No. 142,
"Goodwill and Other Intangible Assets", which addresses the recognition and
measurement of other intangible assets acquired outside of a business
combination whether acquired individually or with a group of assets. In
accordance with these statements, goodwill and certain intangible assets are no
longer amortized, but are subject to at least an annual assessment of
impairment. The Company will adopt these statements on a prospective basis on
January 1, 2002. Management does not believe the adoption of these statements
will have an adverse impact on the financial statements of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", and the accounting and reporting
provisions of APB No. 30, "Reporting the Results of Operations for a Disposal of
a Segment of a Business". SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. The Company will adopt SFAS No. 144 beginning on
January 1, 2002. Management does not expect the adoption of this statement to
have a material impact on the Company's financial position or results of
operations.
36
NOTE 2. Financial Instruments
The following is a summary of available-for-sale investments at December 31,
2001 and 2000:
December 31, 2001 December 31, 2000
------------------------------------------- -------------------------------------------
Gross Gross
Amortized unrealized Fair Amortized unrealized Fair
Cost gains value cost gains value
------------- ------------- ------------- ------------- ------------- -------------
Time deposits $ 236,948 $ 0 $ 236,948 $ 335,000 $ 0 $ 335,000
Corporate bonds 0 0 0 2,001,711 13,109 2,014,820
------------- ------------- ------------- ------------- ------------- -------------
$ 236,948 $ 0 $ 236,948 $ 2,336,711 $ 13,109 $ 2,349,820
============= ============= ============= ============= ============= =============
Included in the above table are securities with fair values totaling $236,948
and $1,013,900 at December 31, 2001 and 2000, respectively, which are classified
as short-term investments and $1,335,920 at December 31, 2000 which are
classified as long-term assets in the accompanying consolidated balance sheets.
All short-term investments mature within one year. At December 31, 2001 and
2000, short-term investments and long-term investments includes restricted time
deposits of $236,948 and $335,000, respectively, which is used as collateral on
capital leases (see Note 8).
NOTE 3. Cumulative Effect of Accounting Change
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101, "Revenue
Recognition in Financial Statements," which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements. The
implementation of SAB 101 requires the Company's revenue generated from up-front
implementation fees that do not represent a separate earnings process to be
recognized over the term of the related service contract. Prior to December 31,
1999, the Company recognized revenue generated from such up-front fees upon
completion of an implementation project. The Company adopted SAB 101 as of
January 1, 2000, and accordingly, changed its revenue recognition policy for
up-front implementation fees. The cumulative effect of this accounting change
totaled $52,273. This amount was recognized as a non-cash after-tax charge
during the first quarter of 2000. The cumulative effect was recorded as deferred
revenue and is being recognized as revenue over the remaining contractual
service periods.
NOTE 4. Issuance of Capital Stock
Regulation S Issuance
On June 11, 1999, the Company issued 946,428 shares of common stock in exchange
for $5.3 million in cash. The stock was issued pursuant to exemption under
Regulation S.
Private Placements
In October 1999 and December 1999, the Company issued 1,404,637 and 732,000
shares of common stock, respectively, under a private placement offering (the
"1999 Offering"). The shares were issued at $3.25 and $5.50 per share,
respectively, which represented a discount upon the average reported closing
sale price of the common stock for the ten business days immediately preceding
the closing date. Net proceeds totaled approximately $7,907,000, net of offering
costs of $684,000, which included $526,000, or 6.5% of the 1999 Offering, paid
to the placement agent. Of the shares issued in October 1999, 153,846 were
issued in satisfaction of a $500,000 short-term note payable (See Note 10).
In accordance with the terms of the 1999 Offering, a registration statement on
Form SB-2 was filed with the SEC registering 3,782,360 shares of common stock.
This registration statement became effective on January 18, 2000. The registered
shares include the 2,136,637 shares issued in October and December 1999 and
1,645,723 shares which were issuable upon exercise of warrants to purchase
common stock issued to the holders of the shares issued in October and December
1999.
On June 2, 2000, the Company entered into an extended biller service provider
agreement with CheckFree Investment Corporation, CheckFree Services Corporation
and CheckFree Holdings Corporation ("CheckFree"). As part of this agreement,
CheckFree purchased 879,121 shares of the Company's common stock at $11.375 per
share totaling $10.0 million. Offering proceeds to the Company, net of issuance
costs, were approximately $9.5 million. In connection with this transaction, the
Company also issued warrants to purchase 2,179,121 shares of common stock, and
warrants to purchase up to an additional 2,801,903 shares if certain criteria
are met (See Note 14).
In March 2001, the Company issued 2,885,462 shares of common stock under a
private placement offering. The shares were issued at an undiscounted price of
$2.50 per share. Net proceeds totaled approximately $6.6 million, net of
offering costs of
37
approximately $565,000, which included approximately $540,000, or 7.5% of the
Offering, paid to the placement agent. The Company subsequently filed a
registration statement with the SEC to register the shares issued in this
offering.
In November 2001, the Company issued 2,000,000 shares of common stock under a
private placement offering (the "2001 Offering"). The shares were issued at an
undiscounted price of $1.25 per share. Net proceeds totaled approximately $2.3
million, net of offering costs of approximately $211,000, which included
approximately $200,000, or 8% of the Offering, paid to the placement agent. The
Company subsequently filed a registration statement with the SEC to register the
shares issued in this offering. In connection with this transaction, the Company
also issued warrants to purchase 2,000,000 shares of common stock (See Note 14).
NOTE 5. Property and Equipment
The following is a summary of property and equipment at December 31, 2001 and
2000:
December 31, December 31,
2001 2000
------------ ------------
Furniture and fixtures $ 1,285,440 $ 1,283,564
Equipment 2,983,164 2,535,602
Software 1,613,759 1,394,990
Leasehold improvements 537,795 483,004
----------- -----------
6,420,158 697,160
Less: accumulated depreciation and amortization (2,718,953) (1,178,813)
----------- -----------
Total property and equipment, net $ 3,701,205 $ 4,518,347
=========== ===========
For 2001, 2000 and 1999, the Company recorded $1,540,626, $925,995 and $263,408,
respectively, of depreciation expense related to fixed assets, including
amortization expense related to capital leases. Amortization expense related to
intangible assets was $15,000, $15,000 and $7,500 in 2001, 2000 and 1999,
respectively.
NOTE 6. Other Assets
At December 31, 2001 and 2000, other assets included a cash deposit of
approximately $413,000 and $516,000, respectively, related to the lease for its
corporate headquarters. Additionally, certificates of deposit totaling $335,000
used as collateral for long-term capital leases were included in other assets at
December 31, 2000 (see Note 8).
NOTE 7. Accrued Expenses
Accrued expenses consist of the following balances:
December 31, December 31,
2001 2000
------------ ------------
Accrued salaries $ 257,843 $ 332,337
Accrued vacation 122,501 183,703
Accrued property taxes 99,338 94,000
ESPP withholdings 40,745 151,172
Other accrued expenses 143,773 135,560
------------ ------------
Total $ 664,200 $ 896,772
============ ============
NOTE 8. Obligations Under Capital Leases
Property held under capital leases is stated at the present value of minimum
lease payments at the inception of the related leases. Property held under a
capital lease is amortized on a straight-line basis over the estimated useful
life of the assets. Amortization of property held under capital leases is
included with depreciation expense. At both December 31, 2001 and 2000, there
was $498,946 of office and computer equipment held under capital leases. All of
the Company's capital leases are secured by certificates of deposit totaling
approximately $237,000 at December 31, 2001.
38
The following is a schedule of future minimum lease payments under capital
leases for the year ending December 31, 2002, together with the present value of
the minimum lease payments as of December 31, 2001:
Year ending December 31, 2002 $ 158,651
Less: amount representing interest (10,423)
---------
Current portion of obligations under capital leases $ 148,228
=========
These obligations are classified as capital leases due to the bargain purchase
option contained therein.
NOTE 9. Operating Leases
In March 2000, the Company entered into a five-year operating lease for its
corporate headquarters at a rate of $98,000 per month. This lease provides the
Company a five-year renewal option. The lease required an initial cash deposit
of approximately $516,000. Additionally, the Company leases office space and
other equipment under non-cancelable operating leases. Rental expense under
operating leases for the year ended December 31, 2001, 2000 and 1999, was
$1,245,000, $681,000 and $116,000, respectively. Future minimum lease payments
required under operating leases, by year and in the aggregate, consist of the
following at December 31, 2001:
Year ending December 31,
2002 $1,195,446
2003 1,192,909
2004 1,177,803
2005 880,936
----------
Total minimum lease payments $4,447,094
==========
NOTE 10. Debt
Note Payable
On August 6, 1999, the Company issued a one-year unsecured note payable for $1.0
million to an accredited investor, which accrued interest at 9% per annum,
payable quarterly. The proceeds of this note payable were allocated for use in
corporate operations and to supplement cash reserves until future equity
financing was obtained. In connection with the issuance of the note, a $20,000
loan origination fee was paid to a venture capital firm. On October 22, 1999,
153,846 shares of common stock were issued pursuant to the terms of the 1999
Offering (see Note 4) in satisfaction of $500,000 of the note. There was no
resulting gain or loss recognized on the debt extinguishment because the fair
value of the stock issued in satisfaction of the debt was deemed to be $500,000
based on the concurrent issuance of common stock at $3.25 per share under the
terms of the 1999 Offering (see Note 4). The remaining portion of the note, or
$500,000, was paid in cash on October 18, 1999.
Line of Credit
On June 9, 2000, the Company executed a working capital line of credit agreement
with a bank in the amount of $1,500,000. Advances under the line of credit
accrued interest at the prime rate minus 0.25%, with repayment terms of monthly
interest-only payments and principal due in July 2001. At December 31, 2000, the
line of credit was subject to an interest rate of 9.25%. The line of credit was
secured by certain investments of the Company. The Company borrowed $1,500,000
on this line of credit for the security deposit and leasehold improvements of
the Company's corporate headquarters and repaid the entire outstanding balance
plus accrued interest in January 2001. The line of credit expired in July 2001
and was not renewed.
NOTE 11. Related Party Transactions
During 1999, the Company entered into an agreement ("Consulting Agreement") to
receive financial consulting, public relations services, advertising services
and investor relations services from a group of minority shareholders
("Consulting Group"). The agreement provided for services totaling $1.2 million
and was effective from November 1, 1998 to October 31, 1999. The Company paid
$1.0 million due to the Consulting Group under the agreement from the proceeds
of the Regulation S offering completed on June 11, 1999. The remaining $200,000
under the agreement was paid to the Consulting Group during the third quarter of
1999.
From time to time, the Company has made loans to certain officers of the
Company. These amounts are included in Related Party Notes Receivable. The
highest aggregate amount outstanding of loans due from officers was $230,000
during 2001 and 2000 and
39
$25,000 during 1999. On September 30, 1999, the Company loaned $25,000 to an
officer of the Company. The loan was repaid in full, including interest at 8%
annually, during 2000. In December 2000, an officer of the Company borrowed
approximately $20,000 that bears interest at a rate of 8% annually. The loan was
repaid in full during 2001. On August 16, 2000, an officer of the Company
borrowed approximately $60,000 that bears interest at a rate of 8% annually. At
December 31, 2001, $46,000 was outstanding under this loan. On December 21,
2000, the Company entered into a 30-day promissory note with the same officer
for $125,000. The promissory note was repaid in full in January 2001, including
interest at a rate of 8% annually. During 2000, an officer of the Company
borrowed approximately $35,000, of which $25,000 was outstanding at December 31,
2000. During 2001, the Company loaned an additional $94,000 to this officer
prior to his resignation from the Company. At December 31, 2001, the Company had
an aggregate of $115,000 in notes receivable bearing interest at 8% annually
from this ex-officer.
During December 2000 and May 2001, the Company pledged $1.0 million and
$960,000, respectively, held as money market funds and certificates of deposit
to collateralize margin loans of four officers of the Company. These funds are
classified as Cash pledged as collateral for related party obligations on the
Company's balance sheet at December 31, 2001 and 2000. The margin loans are from
an institutional lender and are secured by shares of the Company's common stock
held by these officers, one of whom was no longer employed by the Company at
December 31, 2001. The Company's purpose in collateralizing the margin loans was
to enhance the Company's ability to raise additional capital through private
equity placements. The sale of the Company's common stock held by these officers
may have hindered the Company's ability to raise capital in such a manner and
compromised the Company's continuing efforts to secure additional financing. The
total balance of the margin loans guaranteed by the Company was approximately
$2.0 million at December 31, 2001. The Company believes it has the unrestricted
legal right to use the pledged funds for its operations if necessary based on
(i) its interpretation of the loan guarantee agreements, (ii) the market price
of the Company's stock at the time of the pledge, and (iii) assurances the
Company received from one of the institutional lenders that funds would be made
available if needed. The agreements provide for the Company to terminate its
guarantees at its sole discretion, and at the time the Company entered into
these agreements, the value of the stock pledged by the officers to secure their
margin loans exceeded the balance of the loans in the aggregate.
NOTE 12. Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31 are as
follows:
2001 2000 1999
------------ ------------ ------------
Deferred Tax Assets:
Warrant expense $ 2,713,006 $ 2,713,006 $ --
Deferred revenue 221,894 280,840 --
Start-up and organizational costs 167,042 242,432 283,075
Accrued expenses 42,748 108,155 --
Research credit 38,153 38,153 38,153
Amortization 8,925 5,525 2,210
Allowance for doubtful accounts 6,437 3,400 --
Trademark cost 636 721 774
Other 2,710 2,710 --
Net operating loss 9,195,720 5,562,499 1,683,551
------------ ------------ ------------
12,397,271 8,957,441 2,007,763
Valuation allowance (12,221,101) (8,800,051) (1,990,513)
------------ ------------ ------------
Total Deferred Tax Asset 176,170 157,390 17,250
Deferred Tax Liabilities:
Depreciation 104,773 75,694 11,558
Prepaid expenses 61,987 74,896 5,692
Equity in earnings of investee 2,610 -- --
Other 6,800 6,800 --
------------ ------------ ------------
Total Deferred Tax Liabilities 176,170 157,390 17,250
------------ ------------ ------------
Net Deferred Tax Asset (Liability) $ -- $ -- $ --
============ ============ ============
40
For the years ended December 31, 2001, 2000 and 1999, the Company generated net
operating losses for tax purposes of approximately $10.6 million, $12.0 million,
and $4.95 million, respectively. The loss for the year ended December 31, 2001
expires in 2022; the loss for the year ended December 31, 2000 expires in 2021;
and the loss for the year ended December 31, 1999 expires in 2020. The Company
also has a research and development credit of approximately $38,000 that expires
in 2015. Legislation regarding the research and development tax credit extended
that utilization period. However, use of the credit is suspended during certain
periods. The Company intends to utilize the research and development credit
during the applicable periods. For financial reporting purposes, a valuation
allowance of approximately $12.2 million has been recognized to offset the
deferred tax assets related to various temporary differences at December 31,
2001.
For the period from inception (July 30, 1998) through December 31, 2001, the
Company has net operating loss carryforwards for tax purposes of approximately
$27 million that begin to expire in year 2020. In October 1999, the Company
issued common stock pursuant to a private placement offering. As a result, an
ownership change occurred under Section 382 that limits the utilization of
pre-change net operating loss carryforwards. Approximately $3.5 million of the
total net operating loss is subject to the Section 382 limitations.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is as follows:
2001 2000 1999
----------- ----------- -----------
Tax at US statutory rate -- 34% $(3,537,940) $(6,802,830) $(1,860,802)
Valuation allowance 3,421,050 6,809,538 1,892,513
Permanent and other differences 116,890 31,445 6,442
Research credit -- (38,153) (38,153)
----------- ----------- -----------
Income tax expense $ -- $ -- $ --
=========== =========== ===========
NOTE 13. Employment Benefit Plans
Stock Option Plans
The Board of Directors and stockholders approved the 1999 Employee Comprehensive
Stock Plan ("Employee Plan") to provide qualified incentive stock options
("ISOs") and non-qualified stock options ("NQSOs") as well as restricted stock
to key employees. Under the terms of the Employee Plan, the exercise price of
incentive stock options must be equal to 100% of the fair market value on the
date of grant (or 110% of fair market value in the case of an ISO granted to a
10% stockholder/grantee). There is no price requirement for NQSOs, other than
that the option price must exceed the par value of the common stock. The Company
has reserved 5,000,000 shares of its common stock for issuance pursuant to the
Employee Plan.
The 1999 Non-Employee Director Plan ("Director Plan") was approved by the Board
of Directors and stockholders in 1999. Under the Director Plan, which is
administered by a committee of no less than two board members and two
disinterested persons, non-employee directors may be granted options to purchase
shares of common stock at 100% of fair market value on the date of grant. The
Company has reserved 500,000 shares of its common stock for issuance pursuant to
the Director Plan.
41
Activity under the Employee Plan and Director Plan from inception to December
31, 2001 is as follows:
Weighted Average
Number Of Shares Exercise Price
---------------- --------------
Inception of Plans, January 1, 1999
Granted 1,091,300 $3.86
Cancelled (27,000) 3.93
Exercised -- --
----------
Outstanding, December 31, 1999 1,064,300 3.86
Granted 2,075,075 5.56
Cancelled (236,500) 5.42
Exercised (3,700) 3.66
----------
Outstanding, December 31, 2000 2,899,175 4.95
Granted 2,045,162 0.97
Cancelled (646,032) 4.67
Exercised (8,000) 4.38
----------
Outstanding, December 31, 2001 4,290,305 $3.10
==========
There was an aggregate of 1,197,995, 597,125, and 1,435,700 options to purchase
the Company's common stock available for future grants under the Employee and
Director Plans at December 31, 2001, 2000 and 1999, respectively. Exercisable
stock options amounted to 1,089,059 at a weighted average price of $4.62 and
300,373 at a weighted average price of $3.81 at December 31, 2001 and 2000,
respectively. There were no stock options exercisable at December 31, 1999.
Summarized information about stock options outstanding at December 31, 2001 is
as follows:
Options Outstanding Options Exercisable
------------------------------------- ------------------------------------
Range of Weighted Average Weighted
Exercise Options Remaining Average Number of Weighted Average
Prices Outstanding Contractual Life Exercise Price Options Exercise Price
----------------------- ----------------- ------------------- ----------------- ----------------- ------------------
$0.86 - $0.88 1,851,300 9.83 $0.86 -- --
$1.55 - $2.09 892,012 9.05 $2.04 299,405 $2.04
$2.75 - $4.88 695,967 7.55 $3.61 459,736 $3.62
$5.19 - $7.84 494,850 8.11 $6.91 205,186 $6.67
$9.44 - $11.88 356,176 8.29 $11.09 124,732 $11.10
--------- ---------
4,290,305 8.97 $3.10 1,089,059 $4.62
========= =========
The weighted average fair value of stock options at date of grant was $0.73,
$4.20 and $2.69 per option for options granted during fiscal years 2001, 2000,
and 1999, respectively. The fair value of each option granted was estimated
using the Black-Scholes option-pricing model, utilizing the following
assumptions:
2001 2000 1999
---- ---- ----
Dividend yield None None None
Expected volatility 119% 118% 102%
Risk-free interest rate 3.40% 5.22% 6.25%
Expected life 3.95 3.98 3.50
42
Had compensation expense been recorded based on the fair value at the grant date
for 2001, 2000 and 1999 stock option grants, net loss and net loss per share
would approximate the pro forma amounts below:
2001 2000 1999
------------ ------------ -------------
Pro forma net loss $(13,188,701) $(23,778,759) $ (6,476,551)
Pro forma net loss per common share - basic and diluted $ (0.73) $ (1.61) $ (0.60)
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. Additional awards in future years are anticipated.
Employee Stock Purchase Plan
The Company established the 1999 Employee Stock Purchase Plan ("ESPP") under the
requirements of Section 423 of the Internal Revenue Code (the "Code") to allow
eligible employees to purchase the Company's common stock at regular intervals.
Participating employees may purchase common stock through voluntary payroll
deductions at the end of each participation period at a purchase price equal to
85% of the lower of the fair market value of the common stock at the beginning
or the end of the participation period. Common stock reserved for future
employee purchases under the plan aggregated 864,958 shares at December 31,
2001. The first offering period under the ESPP began January 1, 2000. A total of
117,194 and 17,848 shares were issued under the ESPP in 2001 and 2000,
respectively, at prices ranging from $1.74 per share to $6.56 per share.
401(k) Plan
In May 1999, the Company adopted a defined contribution plan (the "401(k) Plan")
pursuant to Section 401(k) of the Code. All eligible full and part-time
employees of the Company who meet certain age requirements may participate in
the 401(k) Plan. Participants may contribute between 1% and 15% of their pre-tax
compensation, but not in excess of the maximum allowable under the Code. The
401(k) Plan allows for discretionary and matching contributions by the Company.
The Company made no contributions during fiscal 2001, 2000 and 1999.
NOTE 14. Stock Warrants
On May 7, 1999, the Company contracted to issue warrants for the purchase of up
to 500,000 shares of common stock to a financial services reseller. Subject to
specific performance criteria regarding the referral of billing customers to the
Company, this reseller may earn the right to purchase shares of common stock, at
the closing bid price as of May 7, 1999 ($6.50), over a three-year term. No
warrants had been issued as of December 31, 2001.
On May 18, 1999, the Company contracted with an investment bank to provide
strategic and financial advisory services. In exchange for these advisory
services, a warrant to purchase 111,085 shares of the Company's common stock at
an exercise price of $6.75 per share (which represents the average closing price
of the stock over the twenty day period preceding May 18, 1999) was issued. The
warrant is exercisable for five years. This warrant was issued in accordance
with an exemption under Section 4(2) of the Securities Act of 1933, as amended,
because the transaction is by an issuer not involving a public offering. Using
the fair value-based method of accounting, the Company recorded $356,583 of
expense and a corresponding credit to additional paid-in capital related to the
issuance of this warrant.
As part of the August 1999 debt issuance, the Company issued a warrant to the
accredited investor for the purchase of 41,237 shares of the common stock at an
exercise price of $6.0625, which represents the average reported closing sale
price of the common stock for the ten business days immediately preceding the
loan agreement. The warrant is immediately exercisable and carries a term of
five years and piggyback registration rights. Using the fair value-based method
of accounting, the Company recorded $134,845 of expense and a corresponding
credit to paid-in-capital related to the issuance of this warrant.
In connection with the 1999 Offering (see Note 4), the Company issued warrants
to the twenty-one investors to purchase 1,404,637 shares of common stock at
$3.75 per share, or one warrant for each share issued. The warrants are
exercisable for three years from the date of issuance, or until October 14,
2002. The Company has the right to call the exercise of the warrants at any time
after six months after the date of the issuance and after the closing price of
the common stock exceeds $12.00 for a period of twenty consecutive trading days.
Upon such call notice, the holders of the warrants must exercise the warrants
within thirty days, after which time they may be redeemed for $.05 per warrant.
As part of the compensation for acting as placement agent for the 1999 Offering,
the Company issued warrants to the investment banker for the purchase of 36,924,
600, 18,900, 19,950, 8,890 and 3,500 shares of common stock. The warrants are
immediately exercisable, carry a five year term, exercise prices of $3.25,
$3.25, $8.00, $7.44, $7.41, and $7.31, respectively, piggyback registration
rights, and cashless exercise provision.
In connection with the CheckFree investment, the Company issued CheckFree
warrants to purchase 2,179,121 shares at $11.375 per share for entering into the
extended biller service provider agreement and investing $10.0 million. The
Company recorded
43
$7,488,000 of expense and a corresponding credit to additional paid-in capital
related to the estimated fair value of 1.3 million of these warrants, which were
issued as consideration for entering into the extended biller service provider
agreement. Under this agreement, which expires in February 2005, CheckFree
provides us with electronic bill presentment services for volume-based fees. The
related warrant expense was recognized immediately instead of being deferred and
recognized over the life of the agreement because the warrants were fully vested
at the date of grant and CheckFree did not have to perform under the agreement
to earn the warrants. Also, CheckFree has the ability to earn incentive warrants
on up to 2,801,903 additional shares, of which 1,000,000 are exercisable at
$11.375 per share and 1,801,903 are exercisable at $14.219 per share. The
incentive warrants vest upon the achievement of certain target levels of
referred billers to the Company by CheckFree and will occur on the first through
fifth anniversaries of the agreement. All incentive warrants that are not vested
by the fifth anniversary will expire at that time. Assuming certain of these
warrants vest, the Company will record a charge for the fair value of the
warrants based on a Black Scholes valuation, which will take into consideration
the market value of the Company's stock, the strike price of the warrants, the
volatility of the Company's stock price and the applicable risk-free interest
rate at the measurement date. As of December 31, 2001, none of these incentive
warrants have vested.
In connection with the 2001 Offering (see Note 4), the Company issued warrants
to the eighteen investors to purchase 2,000,000 shares of common stock at $1.80
per share, or one warrant for each share issued. The warrants are exercisable
for five years from the date of issuance, or until November 27, 2006. The
Company has the right to call the exercise of the warrants at any time after six
months after the date of the issuance and after the closing price of the common
stock exceeds $5.40 for a period of twenty consecutive trading days. Upon such
call notice, the holders of the warrants must exercise the warrants within
thirty days, after which time they may be redeemed for $.05 per warrant.
At December 31, 2001, the outstanding vested warrants to purchase common stock
are as follows:
Shares of Common Exercise Aggregate Exercise Expiration
Stock Price Price Date
--------------------------------------------------------------------------------
57,431 $ 3.75 $ 215,366 10/14/2002
20,000 3.75 75,000 10/25/2002
41,237 6.06 250,000 08/05/2004
250 3.25 813 10/14/2004
280 8.00 2,240 12/15/2004
8,890 7.41 65,875 12/20/2004
3,500 7.31 25,585 12/22/2004
2,179,121 11.38 24,798,397 06/02/2010
2,000,000 1.80 3,600,000 11/27/2006
--------- ------------
4,310,709 $ 29,033,276
========= ============
NOTE 15. Common Stock Listing
Billserv common stock began trading on the OTC BB operated by the National
Association of Securities Dealers on December 3, 1998. The NASD adopted
eligibility rules in 1999, which required clearance of comments by the SEC on
all SEC filings. The Company filed its initial filing on Form 10 with the SEC on
June 10, 1999 but, as of October 7, 1999, the SEC had not cleared its comment
period. In accordance with the OTC BB's phase-in schedule for the new
eligibility rules, the listing on the OTC BB was terminated. The Company's
common stock was quoted in the National Quotation Board's Electronic Pink Sheets
until December 7, 1999, when the SEC cleared the comment period and the stock
was relisted and traded on the OTC BB through March 13, 2000 at which time the
stock was approved for trading on the NASDAQ Small Cap Market. Subsequently the
stock was approved for trading on the NASDAQ National Market on July 31, 2000,
under the symbol "BLLS".
NOTE 16. Subsequent Events (Unaudited)
In March 2002, the Company executed a working capital line of credit agreement
with a bank in the amount of $700,000. Advances under the line of credit accrue
interest at the prime rate minus 0.25%, with repayment terms of monthly
interest-only payments and principal due in June 2003. The line of credit is
secured by certain investments of the Company.
In March 2002, an ex-officer of the Company repaid the balance of his loans
totaling $115,000, plus accrued interest, to the Company.
44
NOTE 17. Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 2001 and 2000 is presented below.
2001
------------------------------------------------------------
First Second Third Fourth
------------------------------------------------------------
Revenue $ 509,409 $ 690,062 $ 831,893 $ 937,314
Gross margin (722,907) (536,188) (474,507) (292,881)
Net loss $ (3,234,305) $ (2,576,973) $ (2,478,390) $ (2,116,038)
Net loss per common share-
basic and diluted (a) $ (0.21) $ (0.14) $ (0.13) $ (0.11)
Weighted average shares 15,697,051 18,490,631 18,535,923 19,299,313
2000
------------------------------------------------------------
First(b) Second Third Fourth
------------------------------------------------------------
Revenue $ 6,426 $ 45,208 $ 117,499 $ 480,890
Gross margin (464,265) (747,703) (953,708) (875,144)
Net loss $ (2,071,213) $(10,184,683) $ (3,770,212) $ (3,982,215)
Net loss per common share-
basic and diluted (a) $ (0.16) $ (0.68) $ (0.24) $ (0.26)
Weighted average shares 13,230,142 14,874,517 15,525,973 15,527,870
(a) Earnings per common share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly loss per common
share information may not equal the annual loss per common share.
(b) The net loss for the quarter ended March 31, 2000 includes a non-cash
after-tax charge of $52,273 for the cumulative effect of a change in
accounting principle related to the adoption of SAB 101 as discussed in
Note 3.
NOTE 18. Subsequent Event - Going Concern
Due to a material shortfall from anticipated revenues in the third quarter of
2002 and the inability to access its funds held as collateral to guarantee
certain executive margin loans (see Note 11) after attempting to retrieve such
funds during the fourth quarter of 2002, the Company believes that its current
available cash and cash equivalents and investment balances along with
anticipated revenues may be insufficient to meet its anticipated cash needs for
the foreseeable future. Accordingly, the Company reduced its workforce by 36
employees on November 13, 2002 and is currently aggressively pursuing strategic
alternatives, including investment in or sale of the Company. The sale of
additional equity or convertible debt securities would result in additional
dilution to the Company's stockholders, and debt financing, if available, may
involve restrictive covenants which could restrict operations or finances. There
can be no assurance that financing will be available in amounts or on terms
acceptable to the Company, if at all. If the Company cannot raise funds, on
acceptable terms, or achieve positive cash flow, it may not be able to continue
to exist, conduct operations, grow market share, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements,
any of which would negatively impact its business, operating results and
financial condition.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
45
PART III
Certain information required by Part III is omitted from this Report in that we
will file our definitive Proxy Statement for our Annual Meeting of Stockholders
to be held May 23, 2002, pursuant to Regulation 14A of the Securities and
Exchange Act of 1934 (the "Proxy Statement") not later than 120 days after the
end of the fiscal year covered by this Report, and certain information included
in the Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is incorporated in this Item 10, by reference, that portion of the
Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders, which appears therein under the captions "Item 1: Election of
Directors," "Information Concerning Directors," and "Section 16(a) Beneficial
Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
There is incorporated in this Item 11, by reference, that portion of the
Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders, which appears under the caption "Compensation of Executive
Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated in this Item 12, by reference, that portion of the
Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders, which appears under the caption "Beneficial Ownership of Certain
Stockholders, Directors and Executive Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 2, 2000, the Company entered into an extended biller service provider
agreement with CheckFree Investment Corporation, CheckFree Services Corporation
and CheckFree Holdings Corporation ("CheckFree"). As part of this agreement,
CheckFree purchased 879,121 shares of the Company's common stock at $11.375 per
share totaling $10.0 million. Offering proceeds to the Company, net of issuance
costs, were approximately $9.5 million. In connection with the CheckFree
investment, the Company issued to CheckFree warrants to purchase 2,179,121
shares at $11.375 per share, thereby causing CheckFree to beneficially own more
than 5% of the Company's common stock. During 2001 and 2000, the Company paid
CheckFree approximately $175,000 and $100,000 for implementation and
distribution services related to the Company's provision of EBPP services to
billers.
On January 4, 2001, the Company retained PMG Capital to act as its placement
agent in connection with one or more private placement transactions, as well as
to perform other investment, strategic and financial advisory services for the
Company for a one-year term. As compensation for providing these services, the
Company paid PMG Capital a $50,000 initial retainer and a $5,000 monthly
retainer through August 2001. Under the agreement, the Company was obligated to
pay PMG Capital a fee equal to 7.5% of the total amount raised in a private
placement transaction.
Mr. Louis Hoch, President, Chief Operating Officer and a Director of the
Company, borrowed approximately $60,000 at a rate of 8% and entered into a
30-day promissory note for $125,000 at a rate of 8% on August 16, 2000 and
December 21, 2000, respectively. The largest amount owed to the Company by Mr.
Hoch during 2001 was approximately $184,000. Mr. Hoch used the proceeds of the
$60,000 loan for usual and customary living expenses. At December 31, 2001,
approximately $46,000 was outstanding under this loan. The $125,000 30-day
promissory note was incurred to allow Mr. Hoch to pay down a margin loan to an
institutional lender. This margin loan was secured by shares of the Company's
stock held by Mr. Hoch. The promissory note was repaid in full in January 2001,
including accrued interest.
Mr. David Jones, a former Executive Vice President and Director of the Company,
borrowed approximately $35,000 at a rate of 8% during 2000, of which $25,000 was
outstanding at December 31, 2000. During 2001, the Company loaned an additional
$94,000 at a rate of 8% to Mr. Jones prior to his resignation from the Company.
Mr. Jones used the proceeds of these loans for usual and customary living
expenses and to pay down a margin loan to an institutional lender. At December
31, 2001, the Company had an aggregate of $115,000 in notes receivable bearing
interest at 8%, which was the largest amount owed to the Company by Mr. Jones
during 2001. In March 2002, Mr. Jones repaid the balance of these loans in full,
including accrued interest.
46
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this amended Annual Report on
Form 10-K/A, an evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design
and operation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934). Based on that
evaluation, the Company's CEO and CFO concluded that the Company's disclosure
controls and procedures were effective in ensuring that material information
relating to the Company with respect to the period covered by this report was
made known to them. Since the date of their evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this Report
(1) Financial Statements
The financial statements listed in the index under Part II, Item 8
hereof are filed as part of this Report.
(2) Financial Statement Schedules
All financial statement schedules called for by Form 10-K are
omitted because they are inapplicable or the required information is
shown in the financial statements, or notes thereto, included
herein.
(3) Exhibits
The exhibits listed below are filed as part of or incorporated by
reference in this Report.
Exhibit Description
------- -----------
3.1 Articles of Incorporation, as amended (incorporated by reference to such
exhibit in the Registrant's Registration Statement on Form SB-2, filed
December 29, 1999)
3.2 By-laws, as amended (incorporated by reference to such exhibit in the
Registrant's Registration Statement on Form SB-2, filed December 29, 1999)
4.1 Rights Agreement, dated October 4, 2000 (incorporated by reference to such
exhibit in the Registrant's Registration Statement on Form 8-A, filed
October 11, 2000)
10.1 1999 Employee Comprehensive Stock Plan, as amended (incorporated by
reference to such exhibit in the Registrant's Registration Statement on
Form S-8, filed February 11, 2002)
10.2 1999 Non-Employee Director Plan (incorporated by reference to such exhibit
in the Registrant's Definitive Proxy Statement, filed November 22, 1999)
10.3 1999 Employee Stock Purchase Plan (incorporated by reference to such
exhibit in the Registrant's Definitive Proxy Statement, filed November 22,
1999)
10.4 Form of Employment Agreement dated May 31, 2001, between the Company and
Executive Officers of the Company (with accompanying schedule identifying
the parties thereto and material details in which such agreements differ
with respect to the agreement filed herewith)
21.1 Subsidiaries of the Registrant (incorporated by reference to such exhibit
in the Registrant's Annual Report on Form 10-K, filed April 1, 2002)
23.1 Consent of Ernst & Young LLP, Independent Auditors (filed herewith)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 2001.
48
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
Billserv, Inc.
By: /s/ Michael R. Long
---------------------------
Michael R. Long
Chairman of the Board and
Chief Executive Officer
Date: June 25, 2003
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated on June 25, 2003.
By: /s/ Michael R. Long
-----------------------------------------------
Michael R. Long
Chairman of the Board and
Chief Executive Officer (principal executive officer)
By: /s/ Louis A. Hoch
-----------------------------------------------
Louis A. Hoch
President, Chief Operating Officer
and Director
By: /s/ Terri A. Hunter
-----------------------------------------------
Terri A. Hunter
Executive Vice President, Chief Financial Officer
(principal financial and accounting officer) and Director
By: /s/ Peter G. Kirby
-------------------------------------------------
Peter G. Kirby
Director
49
CERTIFICATIONS
I, Michael R. Long, certify that:
1. I have reviewed this annual report on Form 10-K/A of Billserv, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 25, 2003 /s/ Michael R. Long
-----------------------
Michael R. Long
Chief Executive Officer
50
I, Terri A. Hunter, certify that:
1. I have reviewed this annual report on Form 10-K/A of Billserv, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 25, 2003 /s/ Terri A. Hunter
-----------------------
Terri A. Hunter
Chief Financial Officer
51