Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
----------
WASHINGTON, D.C. 20549
----------
FORM 10-K
----------
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-30152
BILLSERV.COM, INC.
(EXACT NAME OF ISSUER 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 100, SAN ANTONIO, TEXAS 78232
(Address of principal executive offices)
(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 checkmark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act 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 checkmark 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 voting and non-voting common stock held by
non-affiliates of the registrant as of March 12, 2001, was $35,713,656. As of
March 12, 2001 15,605,169 shares of the Company's common stock ($.001 par value)
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31, 2000,
are incorporated by reference into Parts I and II. Portions of the proxy
statement for the annual shareholders meeting to be held may 24, 2001, are
incorporated by reference into Part III.
PART I.
Item 1. Business ......................................................... 3
Item 2. Properties and Equipment ......................................... 18
Item 3. Legal Proceedings ................................................ 18
Item 4. Submission of Matters to a Vote of Security Holder ............... 18
Item 4a. Executive Officers of the Company
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters .......................................................... 19
Item 6. Selected Financial Data .......................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ....... 26
Item 8. Financial Statements ............................................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ......................................... 45
PART III
Item 10. Directors and Executive Officers ................................. 46
Item 11. Executive Compensation ........................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management ... 46
Item 13. Certain Relationships and Transactions ........................... 46
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K .. 47
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K 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 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 Business Risk section of this
Annual Report on Form 10-K. 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.
- --------------------------------------------------------------------------------
2
PART I.
ITEM 1. BUSINESS
All references to "we," "us," "our," "billserv" or the "Company" in this Annual
Report on Form 10-K mean billserv.com, Inc. and it's wholly owned subsidiaries.
GENERAL
We provide electronic bill presentment and payment ("EBPP") and related services
to companies generating recurring paper-based bills. EBPP is the process of
presenting a bill in a secure environment on the Internet and facilitating
payment of the bill utilizing an electronic transfer of funds. We provide a
turnkey outsourcing solution that enables our customers to offer EBPP services
to their customers and to utilize the EBPP channel to enhance business, Internet
and customer relationship management strategies by establishing an interactive,
online relationship with their customers, creating additional revenue streams,
increasing branding opportunities, enhancing customer service and reducing the
costs associated with customer care and the billing function. Through the
implementation of our complete solution, we become our customers' single point
of contact for developing, implementing and managing their entire EBPP channel.
Our solution involves the use of certain proprietary components, which we have
integrated with third party, "best-of-breed" hardware and software platforms to
offer our customers a scalable, branded and secure EBPP solution. All of the
technology components of our solution have been integrated and are operational.
We have designed our system so that it is reliable, flexible, and can easily be
expanded to meet growth demands without significant cost or changes. Our modular
solution allows us to work with our customers to build a customized EBPP
solution tailored to their specific needs.
To enable us to offer the most comprehensive solution to our customers, we have
entered into partnership agreements with many significant EBPP and
Internet-based services companies, including Bank of America Corporation, Bank
One, CheckFree iSolutions (formerly "BlueGill Technologies, Inc."), CheckFree
Corporation, International Business Machines Corporation, MasterCard
International, TransPoint and Wells Fargo. We believe that these partnerships,
by allowing us to outsource certain components of our solution, will enable us
to provide more flexibility, higher quality and potentially lower cost services
to our customers than if we were to provide these components ourselves.
We currently market our services through a direct sales force and through
organizations that resell our services to their clients and prospects. To date,
we have 38 contracted billing relationships representing 49 billers who send
over 2.9 billion paper-based bills annually (or approximately 15% of the total
annual bills produced in the United States). These customers include AFSA Data
Corporation, AT&T Corporation, Central Hudson Gas and Electric Corporation,
Chevron U.S.A., Inc., Dow-Jones & Company (Wall Street Journal/Barron's), LASON,
Inc., Reliant Energy and Sallie Mae Corporation. Of these customers, 31 are in a
full production environment and 18 are in various stages of implementation.
A major component of our growth strategy involves not only obtaining new
customers, but also actively assisting these companies in developing a strategy
designed to encourage the highest possible acceptance by the consumer. This
includes assigning a dedicated marketing professional to each customer to assist
in developing a marketing strategy aimed at maximizing consumer adoption of the
EBPP services, as well as through the effective implementation of our EpiCenter
strategy, which stands for Electronic Presentment Innovation CENTER. Our
EpiCenter strategy's objective is to positively influence consumer adoption
rates in each metropolitan area by working with local, regional and national
billers to deliver marketing opportunities to volumes of households. To date, we
have seen positive results in early market tests of certain marketing programs
designed to enhance consumer adoption rates.
Our stock is traded on the Nasdaq National Market under the symbol BLLS. Our
corporate offices are located at 211 North Loop 1604 East, Suite 100, San
Antonio, Texas, 78232. Our phone number is (210) 402-5000.
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 inefficient for
both businesses and consumers. Additionally, paper-based bills are limited in
their functionality. The potential for personalization with paper-based bills is
limited, and there are few opportunities for companies to be interactive with
their customers through the paper-based bill payment experience.
- --------------------------------------------------------------------------------
3
According to Jupiter Communications, an independent market research firm, in
1999 approximately 100 million U.S. households received approximately 20 billion
consumer paper bills, an average of 16.7 bills per household per month. The
majority of these are recurring monthly or quarterly bills 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. According to Gartner
Group, an independent market research firm, the average cost to a company of
creating and delivering a paper bill is $1.00. Additionally, a recent study
chartered by Microsoft Corporation estimates that companies incur another $2.00
per bill for remittance processing and handling exceptions or errors within the
remittance process. Similarly, the paper-based billing and payment process is
time-consuming and can be costly for the consumer. Jupiter Communications
currently estimates that during each 12-month period, U.S. households will spend
an average of 24 hours on bill management, $46 on postage and $144 on
check-writing fees to handle their recurring monthly bills.
OUR MARKET OPPORTUNITY
Growth of the Internet and Internet-Based Financial Services
The Internet has emerged as a significant global medium for communication,
information and commerce. International Data Corporation ("IDC"), an independent
market research firm, estimates that the number of worldwide Internet users will
grow from approximately 240 million at the end of 1999 to approximately 600
million by the end of 2003. As a result of the Internet's increasing adoption
rate, businesses have a growing opportunity to conduct commerce and communicate
to their customers and business partners over the Internet. IDC estimates that
worldwide Internet commerce revenues will increase from approximately $268
billion in 2000 to $1.6 trillion in 2003.
The growth in the use of the Internet has 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 solution 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 through direct marketing and up- and
cross-selling opportunities. EBPP enables companies to enhance this touch point
by leveraging the capabilities of the Internet to improve the value of their
customer relationships, provide enhanced customer service and loyalty and
increased control over the critical billing process, enhance up- and
cross-selling opportunities by leveraging the direct marketing and interactive
capabilities of the Internet and increasing the effectiveness of customer
marketing by providing real-time market intelligence on customers.
Accordingly, we believe there is a substantial potential for growth in EBPP and
related services. Ovum Group, an independent Internet research firm, has
estimated that, globally, electronic deliveries of bills will increase from 300
million in 1999 to 32.8 billion in 2005 and electronic payment of bills will
increase from 600 million in 1999 to 40.4 billion in 2005.
Challenges for Companies in Adopting EBPP
While companies 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 solution. To implement a successful EBPP strategy, companies should
purchase, successfully implement and maintain:
o software which enables the company to parse and decode bill data print
streams;
o in-house servers which will update and display bill content;
o automated clearinghouse software which enables the company to instruct its
bank to electronically debit consumer accounts;
o messaging software which enables the company to communicate with multiple
aggregators;
o a dedicated interface with a major bank which enables the company to
receive funds and data through automated clearinghouse transactions;
o lockbox software which enables the company to update internal accounts
receivable files; and
o customer support software and technical infrastructure which enables a
company to support the EBPP process with Internet-enabled customer care.
- --------------------------------------------------------------------------------
4
In addition, companies must make arrangements with multiple aggregators, such as
CheckFree Corporation and Spectrum, or front ends, such as Internet portals or
financial institutions' web sites that present bills to the consumers, and
manage those multiple relationships on an ongoing basis. Many companies lack the
resources, expertise and/or inclination to cost-effectively develop, implement
and manage their own EBPP solution. 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 SOLUTION
Our solution provides a comprehensive and cost-effective outsourcing solution
enabling any company producing recurring paper-based bills to offer EBPP
services to their customers and to utilize the EBPP channel to enhance business
and customer relationship management strategies. We have used our internal
expertise and integrated certain proprietary components with third party,
"best-of-breed" hardware and software platforms to offer our customers a
scalable, branded and secure EBPP solution. Our solution allows our customers to
offer EBPP services to their customers; support the EBPP process with Internet
customer care; and utilize the EBPP channel to reduce costs, create additional
revenue streams, increase branding opportunities, enhance customer service and
provide competitive differentiation. By outsourcing the development,
implementation and management of their entire EBPP channel, we expect our
customers to realize the following benefits:
o Single Point of Contact - Our solution offers a one-stop, comprehensive
and cost-effective outsourcing solution for our customers' entire EBPP
solution. We become our customers' single point of contact for
implementing, developing and managing their entire EBPP channel;
o Speed to Market - Our solution allows our customers to establish an EBPP
offering in as little as four weeks, without diverting critical time and
financial resources from their core competencies. The speed-to-market of
an EBPP offering is important to our customers because it enables them to
rapidly address the opportunities presented by an EBPP solution;
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, thereby providing their customers with numerous
options of where and when to access and pay their bills;
o Enhanced Customer Service - Our solution provides Internet enabled
customer support for the EBPP process and enables our customers to utilize
the EBPP channel to maintain customer retention, increase customer
acquisition and enhance customer relationships;
o Open System Architecture - Our solution supports all of the data standards
currently employed by aggregators and front-ends today, including Open
Financial eXchange (OFX), eXtensible Markup Language (XML), and 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 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 solution is transparent to the consumer at all times,
allowing our customers to maintain and build upon their brand recognition;
o Security - Our solution enables our customers to have total control over
their billing data at all times; and
o Transaction-Based Pricing - Our customers are required to pay only a small
up-front fee with transaction-based pricing going forward which is based
on the number of electronic bills presented or paid. 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 provider of EBPP and related services. In order to
achieve this goal, we are implementing a strategy consisting of the following
key elements:
Continue to Aggressively Acquire Customers
We believe that establishing a large customer base with a significant number of
recurring paper-based bills is critical to the long-term success of our
business. We have developed a direct sales force consisting of 11 employees
operating in major metropolitan areas. To date, we have 38 contracted billing
relationships representing 49 billers who send over 2.9 billion paper-based
bills annually (or approximately 15% of the total annual bills produced in the
United States). We intend to expand our direct sales force in order to continue
to address our target markets and aggressively acquire new customers.
- --------------------------------------------------------------------------------
5
Our primary sales focus is incorporated in our EpiCenter strategy, where we
focus our sales efforts on local billers that deliver the majority of
paper-based bills in the top 50 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 in the midst of an
active campaign to build a network of organizations that resell our services to
their clients and prospects under a master agreement. This is part of a channel
development strategy that creates a matrix of opportunities from our direct
regional sales, national accounts sales and the indirect sales activities from
the resellers. We currently have four Channel Development Managers who are
tasked with targeting and facilitating the reseller channels.
We have adopted a balanced approach to partner selection, based on their market
orientation, national presence, account base, and sales capabilities. Our
current horizontal (non-industry specific) partners are Bank One (top 5 lender
in 12 states), LASON, Inc. (largest statement and billing print outsource),
CheckFree (largest electronic check processor) and the United States Postal
Service (eBillPay program). We have contracted with vertically specialized
partners such as National Computer Print (mortgage services billing processor),
Personix (financial services statement provider) and Sallie Mae Solutions
(student loan and higher education service provider). The partners selected are
generally leaders in their industries, with a strategic commitment to EBPP. We
will continue to add select partners to expand horizontal and vertical coverage.
We develop business with our partners from both the corporate level and a
localized basis. Our Channel Development Managers are responsible for overall
communications, training and management of proposals on the corporate level. Our
direct sales staff promotes business with the regional and local offices of
these national entities. Our partners leverage relationships with existing and
prospective clients, using our EBPP capabilities as a chance to retain or obtain
new accounts, as well enhance profit margins.
Accelerate the Speed to Market for our Customers
We believe that an important element of our solution is our ability to assist
our customers in accelerating the time to market of their EBPP solution. In
order to achieve this objective, we assign a dedicated 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.
This includes:
o Actively consulting with our customer on the design of the bill template,
including the logo, customer care capabilities, messages, advertising and
marketing and other features;
o Creating the proprietary interfaces to our customer's legacy billing and
accounting system, and the selected EBPP aggregator/front-end (such as
CheckFree Corporation), necessary to deliver the electronic bill and
transmit the payment receipts back to our customer;
o Creating proprietary functions to enable reporting of activity back to our
customer, activation of consumers signing up for EBPP services, automatic
files processing, news/status reporting, computer-telephony-interface with
our customer's existing customer care facility to support the EBPP process
with Internet enabled customer care, and archiving and presenting of
historical bill data;
o Training our customer's personnel; and
o Performing integration testing and pilot testing, including developing
pilot requirements and enrollment materials, sending enrollment
announcements, confirming enrollment and evaluating pilot survey results.
We believe that our dedicated technical project team will have a positive
influence on the timing and effectiveness of the implementation of our EBPP
solution for our customers.
Positively Influence Consumer Adoption Rates
We believe that the rate at which consumers begin utilizing EBPP, commonly
referred to as the "consumer adoption rate," is a critical factor to the
long-term success of our business. We believe that the consumer adoption rate
will increase dramatically once a critical mass (6 to 8 bills) of bills are
presented in one location. Through our EpiCenter strategy, we intend to attract
several companies generating recurring paper-based bills in each targeted
metropolitan area, including local, regional and national billers (i.e.,
utilities, telecommunications companies, cable companies, etc.), thereby
achieving the critical mass of bills which we think will drive consumer adoption
rates.
Additionally, we assign a dedicated marketing professional to each of our
customers to assist in developing a tailored marketing strategy designed to
increase the adoption rates for the EBPP services by their consumers. Through
our involvement, we assist our customers in carefully planning and strategizing
on all facets of the marketing process, including:
o Developing consumer enrollment materials, including bill messages, bill
inserts, direct mail letters, door hangers and enrollment feedback
letters;
- --------------------------------------------------------------------------------
6
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,
on-line promotional tactics and cost analysis;
o Assisting in the customer launch process; and
o Assisting in the development of a regional marketing strategy.
To date, we have seen positive results in early market tests of certain
marketing programs designed to enhance adoption rates with billers experiencing
between 2.5% and 4.5% adoption rates.
Expand and Leverage Strategic Relationships and Partnerships
We have formed strategic partnerships with key technology providers and industry
companies to enable us to offer the best-of-breed technologies and the highest
quality of service to our customers. Our key partners include:
o Technology providers, such as International Business Machines
Corporation and eShare Technologies, Inc., that provide various
hardware and software components of our solution;
o Billing distribution partners that provide the ability to distribute
electronic bills to various Internet sites where consumers can view
and pay the bill as well as provide electronic payments and
remittance information back to our customer. Our billing
distribution partners include CheckFree Corporation, Spectrum,
TransPoint, Bank of America Corporation and MasterCard RPPS;
o Payment processing partners such as Innuity, Inc., that facilitate
the electronic payment to our customer who utilize a biller direct
solution; and
o Reselling partners, such as National Computer Print, Sallie Mae
Solutions, Bank One and LASON, Inc. that resell our solution to
their customer base.
Collectively, we believe that these companies represent the most significant
companies addressing the EBPP industry today. We intend to increase the quality
of our solution by continuing to pursue and enter into strategic relationships
and partnerships with companies that offer us the opportunity to benefit from
the relationship.
Pursue International Market Opportunities
We believe our solution can be adapted for international clients. Although we
have historically focused our marketing efforts in the United States, we have
begun to market our solutions outside of the United States, where we believe the
demand for EBPP solutions will develop and present a significant market
opportunity for us. Killen & Associates, an independent EBPP research firm,
estimates that in 1998 there were approximately 90,000 companies outside of the
U.S. that generated approximately 42 billion paper-based bills. They expect that
these companies outside the U.S. will generate approximately 56 billion
paper-based bills per year by 2005. As a result, we established a Canadian
presence with a sales office in Ontario. We plan on continuing to market our
solution outside the United States in the future. Within the next twelve months,
we may expand beyond Canada. 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.
Generate Additional Revenues by Expanding Offerings
In addition to the components initially integrated into our solution, we intend
to offer additional products and services that could broaden the capabilities
and revenue-generating potential of our solution. These additional products and
services may include Internet-enabled direct marketing and customer relationship
management services. We believe that customer relationships can be enhanced
through the effective use of our comprehensive EBPP solution. Specifically, each
time a consumer receives and pays a bill online or utilizes our eCare solution,
the Internet customer care center, 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 are presented or
"popped" onto the service representative's screen at the exact moment the
consumer makes contact. As such, our representatives are able to provide better
service more quickly, and consumers feel as if our customer knows them
individually and understands their individual 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 could 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.
- --------------------------------------------------------------------------------
7
COMPONENTS OF THE BILLSERV SOLUTION
One of the key advantages of our solution is that we have integrated certain
proprietary components with what we consider best-of-breed 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
clients' needs for designing, developing, implementing and managing their entire
EBPP channel solution. Our integration of products and services also allows our
clients to choose from a menu of components and still have a system implemented
in as little as four weeks. This menu approach allows us to tailor our
customers' EBPP solution to their business and marketing objectives. The
components of our solution include:
eServ
eServ is our flagship product and the foundation for our comprehensive EBPP
solution. eServ provides our customers with a single solution for developing and
managing their entire EBPP capabilities. With eServ, we manage, on behalf of our
customers, the multiple systems, delivery channels and relationships necessary
for a successful EBPP offering. Our eServ product provides the following:
o We consult with our customers to determine the appropriate EBPP strategy;
o We assign a dedicated project development team to each client to ensure
that the project planning and implementation phase is completed
effectively and on time;
o We assign a dedicated marketing team to assist in developing a tailored
marketing strategy designed to increase the consumer adoption rates for
their EBPP services;
o We maintain all customer enrollment functions and the warehousing of
customer enrollment data; accordingly, we forward all activation,
deactivation and change requests to our customer's appropriate system for
acceptance or denial;
o We create a proprietary interface with our customer's legacy billing
system without changing our customer's internal systems;
o We extract the necessary billing data from our customer's print stream and
transmit the data in a secure manner over the Internet to our data center;
our solution is capable of accepting this data in a variety of data
formats;
o We parse the detail of the data using the CheckFree iSolutions, Inc.
parsing engine and proprietary extraction applications to extract the
applicable fields from our customer's print stream;
o We store the data fields in encrypted proprietary databases and, when
requested, an electronic bill is dynamically created based on the fields
and template designs executed to the exact specification of our customer;
o We have existing relationships with all of the leading bill presentment
channels on the Internet, including CheckFree Corporation and Spectrum,
and will forward the summary information for each bill to the associated
presentment channel. We maintain the bill detail in proprietary databases
on behalf of our customer;
o We manage all remittance information from all distribution points and
transmit this information in a secure, daily electronic delivery to our
customers in the format necessary to automatically update their accounts
receivable and accounting systems;
o We provide other related services, such as bill archiving and bill
analysis tools, based on our customers' specifications; and
o Once we are actively processing electronic bills for a customer, we assign
a dedicated Technical Support/Client Relations team member to that
customer to ensure that all required processes are completed as required
and that all electronic bills are presented correctly. In addition, we
provide reports which detail all activities processed and any exceptions
noted, enabling our customers to maintain an audit trail of the EBPP
process.
ePublishing
ePublishing is Billserv's service that provides electronic publishing services
for online statement delivery. We believe that there are significant
opportunities for supporting both Electronic Statement Presentation ("ESP") and
EBPP for business-to-business applications. ESP is the process of electronically
providing recurring paper-based statements that do not require a payment
remittance, such as quarterly brokerage account statements. According to Killen
& Associates, the current global ESP market consists of approximately 147,000
statement issuers that produce 115 billion statements per year. They expect the
global ESP market to grow from less than $500 million in processing revenues in
1998 to over $18 billion in 2005.
eCare
eCare is our Internet-enabled customer care solution supporting the EBPP
process. We currently offer eCare in two separate models, eClient Remote and our
Internet Interaction Center:
o eClient Remote is a multi-function, web-based desktop browser product that
primarily provides access to the consumer's bill detail stored on our
servers. We provide a tool for a customer's customer service
representatives ("CSRs") to deliver
- --------------------------------------------------------------------------------
8
customer service to all customers, including those not using the Internet.
It is available to a customer with three levels of functionality: (i)
eClient Remote Level One provides our customer's CSRs the ability to view
the electronic images of bills that have been sent to their consumers;
(ii) eClient Remote Level Two provides enhanced capabilities such as web
collaboration (web-chat), white boarding and voice-over IP; and (iii)
eClient Remote Level Three adds to the features of the first two levels,
and also provides capabilities for extended Customer Relationship
Management ("CRM") services.
o Our Internet Interaction Center ("IIC") will be deployed to provide eCare
with essentially the same functionality as eClient Remote, using our
employees to perform customer service on behalf of our customer. This
service can be a fully outsourced model in which our customer chooses not
to provide direct in-house services. Alternatively, this service model may
be used as an after-hours support function that supplements our customer's
existing service center. Through our IIC, we can extend our customer's
in-house service center from normal business hours to a 24-hours-a-day,
7-days-a-week operation.
eConsulting
eConsulting is Billserv's professional services consulting group that offers
electronic billing, customer care, project management, and IT consulting
services to both billers' existing clients and the EBPP industry in general.
Billserv's eConsulting group offers solutions ranging from project monitoring to
complete turnkey project development and implementation. In addition, customers
can gain access to Billserv's extensive and successful team in 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 any bill presentment and payment
location across the World Wide Web in addition to its existing distribution
points. The ASP Gateway Service is designed to improve upon a biller's existing
EBPP system, whether an in-house solution or a distribution channel with only
one or two billing consolidators, by expanding its range of distribution
partners with Billserv serving as the single point of contact without a large
additional expense or effort.
bills.com
bills.com, a wholly-owned subsidiary of Billserv, operates as a consumer
financial web site or portal focused on providing bill presentment and payment
services at the domain name www.bills.com. The bills.com strategy is to provide
the consumer an interface for bill presentment and payment.
OPERATIONS
We have created a proprietary technology infrastructure to support all of the
components of our solution. Our systems consist primarily of proprietary
software applications that we have integrated with what we consider to be `best
of breed' third party hardware and software platforms. We have designed our
system so that it is reliable, flexible, and can easily be expanded to meet
growth demands without significant cost or change. We believe that our internal
expertise and the technology and architecture of our solution provides the
following benefits to our customers:
o Back Office Portability - Our support for open standards allows us to
integrate with any third party print-stream parser, such as CheckFree
iSolutions' suite of tools, as well as in-house solutions;
o Business Interoperability - Our core system consists of four major
proprietary gateways: financial, aggregator, biller and e-mail, which
enable us to offer a quick implementation for our customers. These
interfaces give us the ability to integrate with our customer's legacy
applications (without disrupting or changing our customers' internal
systems) as well as external software applications. These interfaces
support a variety of emerging standards for data exchange, including
eXtensible Markup Language (XML), Open Financial eXchange (OFX), and
Electronic Data Interchange (EDI). This foundation allows us to implement
new customers and business partners on each of our gateways, with minimal
development cost and a short implementation cycle;
o Performance and Reliability - The combination of Microsoft Windows NT and
the high throughput of IBM's DB2 database management system provide for a
reliable and scalable environment. This architecture allows us to add or
upgrade processors and disk space without any significant service
interruptions. A third party capacity planning study has confirmed that
our existing platform is capable of handling the volumes we expect in the
future. Out platforms will be continuously evaluated as new technology is
developed;
o Software Scalability - The development environment fully adopts highly
portable methodology to quickly transfer our applications to other
platforms. In addition, these widely used object oriented standards have
provided us with a highly
- --------------------------------------------------------------------------------
9
reusable modular system. Because of this reusability, the business
components can be constructed and modified to adapt to the rapidly
developing EBPP industry without affecting the underlying software
development;
o Hardware Scalability - The IBM Netfinity file servers are capable of
scaling both vertically and horizontally. Depending on the model, Billserv
can add up to eight processors or upgrade the existing processors. The
Netfinity servers could also be clustered giving Billserv close to a
linear performance improvement per added node. The critical data is stored
on multiple Network Appliance F760 network attached disk arrays. Each F760
is scalable to 2.78TB. These are also capable of being clustered for added
scalability;
o Redundancy - Billserv uses IBM Netfinity servers with fully redundant
power supplies, fans, and network interface cards. Each server has two
network interface cards that reach the network through different paths
providing wiring redundancy. Each network interface card is connected to a
different Ethernet switch on our network backbone, ensuring no single
point of failure between the servers and the backbone. If one switch
fails, the data is routed to the other switch automatically. Internally,
the OS uses RAID 1, or mirroring for the protection of the system data and
RAID 5 for general production data. RAID 5 uses a spare parity drive to
recreate the data on a disc drive that might have failed. This process is
automatic and is typically transparent to our customers. The failed drive,
as with the other components mentioned above are hot swappable and can
also be replaced without bringing the system down. Billserv also utilizes
external disc arrays, which consist of two NetAppliance F760s. These
network attached disc arrays also have redundant power supplies, cooling
fans and use RAID 5 technology all of which are hot swappable. Billserv
uses two separate carriers for our Internet traffic. Currently, we have
three T1s from each carrier that utilize BGP. BGP not only gives us
fail-over protection, but load balances the traffic as well. In the event
of an ISP (Internet Service Provider) failure or fiber cut, the traffic is
re-routed to the other T1s. If there is a complete outage by one carrier,
the traffic will automatically route to the other carrier. Billserv
recently signed a three-year contract with Southwestern Bell
Communications (SBC) to use their Internet Data Center (IDC). This
facility is located in Dallas, Texas and will serve as Billserv's disaster
recovery site. The facility itself consists of multiple Liebert A/C units,
UPS, generators and fire suppression systems, all of which were designed
for complete redundancy. Along with space in the facility, Billserv has a
dedicated 10Mbps link to the Internet using Southwestern Bell as the ISP.
SBC is so confident in their multi-tiered redundant environment that they
guarantee 100% uptime. Various mirroring and DB2 data replication methods
are synchronizing the data between the two locations; and
o Security - Multiple Cisco firewalls and layer four switches protect
Billserv's perimeter network. Digital certificates, PGP encryption and NT
authentication are also used to protect our data. External security audits
and penetration tests from third party vendors are performed at Billserv's
discretion.
eServ
Our eServ system consists of proprietary gateways and service bureau operations
software integrated with CheckFree iSolutions' data parsing and electronic bill
presentment software. The eServ infrastructure runs on Microsoft Windows NT and
IBM's AIX operating systems using IBM Netfinity file servers, utilizes Microsoft
IIS (Internet Information Server) web server and Websphere applications server
software to manage its applications and facilitate communications over the
Internet, and manages the underlying data using IBM's DB2 database management
system. eServ also uses IBM internal RAID-5 drives and Network Appliance F760
disc arrays for data backup. Some specific software features of our eServ system
include:
o Parsing and Presentment Software - We license software from CheckFree
iSolutions, Inc. to parse the detail of our customers' billing data and
create the electronic bill to be presented;
o Service Bureau Operations Software - We have developed proprietary
software applications that enable us to manage the entire EBPP process on
an outsourced basis for our customers. These applications include
integration protocols for all of our proprietary gateways and the
CheckFree iSolutions, Inc. software, applications for quality and process
checks, applications to provide reports which detail all activities
processed and any exceptions noted, data extraction applications,
archiving and analysis tools, and others;
o Biller Gateway - Our proprietary biller gateways provide us with the
connectivity to our customers, enabling them to send print streams and
receive remittance and enrollment information;
o Financial Gateway - Our proprietary financial gateways provide us with
connections to payment processing partners, such as Innuity, Inc.;
o Aggregator Gateway - Our proprietary aggregator gateways provide us with
connections to our billing distribution partners, such as CheckFree and
TransPoint; and
o Email Gateway - Our proprietary email gateways enable us to send emails on
behalf of our customers to their consumers when electronic bills have
arrived or for other types of notifications, such as overdue bills or
special offers.
eCare
Our eCare system consists of proprietary software integrated with licensed
Internet interaction software from eShare. These components support all levels
of our eCare solution. The eCare infrastructure runs on Windows NT and IBM's AIX
operating systems using IBM Netfinity file servers, utilizes Microsoft IIS
(Internet Information Server) web server and Websphere
- --------------------------------------------------------------------------------
10
applications server software to manage its applications and facilitate
communications over the Internet, and manages all of the underlying data using
IBM's DB2 database management system. eCare also uses IBM internal RAID-5 drives
and Network Appliance F760 disc arrays for data backup. Some specific software
features of our eCare system include:
o eClient Software - eClient is our proprietary software which enables us to
view a bill electronically while in communications with a consumer;
o Internet Collaboration Software - We license Internet collaboration
software from eShare which enables us to interact with consumers over the
Internet in a variety of ways, including web chat, email, voice over
Internet protocol (VoIP), and web white boarding; and
o Customer Relationship Management Software - 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) as well as interactions
through bills.com.
SALES AND MARKETING
Our sales strategy is focused on both direct and indirect channel sales. We have
a sales staff located in key geographic areas across the US and Canada, with
responsibilities for local, regional and national billers in various industries.
In addition, we have a growing number of strategic relationships with major
financial institutions, print houses and technology providers to resell our
services to their existing and prospective customer bases. We have a staff of
Channel Development Managers who develop sales through our expanding reseller
network. Leads for sales are obtained through direct contact, our resellers and
our corporate marketing efforts.
Our marketing efforts are categorized as either corporate- or adoption-focused.
Corporate marketing promotes the Billserv brand and establishes the company as
the leading outsource solution provider of EBPP services. Through participation
in trade shows, direct mail programs, industry advertising and public
relations/speaking engagements, our corporate marketing program obtains and
forwards leads to our sales staff for qualifying and follow up. Our Adoption
Marketing team, consisting of Client Marketing Consultants, works directly and
regularly with every client's marketing department to produce critically
important adoption driving programs for the client to implement. The shared
knowledge of our staff, combined with the cumulative experience of our entire
customer base, provides valuable leadership as we work to build consumer
adoption rates. Finally, our sales and marketing functions combine in our
EpiCenter strategy. Our EpiCenter strategy, which stands for Electronic
Presentment Innovation CENTER, was developed to positively influence consumer
adoption rates through the coordination of sales and marketing efforts in
selected metropolitan areas. Our branded EpiCenter program involves identifying
the top 50 metropolitan areas in the country based upon the number of online
households. We have analyzed each of these target markets and established
benchmark adoption rates for each market. We then work to attain our adoption
rate objectives in each market primarily by focusing sales efforts on those
local billers that deliver the majority of bills to local consumers, and working
with the community of billers to deliver coordinated marketing opportunities to
volumes of households. In addition, we target those regional and national
billers that deliver bills to these same consumers to further enhance the value
of the EpiCenter. The local billers that we target include media partners
(newspapers, cable operators), households (utilities, telecommunications),
cross-markets (ISP's), and affinity providers (local governments, universities).
The Billserv-sponsored EpiCenter 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 generating recurring paper-based bills in each targeted
geographic region (i.e., utilities, telephone, cable operator, etc.), 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 solution.
COMPETITION
The market for EBPP services is highly competitive. We compete primarily with
companies that provide turnkey outsourced EBPP solutions for customers. These
companies include Derivion Corporation, Princeton eCom Corporation and
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 high level of investment in new technologies,
marketing and customer service. We believe that the principal competitive
factors in our market include:
- --------------------------------------------------------------------------------
11
o system reliability and performance;
o ability to provide an outsourced customer care center, such as eCare;
o price and other financial terms;
o technological support and customer service;
o strategic relationships with aggregators, front-ends and technology
providers; and
o compliance with industry and technological standards.
We also face potential competition from a number of related, but different,
companies. These include aggregators, such as CheckFree Corporation and
TransPoint; EBPP front-ends, such as financial institutions and Internet
portals; EBPP software providers, such as eDocs; 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 have made application for the following trademarks: eSERV, eCARE, eCLIENT,
billserv.com, and bills.com. We have obtained registered mark status for
billserv.com.
EMPLOYEES
On December 31, 2000, we had 141 employees. In order to attract and retain
highly skilled management, technical, marketing and sales personnel, we have
compensation arrangements that include competitive salaries, stock options and
incentive compensation plans. Through December 31, 2000, we were part of a
co-employer arrangement with CNA Unisource, Inc., ("CNA") under which CNA was
the administrative employer and billserv was the worksite employer. The
agreement effectively outsourced many administrative tasks related to payroll
and human resources and provided us with many benefits not available to small
companies. CNA was responsible for administrative functions of employees such as
workmen's compensation, payroll taxes, etc., and billserv controlled the
worksite function of each employee. The terms of the agreement allowed us to
maintain a common law employer-employee relationship. We terminated this
agreement effective December 31, 2000 and simultaneously became the sole
employer of all the employees.
We are not a party to any collective bargaining agreements. We believe that our
relations with our employees are satisfactory.
FOREIGN OPERATIONS AND GEOGRAPHIC INFORMATION
During 2000, billserv entered into the Canadian market place by opening an
office with one employee in Ontario, Canada. As of December 31, 2000, we have
entered into a biller service agreement with one customer, however we have not
yet begun to provide services.
BUSINESS RISKS
Future Capital Needs; Uncertainty of Additional Financing
The Company currently plans to meet its capital requirements primarily through
issuance of equity securities, equipment leasing and new borrowing arrangements,
and in the longer term, revenue from operations. If current cash, marketable
securities and cash that may be generated from operations are insufficient to
satisfy its liquidity requirements, the Company may seek to sell additional
equity or debt securities. The sale of additional equity or debt securities
would result in additional dilution to the Company's stockholders, and debt
financing, may involve restrictive covenants, which could restrict its
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, it may not be able to continue
to exist, expand our operation, 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.
- --------------------------------------------------------------------------------
12
Lack of Operating History; Limited Relevance of Historical Financial Information
The Company was organized in 1998 and began operations as a public company in
1999. The Company has not been profitable. As of December 31, 2000, the
Company's accumulated deficit was $25.8 million. Therefore, all information
included herein may not necessarily reflect 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 providers' 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 might 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. At present, the Company's four principal products, eServ, eCare,
ePublishing and eConsulting, are available. 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
- --------------------------------------------------------------------------------
13
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 also 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, it is possible that 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
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
The ACH (Automated Clearinghouse) Network is a nationwide batch-oriented
electronic funds transfer system that provides for the interbank clearing of
electronic payments for participating financial institutions. The Federal
Reserve rules provide that the ACH system is available only through a bank. To
access the ACH Network, the Company or its authorized representative may
originate an ACH entry. As the originator, the Company forwards transaction data
to the Originating Depository Financial Institution ("ODFI"), which is a
participating financial institution that must abide by the provisions of the ACH
Operating Rules and Guidelines. The OFDI sorts and transmits the file to an ACH
Operator. The Arizona Clearing House Association, Federal Reserve, New York
Automated Clearing House and Visa USA act as ACH Operators, which are central
clearing facilities through which financial institutions transmit or receive ACH
entries. The ACH Operator then distributes the ACH file to the Receiving
Depository Financial Institution, the bank of the customer, which makes the
funds available to the customer. 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.
Intense Competition in Electronic Commerce and Related Financial Services
Portions of the electronic commerce market are becoming increasingly
competitive. The Company expects to face significant competition in all areas of
the EBPP market. Although few companies have focused their efforts as service
bureau consolidators in the EBPP industry, the Company expects that new service
bureau companies will emerge and compete for billers of all sizes. The Company
further believes that software providers, consumer front ends, banks and
Internet portals will provide increasingly competitive billing solutions 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 will 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 result in reduced
transaction pricing that 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, David S. Jones; and its Senior Vice
President of Sales and Marketing, Tony 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 inability to retain and attract key employees could have a
material adverse effect on the Company's business, operating results and
financial condition. To date, the Company has not experienced any of these
difficulties.
- --------------------------------------------------------------------------------
14
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
SAS 70 technical audits and limitation-of-liability provisions in its customer
agreements. There can be no assurance that the 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
The profitability of the Company's business depends, to a substantial degree,
upon billers electing to continue to periodically renew contracts. In the event
that a substantial number of these customers were to decline to renew these
contracts 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.
- --------------------------------------------------------------------------------
15
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.
Control by Principal Stockholders
As of December 31, 2000, the directors and officers of the Company and their
affiliates collectively own approximately 21% 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, 2000, the Company had 15,527,870 shares of common stock
outstanding. The Company anticipates that it will need future equity financing
to meet its operational and strategic requirements. Such future equity financing
may have a significant dilutive effect on the Company's stock price.
In March 2001, the Company issued 2,881,862 shares of common stock under a
private placement offering (the "2001 Offering").
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
stockholders 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 present time, are 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.
- --------------------------------------------------------------------------------
16
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.
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 Innuity, Inc., to provide dependable financial services for customers of
billers. Such financial services include ACH processing through the customer'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 significant 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.
Possible Rights of Redemption
On or about December 3, 1998, the Company, then under the control of former
management, and then known as Goldking Resources, Inc., concluded an offering of
approximately 5.3 million shares of common stock. This transaction was completed
through the cancellation of approximately 6.2 million shares, held by
stockholders who tendered their shares to the Company, followed by the Company's
issuance of 5.3 million shares to 15 new stockholders who paid par value to the
Company for such shares, in the total amount of approximately $5,300. The new
stockholders also paid an additional $300,000 to the stockholders who had agreed
to cancel their shares. Subsequently, some of these new stockholders sold shares
into the secondary market. A Form D was filed with the SEC to timely report the
transaction, and an exemption under Rule 504 was claimed. The SEC has challenged
the validity of this claimed exemption.
- --------------------------------------------------------------------------------
17
It is possible that the issuance of shares described above may have violated
provisions of the federal and state securities laws which subject the Company to
fines, penalties or other regulatory enforcement action. There can be no
assurance that the SEC or applicable state authorities will not pursue any
enforcement action. The Company disputes any such liability.
It is also possible that stockholders who purchased the shares described above
may have the right under state and federal securities laws to require the
Company to repurchase their shares, for the amount originally paid, plus
interest. The Company disputes any such liability.
Based upon the best information available at this time, the Company has
calculated a range of possible, but disputed, exposure that exists in light of
the disputed civil liabilities described above. Accordingly, in the event these
disputed civil liabilities were successfully asserted, the Company could be
liable to the 15 new stockholders, and to any stockholder that immediately
purchased shares from these 15 stockholders, in an amount ranging from
approximately $5,300 up to approximately $2.9 million, plus interest. This range
of possible exposure is calculated by reference to the average closing price for
a share of common stock, weighted for reported daily volume, during December
1998 and January 1999; the number of shares possibly sold during the same period
of time; and the closing price of one share on November 11, 1999. The foregoing
range could be adjusted higher or lower depending upon adjustments to any of the
referenced items, and as any new information becomes available.
The Company publicly disclosed the foregoing matters on November 22, 1999, in
the Company's amended Form 10, which was filed with the SEC. Since the date of
such filing, the Company has received no notice of any claim by any person,
including the SEC.
Forward-Looking Statements May Prove Inaccurate
This private placement memorandum contains certain forward-looking statements
and information relating to the Company that are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this document, the words
"anticipate," "believe," "estimate," "expect," and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including the risk factors described in this
private placement memorandum. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended.
ITEM 2. PROPERTIES AND EQUIPMENT
As of December 31, 2000, our headquarters were housed in approximately 74,000
square feet of leased office space in San Antonio, Texas. Additionally, we lease
sales offices in Dallas, Texas; Hollidaysburg, Pennsylvania; Chicago, Illinois;
and Ontario, Canada.
ITEM 3. LEGAL PROCEEDINGS
There is no litigation currently pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None in the fourth quarter of fiscal 2000.
- --------------------------------------------------------------------------------
18
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. 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 period indicated the range of high and
low closing prices as reported.
HIGH LOW
----------- -----------
1999
------------------
First Quarter $ 8.41 $ 2.81
Second Quarter $ 8.88 $ 4.38
Third Quarter (1) $ 7.38 $ 3.81
Fourth Quarter (1) $ 8.00 $ 3.50
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
(1) From October 7, 1999 to December 7, 1999, our common stock was not traded on
NASD OTC BB. The NASD adopted eligibility rules that required clearance of all
comments by the SEC on our Form 10 filing by October 7, 1999. From that date
until the time at which the SEC cleared comments, or December 7, 1999, our
common stock was quoted on the National Quotation Board's Electronic Pink
Sheets.
B. SHAREHOLDERS
As of March 12, 2001, 15,605,169 shares of common stock are outstanding, $.001
par value. As of March 12, 2001, there were approximately 6,036 stockholders of
record.
Subsequent to March 12, 2001, the Company issued 2,881,862 shares of common
stock under a private placement offering (the "2001 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 approximately $565,000,
which included approximately $540,000, or 7.5% of the Offering, paid to the
placement agent. The Company will file a registration statement with the SEC and
seek registration of the shares issued in the 2001 Offering.
C. DIVIDEND POLICY
We have never paid cash or stock dividends and have no present plan to pay any
such dividends, intending instead to reinvest our earnings, if any.
D. SALES OF UNREGISTERED SECURITIES
On June 2, 2000, the Company sold 879,121 shares of common stock to CheckFree
Investment Corporation, CheckFree Services Corporation and CheckFree Holdings
Corporation (collectively, "CheckFree") for $10.0 million. These shares are not
registered under the Securities Act. The Company is obligated, upon timely
requests by CheckFree, to file a registration statement for these shares.
- --------------------------------------------------------------------------------
19
In March 2001, the Company issued 2,881,862 shares of common stock under a
private placement offering (the "2001 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 approximately $565,000, which included
approximately $540,000, or 7.5% of the Offering, paid to the placement agent.
The Company will file a registration statement with the SEC and seek
registration of the shares issued in the 2001 Offering.
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENT OF OPERATIONS DATA
FROM INCEPTION FROM INCEPTION
YEAR ENDED YEAR ENDED (JULY 30, 1998) (JULY 30, 1998)
DECEMBER 31, DECEMBER 31, TO DECEMBER 31, TO DECEMBER 31,
2000 1999 (1) 1998 2000 (1)
------------ ------------ ---------------- ---------------
Revenues $ 612,340 $ 55,438 $ -- $ 667,778
Cost of sales 3,653,160 127,345 -- 3,780,505
Operating expenses:
Research and development 767,751 906,532 -- 1,674,283
Selling, general and administrative 8,264,657 3,737,922 289,211 12,291,790
Depreciation and amortization 940,995 270,908 559 1,212,462
Non-cash expense related to the
issuance of warrants 7,488,000 491,428 -- 7,979,428
------------ ------------ ------------ ------------
Total operating expenses 17,461,403 5,406,790 289,770 23,157,963
Other income 546,173 5,749 -- 551,922
Cumulative effect of a change in
accounting principle (52,273) -- -- (52,273)
------------ ------------ ------------ ------------
Net loss $(20,008,323) $ (5,472,948) $ (289,770) $(25,771,041)
============ ============ ============ ============
Net loss $ (1.35) $ (0.50) $ (0.03) $ (2.08)
Weighted average common shares
outstanding 14,793,622 10,876,096 10,030,000 12,345,021
CONSOLIDATED BALANCE SHEET DATA
DECEMBER 31, DECEMBER 31,
2000 1999 (1)
----------- -----------
Working capital (deficit) $ 5,291,006 $ 6,293,217
Current assets $ 8,848,543 $ 7,490,648
Total assets $15,290,542 $ 9,398,168
Long-term obligations, net of current portion $ 153,728 $ 259,694
Total stockholders' equity (deficit) $11,006,110 $ 7,936,043
(1) The accounting change related to SAB 101 has not been reflected in
the financials prior to its adoption on January 1, 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
20
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the periods ended December 31, 2000,
1999 and 1998. It should be read in conjunction with the Consolidated Financial
Statements of the Company, the accompanying notes, and other financial
information included elsewhere in this annual report on Form 10-K.
GENERAL
billserv is a development stage enterprise with a limited operating history on
which to base an evaluation of our businesses and prospects. 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, 2000, we have an accumulated deficit of $25.8 million. We believe
that our success will depend in large part on our ability to (a) secure
additional financing to meet capital and operating requirements, (b) continue to
add to our significant customer base, (c) drive the consumer adoption rate of
Electronic Bill Presentment and Payment ("EBPP"), (d) meet changing customer
requirements and (e) adapt to technological changes in an emerging market.
Accordingly, we intend to continue to invest in product research and
development, technology and infrastructure, as well as marketing and promotion.
Because our services will require a significant amount of investment in
infrastructure and a substantial level of fixed and variable-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 include:
o eCare - Our Internet Interaction Center (IIC) which provides
Internet-enabled customer care support.
o eConsulting - Value added professional services for EBPP customers needing
dedicated resources.
o IDM - Internet-enabled Direct Marketing (latter part of Year 2001).
o bills.com - EBPP Internet portal for complete bill payment of all bills.
o Hosting - The housing of monthly bill detail.
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. 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.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2000
Our operations for the year ended December 31, 2000 resulted in a net loss of
$20,008,323, or $1.35 per share. We earned revenues totaling $612,340 for the
year ended December 31, 2000.
Revenue
Although revenue from transaction fees has dramatically increased during each
quarter during 2000, transaction fee revenue accounted for approximately 10% of
our total 2000 revenues. As of December 31, 2000, we had 49 billers under
contract who were in various stages of development, 31 billers in production or
pilot stages and several billers in various stages of their consumer education
and marketing programs. As such, the low adoption rates are consistent with our
expectations at this point. Transaction fees can become a significant revenue
source only when consumer adoption rates increase. While consumer adoption rates
cannot be controlled, we are working with our customers to promote EBPP to their
consumers. However, the volume of transactions and amount of revenue we will
earn in future periods are dependent upon the rate at which consumers utilize
EBPP.
- --------------------------------------------------------------------------------
21
Hosting consists of the loading and storage of billing information on our
servers for a defined period of time. We currently provide this service to two
billers. This revenue accounted for approximately 20% of our total revenue for
2000.
Implementation fee revenue represents 15% of total revenues for 2000. Revenue
from this source will continue to increase as we expect an increase in
implementations as well as the recognition of the deferred revenue from all the
previously implemented billers. Total deferred revenue was $826,000 as of
December 31, 2000 compared to $5,000 at December 31, 1999. This increase is due
to the deferral of implementation fees that were invoiced during 2000.
Prior to December 31, 1999, we recognized revenue generated from up-front fees
upon completion of an implementation project. In December 1999, the SEC issued
SAB 101, which requires recognition of revenue generated from up-front
implementation fees 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 cost
of sales will be expensed as incurred. The cumulative effect of this accounting
change totals $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 to be recognized as revenue over the remaining contractual service
periods, which are primarily three to five years in length. Had the Company not
adopted SAB 101, implementation fee revenue would have been approximately
$570,000 for 2000, which would have resulted in total revenues for 2000 of $1.1
million.
During 2000, the Company recognized $173,000 of non-recurring revenue
attributable to fees for a single biller for which we will no longer be
providing services.
As of December 31, 2000, we had 1,500 subscribers to bills.com, however revenue
remains minimal due to the six-month free trial period offered to customers
during 2000. Currently, we are uncertain of the magnitude of future revenues
from this product and plan to devote minimal resources.
We also launched our eCare product during the second quarter of 2000 and went
live with three customers. This product is an Internet Interaction Center that
enables consumers and customer service representatives to interact privately, in
real time, via the Internet. For 2000, eCare revenue accounted for less than 10%
of total revenue.
In the fourth quarter of 2000, we rolled out our eConsulting services to our
existing customer base. We completed several small and one large consulting
engagement during 2000, which in the aggregate totaled approximately $80,000 of
revenues. We anticipate entering into several more substantial engagements
during 2001.
Cost of Sales
Cost of sales was $3,653,160 for the year ended December 31, 2000. Cost of sales
includes the cost of personnel dedicated to the design of electronic bill
templates, creation of connections to third-party presentment and payment
processors, testing and quality assurance processes related to implementation
and presentment, as well as project management staff devoted to our customers at
the inception of a project. As of December 31, 2000, approximately 71 employees
were involved in these functions. Cost of sales also includes fees paid for
presentation of consumer bills on web sites powered by aggregators and fees paid
to third parties who perform the payment portion of the EBPP transaction.
Research and development expenses
Research and development expenses were $767,751 for the year ended December 31,
2000. All research and development costs are expensed as incurred. These costs
include the cost of personnel devoted to the design of new processes that will
improve our electronic presentment and payment abilities and capacities,
integration of applications from third-party applications, new customer care
solutions, additional business-to-consumer applications, business-to-business
applications and, in future periods, solutions for direct marketing
opportunities. We will continue to invest in research and development efforts in
the foreseeable future, as it is an essential part of the execution of our
business strategy. We believe that it will be important to continue to develop,
test and offer new products and services.
Selling and marketing expenses
Selling and marketing expenses totaled $4,586,823 for the year ended December
31, 2000. The dramatic increase in these costs from prior periods is a result of
the development and expansion initiatives of our sales and marketing departments
as well as advertising media costs associated with bills.com. 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 devoted approximately $1.2 million to
develop and market the portal. As of December 31, 2000, we employed 23 sales and
- --------------------------------------------------------------------------------
22
marketing personnel. We will continue to expand our sales and marketing efforts,
increasing the size of our sales force and broadening our reach with marketing
activities. As each biller is signed, billserv assigns a marketing
representative to work with that biller in developing their plan to educate
their consumers on EBPP. The majority of our billers currently in production
plan to market and advertise EBPP to their consumers during the next few months.
Our selling strategy is a targeted approach with an emphasis on saturating key
geographic areas in an attempt to drive EBPP adoption rates. The approach begins
with targeting local and regional billers in metropolitan areas with high
Technically Advanced Family ("TAF") populations and high Internet usage.
Additionally, we will continue to target national billers to offer complete
coverage of all recurring bills in each targeted region. We expect promotional
expenses to increase at a managed rate in support of our strategy.
General and administrative expenses
General and administrative costs were $3,677,834 for the year ended December 31,
2000. These expenses are primarily related to the compensation costs associated
with general and administrative personnel hired to manage our growth, as well as
increased travel, insurance and professional fee expenses. The increase is also
attributable to a growth in facilities costs resulting from expanded demands. We
expect general and administrative expenses to increase in moderation as a result
of the growth of our business. This increase will be driven by the increase in
the number of customers or by our expectation of increased revenue from the
escalation of adoption rates.
Depreciation and amortization
Depreciation and amortization was $940,995 for the year ended December 31, 2000.
The increase from prior periods is due to depreciation related to the capital
expenditures made for infrastructure and operating systems in support of our
growth strategy. We have purchased over $3.6 million of property and equipment
during 2000 and anticipate making capital expenditures of approximately $1.0
million in the next twelve months.
Non-cash expense related to the issuance of warrants
This non-cash expense relates to expenses recognized for warrants issued in
consideration for services. In accordance with Generally Accepted Accounting
Principles, we calculated the estimated fair value of these warrant issuances
using the Black Scholes Model and recorded the expense and related credit to
additional 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.
During the second and third quarters of 1999, warrant expense was $356,583 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. We anticipate that we
will recognize additional expense in future periods based on warrants that are
issuable in consideration for the referral of billers to us by CheckFree as well
as for each of our billers that CheckFree enables for distribution; however,
those expense amounts are unknown as they are dependent upon various milestones
to be achieved by CheckFree and several other variables.
Other income
Other income was $546,173 for 2000. During 2000, we earned interest from the
investment of the proceeds from the equity offerings in the fourth quarter of
1999, the exercise of warrants during the first quarter of 2000 and the equity
investment by CheckFree in June 2000. The interest income is partially offset by
the interest expense incurred on capital leases and borrowings on the line of
credit during 2000.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1999
Our activities for the year ended December 31, 1999, resulted in a net operating
loss of $5,472,948. We generated our first revenues totaling $55,438, excluding
the impact of adopting SAB 101, during the fourth quarter of the year. Revenue
was comprised principally of design and implementation fees related to our eServ
product. While insignificant in size, included in fourth-quarter revenue are
transaction fees for electronic bills presented for our first live customers.
Cost of sales included the cost of technical and support personnel who design
specific EBPP components for billers, process data, and perform customer care.
Cost of sales also included fees paid to third parties for the presentation of
electronic bills on web sites owned by those parties.
- --------------------------------------------------------------------------------
23
Research and Development Expenses
Research and development expenses totaled $906,532 for the twelve months ended
December 31, 1999. We devoted these resources to develop our technology
infrastructure and operating systems. The cost primarily relates to the cost of
personnel who perform these developmental functions.
Selling and Marketing Expenses
Selling expenses consisted primarily of payroll and related expenses for
personnel engaged in marketing and selling activities, as well as advertising
services purchased from the Consulting Group which totaled approximately
$400,000, for the twelve months ended December 31,1999. We built sales and
marketing teams during the year, opening sales offices in Arizona, California,
Colorado, Massachusetts, New Jersey, North Carolina, Pennsylvania, and Texas. We
planned to increase our marketing and sales capacities through various
activities, including advertising in trade publications, promotional activities,
and aggressive trade show attendance.
General and Administrative Expenses
General and administrative expenses were $1,987,307 and consisted primarily of
payroll and related expenses for executive, accounting, legal, and
administrative personnel, as well as professional and consulting fees and other
general corporate expenses. For the year ended December 31, 1999, financial and
investor relations services provided under a consulting agreement totaled
$650,000.
RESULTS OF OPERATIONS - FROM INCEPTION TO DECEMBER 31, 1998
Our activities for the five-month period from inception to December 31, 1998,
resulted in net operating losses of $289,770. We generated no revenues during
the period. Operating expenses were generally not incurred until December 1998.
Selling and Marketing Expenses
Selling and marketing expenses consisted primarily of payroll and related
expenses for personnel engaged in selling and marketing activities, as well as
advertising services totaling $50,000 under a consulting agreement. We expanded
our sales and marketing staff subsequent to December 31, 1998, and intended to
continue such expansion.
General and Administrative Expenses
General and administrative expenses consisted primarily of payroll and related
expenses for executive, accounting, legal, and administrative personnel, as well
as professional and consulting fees and other general corporate expenses. In
1998, financial and investor relations services provided under a consulting
agreement totaled $100,000. We expanded our general and administrative staff
subsequent to December 31, 1998 and intended to continue such expansion.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company's principal source of liquidity consisted of
$6.2 million of cash and cash equivalents and $1.0 million in short-term
investments, compared to $7.0 million of cash and cash equivalents at December
31, 1999. Additionally, the Company had $1.0 million of long-term investments at
December 31, 2000. At December 31, 2000, the Company had net working capital of
$5.3 million.
Net cash used in operating activities was $11.0 million and $4.4 million for the
years ended December 31, 2000 and 1999, respectively. Net cash used in operating
activities was primarily attributable to operating net losses generated by
development stage marketing and research activities and general and
administrative overhead costs.
Net cash used in investing activities was $6.4 million and $1.5 million for the
years ended December 31, 2000 and 1999, respectively, and primarily consisted of
net purchases of investments and equipment. To a lesser extent, during the year
ended December 31, 2000, cash was used to make deposits for leases. Cash
available for investment purposes increased substantially in the year ended
December 31, 2000, primarily as a result of the proceeds from the equity
investment by CheckFree and the exercise of warrants.
- --------------------------------------------------------------------------------
24
Net cash provided by financing activities of $16.6 million for the year ended
December 31, 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. Net cash provided by financing activities of $12.6 million for the
year ended December 31, 1999 largely resulted from the issuance of common stock
in the October and December 1999 private placements.
We anticipate making capital expenditures of approximately $1.0 million in the
next twelve months. Further, we are expecting a decrease in our cash
requirements through 2001 as revenues continue to grow. Over 2001 we anticipate
managing our cash burn rate to an average of approximately $1.0 million per
month.
In March 2001, the Company issued 2,881,862 shares of common stock under a
private placement offering (the "2001 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 approximately $565,000, which included
approximately $540,000, or 7.5% of the Offering, paid to the placement agent.
The Company will file a registration statement with the SEC and seek
registration of the shares issued in the 2001 Offering.
We believe that our current cash, cash equivalents and investments balances
along with the proceeds of the 2001 Offering will be sufficient to meet our
anticipated cash needs for the next twelve months. 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 has both the intent and the ability to take
the necessary actions to preserve its liquidity through the reduction of
expenditures. We expect to experience operating losses and negative cash flow
for next several quarters, and as a result, we will rely on equity financing,
the establishment of new borrowings and equipment leasing arrangements to meet
future capital requirements, the amount of which is subject to uncertainty.
Our capital requirements depend on several factors, including:
o the rate of consumer acceptance of the Internet, Internet technology,
electronic commerce and our online solution;
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 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.
If our capital requirements vary from those currently planned, we may require
additional financing sooner than anticipated. If current cash, marketable
securities and cash that may be generated from operations are insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities. 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 which could restrict our operations
or finances. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all. If we cannot raise funds, on
acceptable terms, we may not be able to continue to exist, expand our
operations, grow market share, take advantage of future opportunities or respond
to competitive pressures or unanticipated requirements, any of which would
negatively impact our business, operating results and financial condition.
PENDING ACCOUNTING STANDARDS
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." Interpretation No. 44 was issued in
order to clarify certain issues arising from Accounting Principles Board ("APB")
Opinion No. 25 "Accounting for Stock Issued to Employees," which had been
previously issued in October 1972. Interpretation No. 44 became effective July
1, 2000, but certain conclusions cover specific events that occur either after
December 15, 1998 or after January 12, 2000. The principal issues addressed by
Interpretation No. 44 are: (a) the definition of an employee for purposes of
applying APB Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or awards in a
business combination. We do not expect that Interpretation No. 44 will have a
material impact on our results of operations or financial position.
- --------------------------------------------------------------------------------
25
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 and draws on its line of
credit. 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- to
intermediate-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.
- --------------------------------------------------------------------------------
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants ....................................... 28
Consolidated Balance Sheets at December 31, 2000 and 1999 ............... 29
Consolidated Statements of Operations for the years ended
December 31, 2000 and 1999, from July 30, 1998 (inception)
to ecember 31, 1998 and from inception to December 31, 2000 ........... 30
Consolidated Statement of Changes in Shareholders' Equity
from inception to December 31, 2000 ................................... 31
Consolidated Statements of Cash Flows for the years ended
December 31, 2000 and 1999, from July 30, 1998 (inception)
to December 31, 1998 and from inception to December 31, 2000 .......... 33
Notes to Consolidated Financial Statements .............................. 34
- --------------------------------------------------------------------------------
27
REPORT OF INDEPENDENT AUDITORS
To Board of Directors and Shareholders of billserv.com, Inc.
We have audited the accompanying consolidated balance sheets of billserv.com,
Inc. and subsidiaries (a development stage company) as of December 31, 2000 and
December 31, 1999, and the related consolidated statements of operations,
changes in shareholders' equity, and cash flows for the years ended December 31,
2000 and 1999 and the period from inception (July 30, 1998) through December 31,
1998. 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.com, Inc.
and subsidiary at December 31, 2000 and 1999, and the consolidated results of
their operations and their cash flows for the years ended December 31, 2000 and
1999 and for the period from inception (July 30, 1998) through December 31,
1998, in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
San Antonio, Texas
February 5, 2001, except Note 16,
as to which the date is March 21, 2001
- --------------------------------------------------------------------------------
28
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2000 1999
------------ ------------
Assets:
Cash and cash equivalents $ 6,171,822 $ 7,069,423
Investments 1,013,900 --
Accounts receivable, net 782,537 10,227
Prepaid expenses and other 596,546 380,776
Related party accounts receivable 283,738 30,222
------------ ------------
Total current assets 8,848,543 7,490,648
Property and equipment, net of accumulated
depreciation and amortization of $1,178,813
and $258,055 for 2000 and 1999, respectively 4,518,347 1,513,510
Intangible assets, net 52,500 67,500
Long-term investments 1,000,920 --
Other assets 870,232 326,510
------------ ------------
Total assets $ 15,290,542 $ 9,398,168
============ ============
Liabilities & shareholders' equity:
Current liabilities:
Accounts payable $ 726,804 $ 589,480
Accrued expenses and other current liabilities 896,772 298,638
Current portion of obligations under capital leases 181,128 309,313
Current portion of deferred revenue 252,833 --
Short-term borrowings 1,500,000 --
------------ ------------
Total current liabilities 3,557,537 1,197,431
Obligations under capital leases, less current portion 148,428 254,394
Deferred revenue, less current portion 573,167 5,000
Equity subject to potential redemption 5,300 5,300
Shareholders' equity:
Common stock, $.001 par value, 200,000,000 shares
authorized; 15,527,870 issued and outstanding
at December 31, 2000, 13,113,065 issued and
outstanding at December 31, 1999 15,528 13,113
Additional paid-in capital 36,758,450 13,695,584
Accumulated other comprehensive income 13,109 --
Deficit accumulated during the development stage (25,780,977) (5,772,654)
------------ ------------
Total shareholders' equity 11,006,110 7,936,043
------------ ------------
Total liabilities and shareholders' equity $ 15,290,542 $ 9,393,168
============ ============
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
29
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Year ended July 30,1998 July 30, 1998
December 31, December 31, to (Inception) to
2000 1999 December 31, 1998 December 31, 2000
------------ ------------ ----------------- -----------------
Revenues $ 612,340 $ 55,438 $ -- $ 667,778
Cost of sales 3,653,160 127,345 -- 3,780,505
------------ ------------ ------------ ------------
Gross margin (3,040,820) (71,907) -- (3,112,727)
Operating expenses:
Research and development 767,751 906,532 -- 1,674,283
Selling and marketing 4,586,823 1,750,615 88,298 6,425,736
General and administrative 3,677,834 1,987,307 200,913 5,866,054
Depreciation and amortization 940,995 270,908 559 1,212,462
Non-cash expense related to the issuance of warrants 7,488,000 491,428 -- 7,979,428
------------ ------------ ------------ ------------
Total operating expenses 17,461,403 5,406,790 289,770 23,157,963
------------ ------------ ------------ ------------
Operating loss (20,502,223) (5,478,697) (289,770) (26,270,690)
Other income (expense), net:
Interest income 686,824 73,270 -- 760,094
Interest expense (140,651) (67,521) -- (208,172)
------------ ------------ ------------ ------------
Total other income (expense), net 546,173 5,749 -- 551,922
Loss before income taxes and cumulative
effect of accounting change (19,956,050) (5,472,948) (289,770) (25,718,768)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss before cumulative effect of
accounting change (19,956,050) (5,472,948) (289,770) (25,718,768)
Cumulative effect of a change in accounting
principle, net of taxes (52,273) -- -- (52,273)
------------ ------------ ------------ ------------
Net loss $(20,008,323) $ (5,472,948) $ (289,770) $(25,771,041)
============ ============ ============ ============
Net loss per common share before
cumulative effect of accounting change-
basic and diluted $ (1.35) $ (0.50) $ (0.03) $ (2.08)
Cumulative effect of accounting change-
basic and diluted -- -- -- (0.01)
------------ ------------ ------------ ------------
Net loss per common share - basic and
diluted $ (1.35) $ (0.50) $ (0.03) $ (2.09)
============ ============ ============ ============
Weighted average common shares
outstanding - basic and diluted 14,793,622 10,876,096 10,030,000 12,345,021
============ ============ ============ ============
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
30
BILLSERV.COM, 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 $ -- $ -- $ -- $ -- $ --
Reclass of Equity Subject to Potential
Redemption -- -- -- (5,300) -- (5,300)
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 -- (299,706) -- (289,676)
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 (5,772,654) -- 7,936,043
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
- --------------------------------------------------------------------------------
31
BILLSERV.COM, 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 Cost -- -- (150,000) -- -- (150,000)
Unrealized Gain on Investments -- -- -- -- 13,109 13,109
Net Loss for the Year Ended
December 31, 2000 -- -- -- (20,008,323) -- (20,008,323)
------------ ------------ ------------ ------------ ---------- ------------
Balance at December 31, 2000 15,527,870 $ 15,528 $ 36,758,450 $(25,780,977) $ 13,109 $ 11,006,110
============ ============ ============ ============ ========== ============
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
32
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
July 30,1998 July 30, 1998
to (Inception) to
2000 1999 December 31, 1998 December 31, 2000
------------ ------------ ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(20,008,323) $ (5,472,948) $ (289,770) $(25,771,041)
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 940,955 270,908 559 1,212,422
Cumulative effect of change in accounting
principle 52,273 52,273
Changes in current assets and current liabilities:
(Increase) in accounts receivable (772,310) (10,227) -- (782,537)
(Increase) in related party accounts receivable (253,516) (6,222) (24,000) (283,738)
(Increase) decrease in prepaid expenses
and other 5,004 (346,414) (34,362) (375,772)
Increase in accounts payable and accrued
expenses and other currently liabilities 735,458 851,212 191,906 1,778,576
(Decrease) in accounts payable related party -- (150,000) -- (150,000)
Increase in deferred revenue 768,727 -- -- 768,727
------------ ------------ ------------ ------------
Net cash used in operating activities (11,043,732) (4,372,263) (155,667) (15,571,662)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,652,712) (1,052,459) (20,109) (4,725,280)
Purchase of investments (7,864,759) (275,496) -- (8,140,255)
Proceeds from sales and maturities of investments 5,863,048 5,863,048
Purchase of intangible assets -- (75,000) -- (75,000)
Capital lease setup fee -- (11,884) -- (11,884)
Deposits long-term, net (764,496) (45,041) -- (809,537)
Proceeds of acquisition/merger -- -- 5,394 5,394
------------ ------------ ------------ ------------
Net cash used in investing activities (6,418,919) (1,459,880) (14,715) (7,893,514)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance from shareholders -- 1,500,000 500,000 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 -- (500,000) -- (500,000)
Principal payments for capital lease obligations (512,231) (135,291) -- (647,522)
Exercise of warrants 6,096,498 -- -- 6,096,498
Issuance of common stock, net of issuance costs 9,480,783 12,707,239 -- 22,188,022
------------ ------------ ------------ ------------
Net cash provided by financing activities 16,565,050 12,571,948 500,000 29,636,998
------------ ------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (897,601) 6,739,805 329,618 6,171,822
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, beginning of period 7,069,423 329,618 -- --
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 6,171,822 $ 7,069,423 $ 329,618 $ 6,171,822
============ ============ ============ ============
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 49,584 $ 28,933 $ -- $ 78,517
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.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
billserv.com, Inc. and its wholly owned subsidiaries, bills.com., Inc. and
billserv.com-canada, inc. (collectively, "billserv.com" or "the Company"), is a
billing service provider operating in the electronic bill presentment and
payment ("EBPP") industry. In addition, the Company provides consulting and
Internet-based customer care interaction services. The Company also operates an
Internet bill presentment and payment portal for consumers.
BASIS OF PRESENTATION
The Company's principal activities since inception have included research and
development, raising of capital and organizational activities. More recently,
the Company has increased its activities in the areas of marketing and
promotion, as well as obtaining current billers as clients and implementing EBPP
capabilities for those billers. The Company remains a development stage company,
as recurring revenue related to consumer payment activity has not reached a
significant level. The Company expects to continue to incur losses during the
next several quarters of operations and may incur losses in subsequent quarters
as development efforts continue. The Company plans to meet its capital
requirements primarily through borrowings, issuance of additional equity
securities, capital lease financing and, in the longer term, revenues from
operations. Management believes that there will be adequate liquidity to fund
its operations and anticipated cash needs for fiscal 2001. 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 has both the intent and the ability to take
the necessary actions to preserve its liquidity through the reduction of
expenditures. The financial statements have been prepared in conformity with
accounting principles generally accepted in the U.S.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current year
presentation.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, bills.com, Inc. and billserv.com-canada, inc.,
which are wholly owned. All significant inter-company accounts and transactions
have been eliminated.
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
FOREIGN OPERATIONS
Foreign operations began in 2000, however the impact financially of expanding
internationally is immaterial at December 31, 2000. Canada is the only foreign
country in which the Company is currently operating.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
- --------------------------------------------------------------------------------
34
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of accounts receivable. The credit risk is
limited because of the types of customers and their geographic dispersion,
however, the relative small number of customers increases the risk.
One of the Company's primary product offerings is dependent upon services
provided by CheckFree Services Corporation. Additionally, the Company currently
relies on one payment processor for certain processing applications.
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" securities.
"Held-to-maturity" securities have been carried at amortized cost. 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.
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. Expenditures for maintenance
and repairs are charged to expense as incurred.
REVENUE RECOGNITION POLICIES
Revenue consists of design and implementation, hosting, transaction,
professional and consulting fees. Design and implementation fee revenue is
recognized over the term of the related service contract, typically three to
five years. A portion of the hosting fees are recognized as the data is loaded
and the remaining portion is recognized over the period the data is stored.
Transaction fees are recognized as revenue upon completion of transactions.
Professional and consulting fees are recognized when services are rendered.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs are expensed as incurred.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred
$1,394,000, $439,000 and $0 in advertising costs in the periods ended December
31, 2000, 1999 and 1998, respectively.
INCOME TAXES
Income taxes are determined using the liability method (see Note 11). Under this
method, deferred tax assets and liabilities are determined 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.
- --------------------------------------------------------------------------------
35
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
Comprehensive loss is $20,021,432 for the period ended December 31, 2000.
Comprehensive loss is the same as net loss for the periods ended December 31,
1999 and 1998. Accumulated other comprehensive income at December 31, 2000
consisted entirely of unrealized holding gains on available for sale securities.
STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK BASED COMPENSATION, and elected to use the intrinsic value
method in accounting for stock option plans. Accordingly, no compensation cost
has been recognized in the financial statements for these plans. The pro forma
effects of fair value accounting for compensation costs related to options on
net loss and loss per share are disclosed in Note 13.
BASIC AND DILUTED LOSS PER SHARE
Basic loss per common share is calculated using 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 because their effect was
antidilutive.
2. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In December 1999, the SEC issued Staff Accounting Bulletin No. (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 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 on up-front design and implementation fees. The
cumulative effect of this accounting change totals $52,273. This amount has been
recognized as a non-cash after tax charge during the first quarter of 2000. The
cumulative effect has been recorded as deferred revenue and will be recognized
as revenue over the remaining contractual service periods.
3. 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 PLACEMENT
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 9).
- --------------------------------------------------------------------------------
36
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
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.
CHECKFREE INVESTMENT
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 further discussion in Note 14.
4. PROPERTY AND EQUIPMENT
The following is a summary of our property and equipment at December 31, 2000
and 1999:
DECEMBER 31, DECEMBER 31,
2000 1999
----------- -----------
Furniture and fixtures $ 1,283,564 $ 216,824
Equipment 2,535,602 954,123
Software 1,394,990 545,382
Leasehold improvements 483,004 55,236
----------- -----------
697,160 1,771,565
Less: accumulated depreciation and amortization (1,178,813) (258,055)
----------- -----------
Total - property and equipment, net $ 4,518,347 $ 1,513,510
=========== ===========
Depreciation expense as reported in our Consolidated Statements of Operations
included $235,666 and $133,802 of depreciation expense related to capital leases
in 2000 and 1999, respectively. For the periods ended December 31, 2000, 1999
and 1998, the Company recorded approximately $920,759, $257,496 and $559,
respectively, of depreciation expense related to fixed assets.
5. OTHER ASSETS
At December 31, 2000, the Company had a cash deposit of approximately $516,000
related to the lease for its corporate headquarters. Additionally, it had
certificates of deposit purchased for security of long-term capital leases
totaling $335,000.
- --------------------------------------------------------------------------------
37
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
6. ACCRUED EXPENSES
Accrued expenses consist of the following balances:
DECEMBER 31, DECEMBER 31,
2000 1999
----------- -----------
Accrued salaries $ 332,337 $ 132,456
Accrued vacation 183,703 65,234
Accrued professional fees 26,573 79,686
Accrued other 354,159 21,262
----------- -----------
Total $ 896,772 $ 298,638
=========== ===========
7. 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 December 31, 2000 and 1999, there was
$498,946 and $698,998 of office and computer equipment held under capital
leases. All of the Company's capital leases are secured by certificates of
deposit totaling approximately $335,000 at December 31, 2000.
The following is a schedule, by year, of future minimum lease payments under
capital leases, together with the present value of the minimum lease payments as
of December 31, 2000:
Year ending December 31,
2001 $ 219,820
2002 158,651
---------
Total minimum lease payments 378,471
Less: amount representing interest (48,915)
---------
329,556
Less: current portion (181,128)
---------
Obligations under capital leases $ 148,428
=========
These obligations are classified as capital leases due to the bargain purchase
option contained therein.
- --------------------------------------------------------------------------------
38
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
8. OPERATING LEASES
During 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 a cash deposit of
approximately $516,000. Additionally, the Company leases office space and other
equipment under noncancelable operating leases. Rental expense under operating
leases for the year ended December 31, 2000 and 1999, was $681,000 and $116,000.
Future minimum lease payments required under operating leases, by year and in
the aggregate, consist of the following at December 31, 2000:
Year ending December 31,
2001 $1,242,212
2002 1,180,218
2003 1,180,218
2004 1,177,803
2005 880,936
----------
Total minimum lease payments $5,661,387
==========
9. 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 beared 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 15) in satisfaction of $500,000 of the note. 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 $1.5 million. 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 July 2001. The line of credit is
secured by $1.8 million of investments of the Company. At December 31, 2000, the
Company had borrowed $1.5 million on this line of credit for the security
deposit and leasehold improvements of the Company's corporate headquarters.
Subsequent to December 31, 2000, the Company paid down the entire outstanding
balance, however the line of credit remains available.
10. 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.
On September 30, 1999, the Company loaned $25,000 to an officer of the Company.
The loan was paid in full, including interest at 8%, and is included in Accounts
Receivable, Related Party at December 31, 1999.
During 2000, two officers of the Company borrowed approximately $55,000, of
which $10,000 was repaid. At December 31, 2000, approximately $45,000 of these
loans are outstanding and are included in Accounts Receivable-Related Party.
- --------------------------------------------------------------------------------
39
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
On August 16, 2000, the Company loaned an officer of the Company approximately
$60,000. The loan bears interest at a rate of 8% and is for a period of one
year. At December 31, 2000, $58,000 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 subsequent to
December 31, 2000, including interest at a rate of 8%. These amounts are
included in Accounts Receivable-Related Party at December 31, 2000.
During December 2000, the Company pledged $1.0 million of cash held in a money
market to collateralize margin loans of three officers of the Company. The
margin loans are from an institutional lender and are secured by shares of the
Company's common stock held by these officers. Additionally, the Company
guaranteed the total balance of these margin loans, which were approximately
$1.5 million at December 31, 2000. The Company has the unrestricted right to use
the pledged funds for its operations if necessary.
11. 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:
2000 1999 1998
----------- ----------- -----------
Deferred Tax Assets:
Warrant expense $ 2,713,006 $ -- $ --
Deferred revenue 280,840 -- --
Start-up and organizational costs 242,432 283,075 --
Accrued expenses 108,155 -- --
Research credit 38,153 38,153 --
Amortization 5,525 2,210 --
Allowance for Doubtful Accounts 3,400 -- --
Trademark cost 721 774 --
Other 2,710 -- --
Net operating loss 5,562,499 1,683,551 98,000
----------- ----------- -----------
8,957,441 2,007,763 98,000
Valuation allowance (8,800,051) (1,990,513) (98,000)
----------- ----------- -----------
Total Deferred Tax Asset 157,390 17,250 --
Deferred Tax Liabilities:
Depreciation 75,694 11,558 --
Prepaid expenses 74,896 5,692 --
Other 6,800 -- --
----------- ----------- -----------
Total Deferred Tax Liabilities 157,390 17,250 --
----------- ----------- -----------
Net Deferred Tax Asset
(Liability) $ -- $ -- $ --
=========== =========== ===========
At December 31, 2000 and December 31, 1999, the Company generated net operating
losses for tax purposes of approximately $12.0 million and $4.95 million,
respectively. The loss for year ended December 31, 2000 expires in 2021, and the
loss for year ended December 31, 1999 expires in 2020. The $290,000 net
operating loss generated in the period ended December 31, 1998 was reclassified
in 1999 as a start-up deferred tax asset. 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 $8.8 million has been recognized to offset the deferred tax assets
related to various temporary differences at December 31, 2000.
- --------------------------------------------------------------------------------
40
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
2000 1999 1998
----------- ----------- -----------
Tax at US statutory rate -- 34% $(6,802,830) $(1,860,802) $ (98,000)
Change in valuation allowance 6,809,538 1,892,513 98,000
Permanent and other differences 31,445 6,442
Research credit (38,153) (38,153)
----------- ----------- -----------
Income Tax Expense $ -- $ -- $ --
=========== =========== ===========
12. EQUITY SUBJECT TO POTENTIAL REDEMPTION
On or about December 3, 1998, when the Company was under the control of former
management and known as Goldking Resources, Inc., the Company concluded an
offering of approximately 5.3 million shares of common stock. This transaction
was completed through the cancellation of approximately 6.2 million shares held
by shareholders who tendered their shares to the Company, followed by the
Company's issuance of 5.3 million shares to 15 new shareholders, who paid par
value to the Company for such shares, in the total amount of approximately
$5,300. The new shareholders also paid an additional $300,000 to the
shareholders who had agreed to cancel their shares. Subsequently, some of these
new shareholders sold shares into the secondary market. Form D was filed with
the SEC to timely report the transaction, and an exemption under Rule 504 was
claimed. The SEC has challenged the validity of this claimed exemption.
The Company disputes the following assertions, but it is possible that the
issuance of shares described above may have violated provisions of the federal
and state securities laws which subjects the Company to fines, penalties or
other regulatory enforcement action. There can be no assurance that the SEC or
applicable state authorities will not pursue any enforcement action. The Company
disputes any such liability.
Additionally, while the Company also disputes the following assertions, it is
possible that shareholders who purchased the shares described above may have the
right under state and federal securities laws to require the Company to
repurchase their shares for the amount originally paid, plus interest. The
Company disputes any such liability.
Based upon the best information available at this time, the Company has
calculated a range of possible, but disputed, exposure that exists in light of
the disputed civil liabilities described above. Accordingly, in the event these
disputed civil liabilities were successfully asserted, the Company could be
liable to the 15 new shareholders, and to any shareholder that immediately
purchased from these 15 shareholders, in an amount ranging from approximately
$5,300 up to approximately $2.9 million, plus interest. This range of possible
exposure is calculated by reference to the average closing price for a share of
common stock, weighted for reported daily volume, during December 1998 and
January 1999; then number of shares possibly sold during the same period of
time; and the closing price of one share on November 11, 1999. The foregoing
range could be adjusted higher or lower depending upon adjustments to any of the
referenced items, and as any new information becomes available.
13. EMPLOYMENT BENEFIT PLANS
STOCK OPTION PLANS
The Board of Directors and shareholders adopted the 1999 Employees 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. A total of 2,000,000 shares of common stock had been reserved
under the Employee Plan at December 31, 1999. On July 13, 2000, the Board of
Directors and shareholders approved an additional 1,000,000 shares of common
stock under the employee plan.
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. At December 31,
2000, options to purchase 2,876,375 shares had been granted under the Employee
Plan.
- --------------------------------------------------------------------------------
41
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
The 1999 Non-Employee Director Plan ("Director Plan") was approved by
shareholders in 1999 and covers an aggregate of 500,000 shares of common stock.
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. At December 31, 2000, options to purchase 290,000 shares
had been granted under the Non-Employee Plan.
SUPPLEMENTAL DISCLOSURES FOR STOCK-BASED COMPENSATION
Activity under the Employee Plan and Director Plan from inception to December
31, 2000 is as follows:
NUMBER OF WEIGHTED AVG.
SHARES EXERCISE PRICE
------ --------------
Inception of Plan, 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
Summarized information about stock options outstanding at December 31, 2000 is
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF EXERCISE OPTIONS REMAINING AVERAGE NUMBER OF WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
- -------------------- ---------- ----------------- --------------- --------- ---------------
$2.063 928,850 9.99 $ 2.063 0 --
$2.812 - $4.375 737,900 8.43 $ 3.285 205,638 $3.281
$4.500 - $7.750 779,350 9.05 $ 6.496 94,735 $4.967
$7.843 - $11.250 445,575 9.29 $10.880 0 --
$11.875 7,500 9.07 $11.875 0 --
- -------------------- ---------- ----------------- --------------- --------- ---------------
$2.063 - $11.875 2,899,175 9.23 $ 4.946 300,373 $3.813
- --------------------------------------------------------------------------------
42
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
STOCK OPTION PLAN (continued)
The fair value of each option granted during 2000 and 1999 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions:
2000 1999
---- ----
Dividend yield None None
Expected volatility 1.18 1.02
Risk-free interest rate 5.22% 6.25%
Expected life 3.98 3.50
Had compensation cost for 2000 and 1999 stock option grants been determined
consistent with SFAS 123, net loss and net loss per share would approximate the
pro forma amounts below:
2000 1999
-------------------------- -------------------------
NET LOSS NET LOSS
NET LOSS PER SHARE NET LOSS PER SHARE
------------- ------- ------------ --------
As reported ($20,008,323) ($1.35) ($5,472,948) ($0.50)
Pro forma ($23,778,759) ($1.61) ($6,476,551) ($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.
STOCK PURCHASE PLAN
The Company established the 1999 Employee Stock Purchase Plan ("Purchase Plan")
that was approved by the stockholders at the 1999 Annual Meeting of
Stockholders. The Purchase Plan allows eligible employees to purchase the
Company's common stock at regular intervals by means of wage and salary
deferrals. The first offering period under the Purchase Plan began January 1,
2000. During 2000, 17,848 shares were issued and an additional 69,299 were
issued in January 2001 for wages and salaries that were deferred in 2000.
401(K) PLAN
The Company adopted a 401(K) plan in May 1999. No employer contributions were
made for the years ended December 31, 2000 and 1999.
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, 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, 2000.
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.
- --------------------------------------------------------------------------------
43
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
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 3), 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 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 $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. 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, 2000, none
of these incentive warrants have vested.
At December 31, 2000, 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
--------- ------------
2,310,709 $ 25,433,276
========= ============
- --------------------------------------------------------------------------------
44
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
15. COMMON STOCK LISTING
billserv.com 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".
16. SUBSEQUENT EVENTS
In March 2001, the Company issued 2,881,862 shares of common stock under a
private placement offering (the "2001 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 approximately $565,000, which included
approximately $540,000, or 7.5% of the Offering, paid to the placement agent.
The Company will file a registration statement with the SEC and seek
registration of the shares issued in the 2001 Offering.
17. QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data for 1999 and 2000 is presented below.
1999
First Second Third Fourth (1)
---------------------------------------------------------------
Revenue -- -- -- $ 55,438
Gross margin (Loss) -- -- -- $ (71,907)
Net income (Loss) $ (800,860) $ (1,650,631) $ (1,539,858) $ (1,481,599)
Earnings per share-
basic and diluted $ (0.08) $ (0.16) $ (0.14) $ (0.12)
Weighted average shares 10,030,000 10,227,606 10,976,428 12,244,908
2000
First Second Third Fourth
---------------------------------------------------------------
Revenue $ 6,426 $ 45,208 $ 106,564 $ 454,142
Gross margin $ (464,265) $ (747,703) $ (953,708) $ (875,144)
Net income (Loss) $ (2,071,213) $(10,184,683) $ (3,770,212) $ (3,982,215)
Earnings per share-
basic and diluted $ (0.16) $ (0.68) $ (0.24) $ (0.26)
Weighted average shares 13,230,142 14,874,517 15,525,973 15,527,870
(1) The accounting change related to SAB 101 has not been reflected in the
financials prior to its adoption.
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 24, 2001, 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 herein, by reference, that portion of the Company's
definitive proxy statement for the 2001 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." See also the information in Item 4a. of Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
There is incorporated in this Item 11, by reference, that portion of the
Company's definitive proxy statement for the 2000 Annual Meeting of
Stockholders, which appears under the caption "Executive Compensation."
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 2000 Annual Meeting of
Stockholders, which appears under the caption "Beneficial Owners of Common
Stock."
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.
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 is paying PMG Capital a
$5,000 monthly retainer. Under the agreement, the Company is 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 2000 was approximately $184,000. Mr. Hoch used the proceeds of the
$60,000 loan for usual and customary living expenses.
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 that are held by Mr. Hoch. At December 31, 2000, an
aggregate of $184,000 is outstanding under these loans.
During 2000, the Company paid CheckFree approximately $100,000 for services
related to implementing billers.
- --------------------------------------------------------------------------------
46
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
10.1 1999 Employee Comprehensive Stock Plan, as amended, incorporated by
reference from the Proxy Statement on Form 14(A), filed with the SEC on
June 2, 2000.
10.2 Employment Agreement dated April 17, 2000, between the Company and Terri
A. Hunter, Senior Vice President and Chief Financial Officer of the
Company (filed herewith).
10.3 Employment Agreement dated June 23, 2000, between the Company and Tony
Diamond, Senior Vice President, Sales and Marketing (filed herewith).
21.1 bills.com, Inc. and billserv.com-canada, Inc. are subsidiaries of
billserv.com, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors pertaining to the
billserv.com, Inc. 1999 Employee Comprehensive Stock Plan, the
billserv.com, Inc. 1999 Non-Employee Director Plan and the
billserv.com, Inc. 1999 Employee Stock Purchase Plan, each having
a registration statement filed with the SEC on form S-8 on February 23,
2000 (filed herewith).
99.1 Rights Agreement, dated as of October 4, incorporated by reference from
the Registration Statement on Form 8-A filed with the SEC on October 11,
2000.
- --------------------------------------------------------------------------------
47
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.com, Inc.
A Nevada Corporation
By: /s/ Louis A. Hoch
------------------------------------------
Louis A. Hoch
President, Chief Operating Officer,
and Director
Date: 3/30/2001
-----------------------------------------
By: /s/ Michael R. Long
--------------------------------------------
Michael R. Long
Chief Executive Officer and Chairman of
the Board of Directors
Date: 3/30/2001
------------------------------------------
By: /s/ David S. Jones
--------------------------------------------
David S. Jones
Executive Vice President and Director
Date: 3/30/2001
------------------------------------------
By: /s/ Roger Hemminghaus
--------------------------------------------
Roger Hemminghaus
Director
Date: 3/30/2001
------------------------------------------
By: /s/ E. Scott Crist
--------------------------------------------
E. Scott Crist
Director
Date: 3/30/2001
------------------------------------------
By: /s/ Terri A. Hunter
--------------------------------------------
Terri A. Hunter
Senior Vice President, Chief Financial Officer,
And Principal Accounting Officer
Date: 3/30/2001
------------------------------------------
- --------------------------------------------------------------------------------
48