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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-30152
BILLSERV, INC.
(Exact name of registrant as specified in its charter)
NEVADA 98-0190072
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
211 NORTH LOOP 1604, SUITE 100, SAN ANTONIO, TEXAS 78232
(Address of principal executive offices, including Zip Code)
(210) 402-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.001 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 20, 2002, was $21,404,371. As of March 20, 2002,
20,581,126 shares of the registrant's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Registrant's Annual Meeting
of Stockholders to be held May 23, 2002, are incorporated by reference in Part
III of this Report.
BILLSERV, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
INDEX
Page
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PART I
Item 1. Business _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _3
Item 2. Properties _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _10
Item 3. Legal Proceedings _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _10
Item 4. Submission of Matters to a Vote of Security Holders _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters _ _ _ _ _ _ _ _ _ _ _ _ _11
Item 6. Selected Financial Data _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations _ _ _ _ _12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _21
Item 8. Financial Statements and Supplementary Data _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure _ _ _ _ _40
PART III
Item 10. Directors and Executive Officers of the Registrant_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _41
Item 11. Executive Compensation _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _41
Item 12. Security Ownership of Certain Beneficial Owners and Management_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _41
Item 13. Certain Relationships and Related Transactions _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _42
Signatures_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _43
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 Risk Factors section of Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of this Annual Report on Form 10-K. 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.
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PART I
ITEM 1. BUSINESS
All references to "we," "us," "our," "Billserv" or the "Company" in this Annual
Report on Form 10-K mean Billserv, Inc. and its consolidated subsidiaries.
GENERAL
Billserv provides Electronic Bill Presentment and Payment ("EBPP") and related
services to companies that generate recurring paper-based bills. EBPP is the
process of presenting a bill in a secure environment on the Internet and
facilitating payment of the bill utilizing an electronic transfer of funds.
Billserv provides a cost-effective, turnkey outsourced solution that enables our
clients to offer EBPP services to their customers and to utilize that channel to
enhance their business, Internet and customer relationship management
strategies. The EBPP medium allows billers to establish an interactive, online
relationship with their customers, creating avenues for 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 provide our customers a
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. We have
designed our system so that it is reliable, flexible, and expandable 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.
We currently market our services through a direct sales force and through
organizations that resell our services to their clients and prospects. As of
December 31, 2001, we have signed 101 billers who generate approximately 1.3
billion paper-based bills annually (or approximately 7% of the total annual
bills produced in the United States). Of these billers, 84 are in a full
production environment and 17 are in various stages of implementation.
Billserv's customers include notable companies such as AFSA Data Corporation,
AT&T Corporation, Chevron, Time Warner Cable, Waste Management and Sallie Mae
Corporation. The Company was founded in July 1998 and is incorporated in the
State of Nevada. Billserv operates primarily in the United States as a single
operating segment, although it also operates in Australia and Canada on a
limited basis. Foreign operations began in 2000; however, the impact financially
of expanding internationally is not significant as of December 31, 2001.
INDUSTRY BACKGROUND
As a paper-based process, bill presentment and payment are the most regular and
critical functions in which most businesses engage. For many companies,
particularly those generating recurring bills, the bill represents a critical
touch point for maintaining and improving customer loyalty, and a valuable
opportunity to increase revenues through up- and cross-selling. However, the
paper-based bill delivery and payment process is expensive and inefficient for
both businesses and consumers. Additionally, paper-based bills are limited in
their functionality. The potential for personalization is limited, and there are
few opportunities for companies to engage in interactive communication with
their customers through the paper-based bill payment experience.
The majority of paper-based bills are recurring monthly or quarterly invoices
mailed to consumers by communications companies (such as telephone and cable
companies), utilities, newspapers and financial institutions such as banks and
other lenders. Paper bills are prepared either by the company itself or by an
outsourced bill fulfillment vendor. Creating and distributing a paper bill is a
costly, multiple-step process that includes extracting relevant data from the
internal accounts receivable system of the company, organizing the data into a
billing format, printing and separating the bills, inserting the bills into
envelopes, applying postage and mailing the bill to the consumer. Similarly, the
paper-based payment process is time-consuming and can be costly for the
consumer.
OUR MARKET OPPORTUNITY
GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE
The Internet has emerged as a significant global medium for communication,
information and commerce. According to the U.S. Commerce Department, 143 million
Americans, or 54% of the country, were using the Internet as of September 2001,
and the number was growing at the rate of 2 million per month. Because of the
Internet's increasing adoption rate, businesses have a growing opportunity to
conduct commerce and communicate with their customers and business partners over
the Internet.
One of the consequences of the widespread growth and acceptance of Web use is
that consumers are rapidly embracing the ability to pay their bills and conduct
other personal business over the Internet. Gartner Group, an independent market
research firm, projects that by the end of 2003, 64
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million Americans will be viewing their credit card and other billing statements
electronically, which is a 100% increase from the estimated 32 million that were
doing so at the end of 2001. Accordingly, we believe there is a substantial
potential for growth in EBPP and related services.
The growth in the use of the Internet has also transformed the competitive
landscape in many industries. To remain competitive, many companies are seeking
to leverage the Internet to provide operational efficiencies, create new revenue
opportunities and maximize the longevity and profitability of their customer
relationships. Many companies, particularly those generating recurring
paper-based bills, such as utilities and telecommunications providers, are
increasingly recognizing that an Internet-based 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. EBPP enables companies to enhance this
touch point by leveraging the capabilities of the Internet to promote customer
loyalty, provide enhanced customer service, increase control over the critical
billing process, enhance up- and cross-selling opportunities by utilizing the
direct marketing and interactive capabilities of the Internet and improve the
effectiveness of customer marketing by providing real-time market intelligence
on customers. Companies can also realize significant cost savings by moving to
an electronic billing process from a paper-based system, especially given the
recent trend of steadily rising postal rates.
CHALLENGES FOR COMPANIES IN ADOPTING EBPP
While companies may recognize the critical role that EBPP will play in their
mission critical Internet and customer relationship management strategies, they
face significant challenges in the development, implementation and management of
their EBPP solution. To execute a successful EBPP strategy, companies should
purchase, successfully implement and maintain:
o Software that enables the company to parse and decode bill data print
streams
o In-house servers that update and display bill content
o Automated clearinghouse software that enables the company to instruct its
bank to electronically debit consumer accounts
o Messaging software that enables the company to communicate with multiple
aggregators
o A dedicated interface with a major bank that enables the company to receive
funds and data through automated clearinghouse transactions
o Lockbox software that enables the company to update internal accounts
receivable files
o Customer support software and technical infrastructure that enables a
company to support the EBPP process with Internet- enabled customer care
In addition, companies must make arrangements with multiple aggregators, such as
CheckFree, Spectrum, Mastercard RPPS, Paytrust and Metavante, or front ends,
such as Internet portals or financial institutions' Web sites that present bills
to consumers, and manage those multiple relationships on an ongoing basis.
Many companies lack the resources, expertise and/or inclination to develop,
implement and manage their own EBPP solution in a cost-effective manner. These
issues are compounded by the current state of the EBPP industry, which can be
characterized by rapid technological change, disparate standards and competing
business models.
THE BILLSERV SOLUTION
Our solution provides a comprehensive and cost-effective outsourced solution
that enables 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 use our internal expertise
and integrate 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, our customers can 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 90 days, without diverting critical time and
financial resources from their core competencies. The time-to-market of an
EBPP offering is important to our customers because it enables them to
rapidly address the opportunities presented by an EBPP solution.
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o Reduced Capital Requirements and Technology Risk - Outsourcing the design,
development, installation and management of their entire EBPP process
reduces the costs and administrative burden on our customers by eliminating
the need to develop and manage an in-house system and by capitalizing on
our economies of scale and implementation expertise.
o Broad Distribution - Our relationships with multiple EBPP aggregators and
other front-ends enable our customers to publish their bills through
multiple presenters and our Direct Delivery product enables the presentment
of bills straight to the consumer's email inbox. These distribution
channels provide our clients with the ability to offer their customers
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 improve customer retention, increase customer loyalty 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), 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.
o Transaction-Based Pricing - Our customers pay an up-front fee that covers
basic implementation with transaction-based pricing going forward that 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 outsourced solution provider of EBPP and related
services. In order to achieve this goal, we are implementing a strategy
consisting of the following key elements:
ACQUIRE ADDITIONAL BILLING CUSTOMERS
We believe that establishing a large customer base that distributes a
significant number of recurring paper-based bills is critical to the long-term
success of our business. We intend to continue expanding our customer base,
targeting those companies with a high likelihood of generating significant
revenue. We focus our sales efforts on local billers that deliver the majority
of paper-based bills in selected metropolitan areas in the country (based upon
the number of online households), as well as those regional and national billers
that deliver bills to these same consumers. We are also actively building a
network of organizations that resell our services to their clients and
prospects. Our partners leverage relationships with existing and prospective
clients, using our EBPP capabilities as a chance to retain or obtain new
accounts, as well enhance profit margins. This strategy allows us to take
advantage of a matrix of opportunities that arise from the sales activities of
our resellers in conjunction with our direct sales efforts.
We have adopted a balanced approach to reseller selection, based on their market
orientation, national presence, account base, and sales capabilities. 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. Our direct sales staff promotes business with our
partners on both the corporate level and a localized basis. The direct sales
staff coordinates their development efforts with resellers to achieve
comprehensive coverage of targeted markets.
POSITIVELY INFLUENCE CONSUMER ADOPTION RATES
We believe that the rate at which consumers begin utilizing EBPP services,
commonly referred to as the "consumer adoption rate," is a critical factor to
the long-term success of our business. A major component of our growth strategy
involves not only obtaining additional customers, but also actively assisting
contracted billers in developing a strategy designed to encourage the highest
possible acceptance of EBPP services by their consumers. This includes
incorporating our adoption-building Preferred Enrollment Program as part of a
customized EBPP solution for direct billing clients. This program consists of
process and service offerings that build adoption at the time of new account
acquisition and facilitate the accelerated conversion of existing paper-based
consumers to EBPP services. Program components include Auto Enrollment of our
clients' new customers, Online Demonstrations that walk consumers through the
client's bill presentment and payment site, Online Enrollment Assistance to
provide instant online help to consumers, and Instant Activation that allows
consumers immediate access to view and pay bills online upon enrollment.
Additionally, we assign a dedicated Account Manager to each of our clients to
assist them in maximizing consumer adoption of their EBPP services and help them
realize a higher return on their investment. Our Account Managers work with
their clients to
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develop a tailored marketing strategy designed to increase the EBPP adoption
rate of 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, such as bill messages, bill
inserts, direct mail letters and enrollment feedback letters
o Developing public relations materials regarding their EBPP services
o Planning an effective advertising campaign regarding their EBPP services,
including broadcast and print advertisements
o Planning an Internet marketing campaign, including banner advertisements,
online promotional tactics and cost analysis
o Assisting in the customer launch process
o Assisting in the development of a regional marketing strategy
o Developing cross-marketing and co-marketing opportunities with other
billers, banks and bill payment Web sites
Another adoption-driving program we provide is our branded EPI-Center strategy,
which stands for Electronic Payment Innovation CENTER. Our EPI-Center strategy's
objective is to positively influence consumer adoption rates within specific
metropolitan areas by working with local, regional and national billers to
deliver cooperative adoption marketing messages to volumes of households. 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
EPI-Center strategy, we provide local billers the plan and communications to
allow them to partner with other local, regional and national billers (e.g.,
utilities, telecommunications companies, cable companies, etc.) and Consumer
Service Providers (i.e., financial institutions, Web portals, or any site where
consumers go to view and pay their bills), thereby communicating the
availability of a critical mass of bills and positively affecting consumer
adoption rates.
To date, we have seen positive results from marketing programs designed to
enhance adoption rates. Billers that are marketing aggressively to their
consumer base or have favorable consumer demographics, such as high Internet
usage, are experiencing adoption rates of between 3.5% and 15.0%.
Finally, connecting companies to customers through the widest array of Web sites
from which to receive, view, pay and manage bills is also an important step
towards realizing increased customer adoption. In this regard, the Company
recently announced that it was the first billing service provider (BSP) to
transmit e-bills to MasterCard RPPS. Our efforts to provide clients with
distribution to all major aggregators will be a continuing focus for the
Company.
EXPAND AND LEVERAGE STRATEGIC RELATIONSHIPS AND PARTNERSHIPS
An important element of the Company's strategy is to strengthen and expand its
relationships with strategic allies and partners to increase the market
awareness, demand and acceptance of EBPP and value of Billserv's solution. We
have formed strategic partnerships with key technology providers and companies
serving the EBPP industry 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,
CheckFree iSolutions and ACI Worldwide, 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 receive,
view, pay and manage bills as well as provide electronic payments and
remittance information back to our customer. Our billing distribution
partners include CheckFree, Spectrum, MasterCard RPPS, Paytrust and
Metavante;
o Payment processing partners, such as Bank One and Paymentech, Inc., that
facilitate the electronic payments to our customers who utilize a biller
direct solution; and
o Reselling partners, such as Sallie Mae Solutions and Bank One, which resell
our solution to their customer base.
A strategic ally can also provide our customers with additional resources and
expertise, especially in vertical or geographic markets in which the partner has
expertise, to help meet our customers' system definition and application
development requirements. We intend to enhance the quality of our solution by
continuing to pursue and enter into strategic relationships and partnerships
with companies that offer us the opportunity to benefit from the relationship.
ACCELERATE THE TIME 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, thereby
increasing the return on their investment. In order to help achieve this
objective, we assign a dedicated Account Manager and technical project team from
the beginning of the planning and implementation process for each customer to
ensure that the project implementation is completed effectively and on time. The
design of our solution also contributes to an efficient and timely deployment.
Our core system consists of four major proprietary gateways: financial,
aggregator, biller and email, which support a variety of emerging standards for
data exchange and enable us to offer a quick implementation. These interfaces
give us the ability to integrate with our customers' legacy applications,
without disrupting or
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changing their internal systems, as well as external software applications. The
modular design and integrative features of our products and services allows our
clients to choose from a menu of components and still have a system implemented
in as little as 90 days. We believe that our system design and approach
utilizing a dedicated team has a positive influence on the timing and
effectiveness of the implementation of our EBPP solution for our customers.
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 also
market our solutions in Canada and Australia. We plan on continuing to market
our solution outside the United States in the future. However, that expansion
will take place in a fashion that brings strength of local country partnerships
and minimizes the capital investment made by us to expand into these countries.
For example, during 2001, the Company acquired a 50% interest in a corporate
joint venture operating in Australia to provide EBPP services. The equal partner
in this venture is Salmat, the leading customer communications company in
Australia specializing in document management solutions, letterbox delivery,
data solutions, teleservices, fulfilment and customer targeting. The venture
recently presented the first live electronic bill through a banking Web site in
Australia for payment through BPAY, Australia's leading electronic bill payment
service. We believe the demand for EBPP solutions is developing in Australia and
presents a viable market opportunity through our partnership with Salmat.
EXPAND SERVICE OFFERINGS
We have recently begun marketing a more comprehensive offering that delivers a
single, outsourced solution for developing customer relationships utilizing the
electronic bill as a dynamic communication medium. By integrating our electronic
billing capabilities with Internet-enabled direct marketing and communication
("IDMC") services and online real-time customer care support provided by our
Internet Interaction Center ("IIC"), Billserv effectively creates a media
network that puts billers in direct, interactive contact with their customers.
We are actively promoting our Customer Communication Networks to qualified
prospective billers as well as converting existing clients to this enhanced
service. In addition to the current components integrated into our solution, we
intend to offer enhanced products and services that could further broaden the
capabilities and revenue-generating potential of our solution. These enhanced
offerings will primarily be in the areas of IDMC and customer relationship
management services.
We believe that customer relationships can be enhanced through the effective use
of our comprehensive EBPP solution. Specifically, each time a consumer receives
and pays a bill online or utilizes our customer care solution, valuable data
about the interaction is obtained and stored in a database. Critical information
such as customer case histories, account balances and product configuration
details is presented or "popped" onto the service representative's screen at the
exact moment the consumer makes contact. As such, representatives are able to
provide better service more quickly, and consumers feel as though our customer
knows them individually and understands their particular needs. We are also able
to utilize this information to better anticipate the needs of a consumer in
advance of the next consumer contact. This information may also be used to
assist our customers in identifying specific consumer needs and possible
consumer segments that could be used to provide differentiated services such as
direct marketing or specific product offers.
COMPONENTS OF THE BILLSERV 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 menu approach to offering our integrated products and
services also allows us to tailor our customers' EBPP solution to their business
and marketing objectives. The available 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 outsourced creation
and management of presentment and payment processes for a biller direct site and
all aggregator sites, as well as payment processing and full reporting and
reconciliation capabilities. An optional service that our clients can utilize is
Direct Delivery, which offers a delivery medium whereby the electronic bill is
"pushed" directly to the consumer's email inbox. This service gives consumers
the opportunity to view their bill and make payments directly from the email by
clicking the "pay" button found within. In conjunction with our eServ offering,
clients may also choose to employ other optional services such as eInsert, our
IDMC product that provides a targeted messaging medium that interacts with
consumers individually by dynamically presenting customized communication
campaigns directly on the electronic bill statement.
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eCare
eCare is our Internet-enabled customer care solution supporting the EBPP
process. We currently offer eCare in two separate models, eCare View and eCare
Connect. eCare View is a proprietary, multi-function, Web-based desktop browser
product that provides access to the consumer's bill detail stored on our
servers. We provide a tool for our client's customer service representatives
("CSRs") to deliver customer service to all consumers, including those not using
the Internet. eCare Connect provides enhanced capabilities by utilizing licensed
Internet collaboration software to enable interaction with consumers over the
Internet in a variety of ways, such as email, Web collaboration (Web-chat) and
voice-over Internet protocol (VoIP), and also provides capabilities for extended
Customer Relationship Management ("CRM") services. We have developed proprietary
customer relationship management software applications that enable us to
intelligently and efficiently analyze data obtained through the EBPP process,
including eServ and eCare interactions. eCare Outsourced is available through
our Internet Interaction Center ("IIC") to provide the client with essentially
the same functionality as eCare Connect, using our employees to perform customer
service on behalf of the client. This service can be a fully outsourced model in
which our client chooses not to provide direct in-house services. Alternatively,
this service model may be used as an after-hours support function that
supplements and extends our client's existing service center hours of operation.
eConsulting
eConsulting is Billserv's professional services group that offers electronic
billing, customer care, project management, and IT consulting services to both
existing billing 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 to acquire data-centric
(Internet-based) customer care knowledge.
ASP Gateway Services
Billserv's ASP Gateway Services offers billers who are already participating in
EBPP a single distribution point to virtually all bill presentment and payment
locations across the World Wide Web. The ASP Gateway Service is designed to
improve a biller's existing EBPP system, whether an in-house solution, biller
direct site or limited distribution channel, by expanding the range of
distribution partners. Billserv serves as the single point of contact to the
distribution network which gives billers a cost-effective means to make bills
more accessible to consumers. Billserv's unique ASP Gateway specifications may
also be embedded as an OEM (Original Equipment Manufacturer) component within
companies' software or service offerings, affording such vendors a
cost-effective, proven method to give their clients and consumers the ability to
make online payments, and view and pay bills anytime, anywhere through bank and
internet payment portals.
bills.com
Billserv operates a consumer Web site, or portal, focused on providing bill
presentment and payment services under the domain name www.bills.com. The
bills.com strategy is to provide the consumer with an efficient and secure
interface for viewing, paying and managing bills via the Internet. We have
recently begun to market this portal service to online financial services
providers looking to provide EBPP capabilities as part of their service
offering.
PRODUCT DEVELOPMENT
Our total research and development expenses were $760,082, $767,751 and $906,532
for 2001, 2000 and 1999, respectively. We have created a proprietary technology
infrastructure to support all of the components of our solution. Our systems
consist primarily of proprietary software applications that we have integrated
with what we consider "best of breed" third party hardware and software
platforms. We have designed our system so that it is reliable, flexible, and
easily expanded to meet growth demands without significant cost or change. Our
support for open standards allows us to integrate with any third party
print-stream parser, as well as in-house EBPP solutions. In addition, these
widely used object oriented standards have provided us with a highly 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.
The Company believes that its success will depend in part upon its ability to
enhance existing products and develop or acquire new products that meet the
needs of the rapidly evolving EBPP market. The Company intends to continue to
devote resources to expanding its product offerings, introducing new products
and services, and offering higher levels of integration among its products. We
also intend to continue to evaluate and enhance our systems as new technology is
developed to maintain a competitive advantage.
SALES AND MARKETING
Our sales strategy targets both direct and indirect sales. Leads for sales are
obtained through resellers, direct contact by our sales personnel, and our
marketing efforts to existing clients led by our Account Management team. We
have a direct sales staff with
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8
responsibilities for local, regional and national billers in various industries.
In addition, we manage a number of strategic relationships with major financial
institutions, print houses and technology providers to resell our services to
their existing and prospective customer bases. Reselling partners generate and
qualify sales leads, make initial contacts, assess client needs and recommend
use of a Billserv solution, and introduce Billserv at high levels within the
customer organization.
Our marketing efforts are primarily EBPP adoption-focused. Our professional
staff of Account Managers actively assists our clients in creating programs to
encourage their consumers to utilize EBPP. The shared knowledge of our staff,
combined with the cumulative experience of our entire customer base, enables
them to provide valuable leadership as we work to build consumer adoption rates.
We also participate in limited corporate marketing that promotes the Billserv
brand and provides leads to our sales staff for qualifying and follow-up.
Our EPI-Center strategy was developed to positively influence consumer adoption
rates through the coordination of sales and marketing efforts in select
metropolitan areas. We are working to attain our adoption rate objectives in
each market primarily by focusing sales efforts on those local, regional and
national billers that deliver the majority of bills to local consumers, and
working with the community of billers to deliver coordinated marketing messages
to volumes of households. The billers that we target include media partners
(newspapers, cable operators), service providers (utilities,
telecommunications), cross-markets (ISP's), and affinity providers (local
governments, universities). The Billserv-sponsored EPI-Center Web site may be
viewed at www.ebillepicenter.com.
CUSTOMERS
Our primary market focus will be on both top-tier and middle-market companies
generating recurring (usually monthly) paper-based bills within a specific
geographical market. Through our geographic sales focus, we look to capture
significant companies (i.e., utilities, telephone providers, cable operators,
etc.) generating recurring paper-based bills in each targeted geographic region,
thereby achieving the necessary critical mass and driving consumer adoption
rates. An additional market focus will be on larger companies in select vertical
markets, such as the insurance industry and the financial services industry,
that are generating a significant amount of recurring paper-based bills, as well
as traditional outsourced print and mail enterprises whose customers could
benefit from an EBPP solution.
EBPP services provided to Reliant Energy accounted for approximately 23% and 40%
of total consolidated revenues for the years ended December 31, 2001 and 2000,
respectively. This customer is planning to develop an in-house EBPP solution
during 2002 utilizing Billserv's transition plan that allows a customer to move
from an outsourced solution provided by Billserv to an in-house solution of the
customer's choosing. We expect the resulting loss of transaction revenues to be
mitigated by fees generated from consulting services provided to Reliant Energy
related to the transition of their EBPP capabilities to an in-house solution.
Also, 27% of total consolidated revenues for 2000 were attributable to a single
customer for which we are no longer providing services. Total consolidated
revenues in 1999 were not significant, as the Company did not begin generating
revenue until the fourth quarter of 1999.
COMPETITION
The market for EBPP services is highly competitive. We compete primarily with
companies that provide turnkey outsourced EBPP solutions for customers. These
companies include Metavante, Princeton eCom Corporation and DST Output (formerly
YourAccounts.com). In addition, we expect that other companies, such as
traditional information technology services companies and systems integrators,
may introduce services that compete with us. Remaining competitive in the EBPP
market will require a continued investment in new technologies, marketing and a
high level of customer service. We believe that the principal competitive
factors in our market include:
o System reliability and performance
o Ability to provide a CRM component
o Price and other financial terms
o Technological support and customer service
o Time-to-market of implemented solutions
o Strategic relationships with aggregators, front-ends and technology
providers
o Compliance with industry and technological standards
We also face potential competition from a number of other companies that compete
with us indirectly. These include aggregators, such as CheckFree Corporation;
EBPP front-ends, such as financial institutions and Internet portals; EBPP
software providers, such as eDocs and Avolent; and traditional bill printing
companies, such as Electronic Data Systems Corporation, CSG Interactive LLC, and
Cable Data. In addition, several companies are addressing the emergence of the
Internet banking industry with service bureau offerings, which could include
electronic bill presentment. These competitors have significant market presence
and financial resources. If they enter our market, we may not have sufficient
resources to continue to make the investments or achieve the technological
advances necessary to compete successfully.
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9
TRADEMARKS
We own federally registered trademarks of the following marks: Billserv, Inc.,
Billserv, Inc. and design, Bills.com, Bills.com and design, eServ, and Click
your bills goodbye. eCare is a federally registered trademark of Nebo Systems,
Inc. and is being used by permission. In addition, we have filed trademark
applications for the following marks: eServ Express, eServ Select, eInsert,
eConsulting, EPI-Center, and Connecting Companies to Customers.
We have also secured the following domain name registrations:
bills.com ebillepicenter.com
billserv.com mybillers.com
billserv.cc mypaymentbook.com
billserv.inc mypaymentbook.org
billserv.org mypaymentbook.net
billserv.law payb2bbill.com
billserv.tech securebills.com
billerregistry.com securebills.cc
b2bpayserv.com securebills.net
ebillcare.com
We rely on a combination of copyright, trademark and trade secret laws, employee
and third party nondisclosure agreements and other intellectual property
protection methods to protect our services and related products.
EMPLOYEES
As of December 31, 2001, we had 108 employees. We are not a party to any
collective bargaining agreements. We believe that our relations with our
employees are good.
ITEM 2. PROPERTIES
As of December 31, 2001, our headquarters and operations were housed in
approximately 63,000 square feet of leased office space in San Antonio, Texas.
The Company believes its existing facilities will be adequate to meet its
anticipated needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation currently pending. We are not aware of any
disputes that may lead to material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's stockholders during
the fourth quarter of fiscal year 2001.
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10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock was traded on the National Association of Securities Dealers
("NASD") Over the Counter Bulletin Board ("OTC BB") through March 13, 2000 at
which time our common stock was approved for trading on the NASDAQ Small Cap
Market. Subsequently, our stock was approved for trading on the NASDAQ National
Market on July 31, 2000 under the symbol "BLLS."
The following table sets forth for the quarterly periods indicated the range of
high and low closing prices of the common stock as reported.
High Low
---------- ----------
2001
--------------------
First Quarter $ 5.38 $ 2.16
Second Quarter $ 3.05 $ 1.88
Third Quarter $ 2.20 $ 0.73
Fourth Quarter $ 1.55 $ 0.80
2000
--------------------
First Quarter $ 31.88 $ 7.63
Second Quarter $ 19.50 $ 9.13
Third Quarter $ 9.19 $ 6.25
Fourth Quarter $ 7.75 $ 2.06
HOLDERS
As of March 20, 2002, 20,581,126 shares of common stock are outstanding, $.001
par value. As of March 5, 2002, there were approximately 6,002 stockholders of
record of the common stock.
DIVIDEND POLICY
We have never declared or paid cash or stock dividends and have no present plan
to pay any such dividends in the foreseeable future, intending instead to
reinvest our earnings, if any.
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11
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Form 10-K.
CONSOLIDATED STATEMENT OF OPERATIONS DATA
From Inception From Inception
Year Ended Year Ended Year Ended (July 30, 1998) (July 30, 1998)
December 31, December 31, December 31, To December To December
2001 2000 1999 (1) 31, 1998 (1) 31, 2001 (1)
--------------- -------------- -------------- -------------- ---------------
Revenues $ 2,968,678 $ 650,023 $ 55,438 $ - $ 3,674,139
Cost of revenues 4,995,161 3,690,843 127,345 - 8,813,349
Operating expenses:
Research and development 760,082 767,751 906,532 - 2,434,365
Selling, general and
administrative 6,423,315 8,264,657 3,737,922 289,211 18,715,105
Depreciation and
amortization 1,555,626 940,995 270,908 559 2,768,088
Non-cash expense related
to the issuance of warrants - 7,488,000 491,428 - 7,979,428
--------------- -------------- -------------- -------------- ---------------
Total operating expenses 8,739,023 17,461,403 5,406,790 289,770 31,896,986
Other income, net 359,800 546,173 5,749 - 911,722
Cumulative effect of a
change in accounting
principle - (52,273) - - (52,273)
--------------- -------------- -------------- -------------- ---------------
Net loss $(10,405,706) $(20,008,323) $(5,472,948) $ (289,770) $(36,176,747)
=============== ============== ============== ============== ===============
Per share information:
Net loss - basic and diluted $ (0.58) $ (1.35) $ (0.50) $ (0.03) $ (2.58)
Weighted average common
shares outstanding - basic
and diluted 18,017,051 14,793,622 10,876,096 10,030,000 13,999,930
CONSOLIDATED BALANCE SHEET DATA
December 31,
----------------------------------------------------------------
2001 2000 1999 (1) 1998 (1)
---------------- --------------- --------------- ---------------
Working capital (deficit) $ 5,750,354 $ 5,291,006 $ 6,293,217 $ (303,926)
Current assets $ 7,255,124 $ 8,848,543 $ 7,490,648 $ 387,980
Total assets $ 11,415,136 $ 15,290,542 $ 9,398,168 $ 407,530
Long-term obligations, net of current $ - $ 148,428 $ 259,694 $ -
portion
Total stockholders' equity (deficit) $ 9,748,566 $ 11,011,410 $ 7,936,043 $ (289,676)
(1) The accounting change related to SAB 101 has not been reflected in the
financials prior to its adoption on January 1, 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and other financial
information included elsewhere in this Form 10-K. This report contains
forward-looking statements that involve risks and uncertainties. Actual results
in future periods may differ materially from those expressed or implied in such
forward-looking statements as a result of a number of factors, including, but
not limited to, the risks discussed under the heading "Risk Factors" and
elsewhere in this Form 10-K.
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12
OVERVIEW
Billserv is a development stage enterprise with a limited operating history on
which to base an evaluation of our businesses and prospects. The Company's
principal activities since inception have included research and development,
raising of capital and organizational activities. The Company has recently
increased its activities in the areas of obtaining billing clients and
implementing Electronic Bill Presentment and Payment ("EBPP") capabilities for
those billers. Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets such as
electronic commerce. Such risks include, but are not limited to, an evolving and
unpredictable business model and our ability to manage growth. To address these
risks, we must, among other things, maintain and increase our customer base;
implement and successfully execute our business and marketing strategy; continue
to develop and upgrade our technology and transaction-processing systems;
provide superior customer service; respond to competitive developments; attract,
retain and motivate qualified personnel; and respond to unforeseen industry
developments and other factors. We cannot assure you that we will be successful
in addressing such risks, and the failure to do so could have a material adverse
effect on our business, prospects, financial condition and results of
operations.
Since inception, we have incurred operating losses each quarter, and as of
December 31, 2001, we have an accumulated deficit of $36.2 million. The Company
expects to continue to incur losses during the next several quarters of
operations as efforts to achieve profitability continue. We believe that our
success will depend in large part on our ability to (a) drive the consumer
adoption rate of EBPP, (b) continue to add quality billers to our significant
client base, (c) meet evolving customer requirements and (d) adapt to
technological changes in an emerging market. Accordingly, we intend to focus on
activities that serve to encourage EBPP adoption by consumers and billers as
well as continue to invest in product research and development, technology and
infrastructure as required to remain competitive.
In keeping with this strategy, our sales focus has shifted to a more
comprehensive offering that delivers a single, outsourced solution for
developing customer relationships utilizing the electronic bill as a dynamic
communication medium. By integrating our electronic billing capabilities with
online real-time customer care support provided by our Internet Interaction
Center ("IIC") and Internet-enabled direct marketing and communication ("IDMC"),
Billserv effectively creates a media network that puts billers in direct,
interactive contact with their customers. We are actively promoting our Customer
Communication Networks to qualified prospective billers as well as
converting existing clients to this enhanced service. Our selling strategy is a
targeted approach with an emphasis on complementary marketing initiatives within
key geographic areas in an attempt to drive EBPP adoption rates. The approach
begins with targeting local and regional billers in selected metropolitan areas
with high Internet usage that have the willingness and ability to market EBPP
access to their consumers. Additionally, we will continue to target national
billers to offer complete coverage of all recurring bills in each targeted
region. New accounts are obtained through both direct sales and by working with
our valued reseller and referral partners in order to maximize our leverage in
the marketplace.
The Company also provides professional marketing consultations as a key element
of its account management group to actively assist billers in creating programs
to move their consumers to EBPP. Because growth of our revenues is dependent
upon consumer acceptance of EBPP, we work directly and regularly with a client's
marketing department to spur adoption rates and increase the number of EBPP
transactions. Since we have a significant amount of investment in infrastructure
and a certain level of fixed operating expenses, achieving profitability depends
on the volume of transactions we process and the revenue we generate from these
transactions, as well as other services performed for our customers. Other
sources of revenue include:
o eConsulting - Provides value-added professional services for EBPP
billers or software vendors needing dedicated resources to deliver
customized EBPP solutions.
o eInsert - Provides a targeted messaging medium that interacts with
consumers individually by dynamically presenting customized
communication campaigns directly on the electronic bill statement.
o Direct Delivery - Offers a distribution medium whereby the electronic
bill is delivered directly to the consumer's email inbox, giving them
the opportunity to make payments directly from it by accessing the
link to the appropriate biller direct site.
o Preferred Enrollment - Offers billers services that encourage consumer
adoption of EBPP such as Online Demonstrations, Online Enrollment
Assistance, Instant Activation of new consumers by warehousing bill
records, and Auto Enrollment, which streamlines the enrollment process
for new consumers.
o ASP Gateway Services - Offers billers who are already participating in
EBPP using in-house software solutions a single distribution point to
virtually any bill presentment and payment location across the World
Wide Web in addition to their existing distribution points or biller
direct site. ASP Gateway may also be used by vendors to provide a
cost-effective, proven method to give their clients and consumers the
ability to make online payments, and view and pay bills anytime,
anywhere through bank and Internet payment portals.
o bills.com - Provides an EBPP Internet portal for complete receipt,
management and payment of all bills.
As a result of our limited operating history and the emerging nature of the
markets in which we compete, we are unable to precisely forecast our revenues.
Our current and future expense levels are based largely on our investment plans
and estimates of
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13
future revenues. Revenue and operating results will depend on the volume of
transactions processed and related services rendered. The timing of such
services and transactions and our ability to fulfill a customer's demands are
difficult to forecast. Although we systematically budget for planned outlays and
maintain tight controls on our expenditures, we may be unable to adjust spending
in a timely manner to compensate for any unexpected revenue shortfall.
Accordingly, any significant shortfall in revenues in relation to our planned
expenditures could have a material adverse effect on our business, prospects,
financial condition and results of operations. Further, we may make certain
pricing, service, marketing or acquisition decisions that could have a material
adverse effect on each or all of these areas.
CRITICAL ACCOUNTING POLICIES
General
Billserv's discussion and analysis of its financial condition and results of
operations are based upon Billserv's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
Billserv to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, Billserv evaluates its estimates,
including those related to the reported amounts of revenues and expenses, bad
debt, investments, intangible assets, income taxes, and contingencies and
litigation. Billserv bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results could differ from these estimates under different
assumptions or conditions.
Revenue Recognition
Prior to December 31, 1999, we recognized revenue generated from up-front fees
upon completion of an implementation project. In December 1999, the SEC issued
SAB 101, which requires that revenue generated from up-front implementation fees
that do not represent a separate earnings process to be recognized over the term
of the related service contract. We adopted SAB 101 on January 1, 2000, and
accordingly, revised our implementation fee revenue recognition policy to defer
this type of revenue, while the related costs will be expensed as incurred. The
cumulative effect of this accounting change totaled $52,273 and was recognized
as a non-cash after-tax charge during the first quarter of 2000. The cumulative
effect has been recorded as deferred revenue to be recognized as revenue over
the remaining contractual service periods, which are primarily three to five
years in length. At December 30, 2001, deferred revenue was $652,629. We
anticipate that transaction fees and other services will make up a larger
percentage of total revenue in future periods, which will reduce the effect that
deferring implementation fee revenue has on our current operating results.
However, the volume of transactions and amount of related revenue we will
generate in future periods is dependent upon, among other things, the rate at
which consumers utilize EBPP.
Bad Debt
Billserv maintains an allowance for doubtful accounts for estimated losses
resulting from the inability or failure of its customers to make required
payments. If the financial condition of the Billserv's customers were to
deteriorate, resulting in an impairment of their ability to make contractual
payments, additional allowances may be required.
RESULTS OF OPERATIONS
Billserv's revenues are principally derived from fees for implementing EBPP
capabilities, processing EBPP transactions and providing related customer care,
and consulting services. Total revenues increased 357% to $2,968,678 in 2001
from $650,023 in 2000. The increase from the prior year was primarily
attributable to the addition of a full year of EConsulting revenue in 2001
(EConsulting services were first offered to clients in the fourth quarter of
2000) and growth in transaction and related implementation fee revenue due to an
increase in the number of implemented billers and volume of transactions. As of
December 31, 2001, we had 101 billers under contract who were in various stages
of development, including 84 billers that were in full production or pilot
stages, as compared to 31 billers in full production or pilot stages at December
31, 2000. Although revenue from transaction fees increased significantly from
2000, transaction fees are not likely to become a major revenue source until
consumer adoption rates increase. While consumer adoption rates cannot be
controlled, we are working with our clients and partners to promote EBPP through
consumer education and marketing programs.
One billing customer accounted for approximately 23% and 40% of total
consolidated revenues for the years ended December 31, 2001 and 2000,
respectively. This customer is planning to develop an in-house EBPP solution
during 2002 utilizing Billserv's transition plan that allows the customer to
move from an outsourced solution with Billserv to an in-house solution. We
expect the resulting loss of transaction revenues to be mitigated by fees
generated from consulting services provided to this customer related to
transitioning their EBPP capabilities to an in-house solution. In addition, the
Company recognized $173,000 of non-recurring revenue in 2000 attributable to a
single customer for which we are no longer providing services.
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14
We generated our first revenues totaling $55,438, excluding the impact of
adopting SAB 101, during the fourth quarter of 1999. Revenue for 1999 was
comprised principally of design and implementation fees, but also included
transaction fees for the first electronic bills presented for our customers.
Cost of revenues includes the cost of personnel dedicated to the design of
electronic bill templates, creation of connections to third-party presentment
and payment processors, testing and quality assurance processes related to
implementation and presentment, as well as professional staff dedicated to
providing contracted services to EBPP customers under consulting arrangements.
Cost of revenues also includes fees paid for presentation of consumer bills on
Web sites powered by aggregators and processing of payments for EBPP
transactions by third party providers. Cost of revenues increased 35% to
$4,995,161 in 2001 from $3,690,843 for 2000. The increase from 2000 is primarily
due to an increase in the number of personnel employed to provide
revenue-producing services. Cost of revenues was only $127,345 for 1999 as this
was the first year that revenues were generated.
Research and development expenses consist primarily of the cost of personnel
devoted to the design of new processes that will improve our electronic
presentment and payment abilities and capacities, integration of third-party
applications, new customer care solutions, additional business-to-consumer
applications, business-to-business applications and solutions for direct
marketing opportunities. These expenses remained relatively flat in 2001 and
2000 at $760,082 and $767,751, respectively, after decreasing from $906,532 in
1999. During the earlier stages of our Company, we applied additional resources
to design and develop our base technology infrastructure and operating systems.
All research and development costs are expensed as incurred. We will continue to
invest in research and development efforts in the foreseeable future, as we
believe this is critical in order to remain competitive.
Selling and marketing expenses consist primarily of payroll and related expenses
for personnel engaged in marketing and selling activities, as well as
advertising services. The decrease in such expenses to $2,084,941 in 2001 from
$4,586,823 in 2000 was primarily the result of lower advertising media costs
related to promotion of the bills.com Web site as well as lower travel expenses
and reductions in personnel and corporate marketing. 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 payment portal. The increase in selling and marketing expenses in
2000 from $1,750,615 in 1999 was the result of the development and expansion
initiatives of our sales and marketing departments as well as the advertising
media costs associated with our bills.com promotion. We will continue to analyze
our sales and marketing efforts in order to control costs, increase the
effectiveness of our sales force, and broaden our reach through reseller
initiatives and advantageous alliances. As we have increased our focus on using
strategic partners to provide sales opportunities related to the deployment and
use of our EBPP services, we have experienced a decrease in the amount of
expenses related to our direct sales force.
General and administrative expenses include costs for the Company's human
resources, finance, legal, facilities and executive management functions. These
expenses increased to $4,338,374 in 2001 from $3,677,834 for 2000 and $1,987,307
for 1999. The increase in such expenses from 2000 to 2001 is principally due to
increased facilities costs resulting from our move to new corporate
headquarters. Total rent expense in 2000 was $681,000, and in 2001, the
aggregate rent expense was approximately $1.2 million. The increase from 1999 to
2000 is attributable to the expansion of the Company's support infrastructure,
including costs associated with additional general and administrative personnel
hired to manage our growth. We expect total general and administrative expenses
to remain relatively flat in subsequent periods as a result of the recent
realignment of our organization to make more efficient use of resources.
Depreciation and amortization was $1,555,626, $940,995 and $270,908 for 2001,
2000 and 1999, respectively. The increases from prior years are due to
depreciation related to the capital expenditures made for infrastructure and
operating systems in support of our growth strategy. We purchased approximately
$723,000, $3.7 million and $1.1 million of property and equipment during 2001,
2000 and 1999, respectively, and anticipate making capital expenditures of
approximately $1.0 million in 2002.
Non-cash expense related to the issuance of warrants relates to expenses
recognized for warrants issued in consideration for services. In accordance with
accounting principles generally accepted in the United States, we expensed the
fair value of these warrant issuances, which was calculated using the
Black-Scholes option-pricing model, and recorded the related credit to paid-in
capital. During 2000, we recognized $7.5 million of expense associated with the
issuance of 1.3 million warrants to CheckFree as consideration for entering into
an extended biller service provider agreement. We may recognize warrant costs in
future periods based on warrants that are issuable in consideration for the
referral of billers to us by CheckFree; however, those expense amounts are
unknown as they are dependent upon various milestones to be achieved by
CheckFree and several other variables. During the second and third quarters of
1999, we recognized $356,583 of warrant expense for 111,085 warrants issued in
exchange for strategic and financial advisory services rendered by our private
placement agent and $134,845 related to the issuance of warrants associated with
debt, respectively.
Net other income was $359,800 in 2001 compared to $546,173 for 2000 and $5,749
for 1999. The decrease from 2000 to 2001 is primarily attributable to lower
interest income earned in 2001 as a result of lower invested balances and market
interest rates. The
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15
increase from 1999 to 2000 was the result of investing the proceeds of the
equity investments made in the Company during the fourth quarter of 1999 and
throughout 2000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, the Company's principal source of liquidity consisted of
$6.2 million of cash and cash equivalents and $237,000 in short-term
investments, compared to $6.2 million of cash and cash equivalents and $1.0
million in short-term investments at December 31, 2000. Additionally, the
Company had $1.0 million of long-term investments at December 31, 2000. The
Company had net working capital of $5.8 million and $5.3 million at December 31,
2001 and 2000, respectively.
Net cash used in operating activities was $9.0 million, $11.0 million and $4.4
million for 2001, 2000 and 1999, respectively. Net cash used in operating
activities was primarily attributable to operating net losses generated by
development stage activities and overhead costs. Through revenue growth and
realignment of its costs to address current market conditions, the Company
succeeded in lowering its average monthly net cash outflows, or cash burn rate,
by 57% from approximately $1.1 million in the first quarter of 2001 to
approximately $466,000 for the fourth quarter of 2001. We plan to continue to
focus on expending our resources prudently and expect to achieve positive cash
flow by the end of 2002 as a result of anticipated revenue growth.
Net cash provided by investing activities for 2001 was $1.5 million and
reflected sales and maturities of marketable securities of $2.0 million and
purchases of property and equipment of $723,000. Net cash used in investing
activities was $6.4 million and $1.5 million used in 2000 and 1999,
respectively, and was primarily used for purchases of investments and equipment
and to make deposits for leases. We anticipate making capital expenditures of
approximately $1.0 million in 2002.
Net cash provided by financing activities of $7.5 million for 2001 resulted from
proceeds, net of issuance costs, of $9.2 million from the issuance of common
stock private placement offerings in March and November 2001. The $1.5 million
repayment of the outstanding line of credit in January 2001 reduced the amount
of net cash provided by financing activities. Net cash provided by financing
activities of $16.6 million for 2000 resulted from proceeds, net of issuance
costs, of $9.5 million from the purchase of common stock by CheckFree and $6.1
million from the exercise of warrants issued in the October and December 1999
private equity placements. In addition, the Company drew $1.5 million on its
line of credit in 2000. Net cash provided by financing activities of $12.6
million for 1999 largely resulted from the issuance of common stock in the
October and December 1999 private placements.
In June 2000, the Company executed a working capital line of credit agreement
with a bank in the amount of $1,500,000. Advances under the line of credit
accrued interest at the prime rate minus 0.25%, with repayment terms of monthly
interest-only payments and principal due in July 2001. The line of credit was
secured by certain investments of the Company. The Company borrowed $1,500,000
on this line of credit for the security deposit and leasehold improvements for
the Company's corporate headquarters and repaid the entire outstanding balance
in January 2001. The line of credit expired in July 2001 and was not renewed. In
March 2002, the Company executed a working capital line of credit agreement with
a bank in the amount of $700,000. Advances under the line of credit accrue
interest at the prime rate minus 0.25%, with repayment terms of monthly
interest-only payments and principal due in June 2003. The line of credit is
secured by certain investments of the Company.
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 computer equipment and software;
o Possible acquisitions of or investments in complementary businesses,
products, services and technologies; and
o The need to respond to unforeseen industry developments and other factors.
We believe that our current cash and cash equivalents and investment balances
along with anticipated revenues will be sufficient to meet our expected cash
needs for the foreseeable future; 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 the next several quarters as we work
toward achieving profitability and generating positive cash flow from
operations.
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16
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations",
which addresses the initial recognition of goodwill and other intangible assets
acquired in a business combination and requires that all future business
combinations be accounted for under the purchase method of accounting. In July
2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets",
which addresses the recognition and measurement of other intangible assets
acquired outside of a business combination whether acquired individually or with
a group of assets. In accordance with these statements, goodwill and certain
intangible assets are no longer amortized, but are subject to at least an annual
assessment of impairment. The Company will adopt these statements on a
prospective basis on January 1, 2002. Management does not believe the adoption
of these statements will have an adverse impact on the financial statements of
the Company.
RISK FACTORS
There are many factors that affect the Company's business and the results of its
operations, some of which are beyond its control. The following is a description
of some of the important factors that may cause the actual results of the
Company's operations in future periods to differ materially from those currently
expected or desired.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently plans to meet its capital requirements primarily through
revenue from operations and its existing cash and investment balances. If our
capital requirements vary from those currently planned, or current cash,
marketable securities and cash that may be generated from operations are
insufficient to satisfy our liquidity requirements, the Company 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 that could restrict our operations or finances. There can be no
assurance that financing will be available in amounts or on terms acceptable to
the Company, if at all. If the Company cannot raise funds on acceptable terms,
it may not be able to continue to exist, expand operations, grow market share,
take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, any of which would negatively impact its business,
operating results and financial condition.
LACK OF 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, 2001, the
Company's accumulated deficit was $36.2 million. Because we have a relatively
limited history in a rapidly evolving and dynamic market, it is difficult to
predict our future operating results. Therefore, all historical information
included herein may not necessarily be indicative of the results of operations,
financial position and cash flows of the Company in the future.
UNCERTAIN RELIABILITY, GROWTH AND CONSUMER ACCEPTANCE OF THE INTERNET, INTERNET
TECHNOLOGY, AND ELECTRONIC COMMERCE
The electronic commerce market is a relatively new and growing service industry.
If the electronic commerce market fails to grow or grows slower than
anticipated, or if the Company, despite an investment of significant resources,
is unable to adapt to meet changing customer requirements or technological
changes in this emerging market, or if the Company's services and related
products do not maintain a proportionate degree of acceptance in this growing
market, the Company's business, operating results, and financial condition could
be materially adversely affected. Additionally, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
electronic commerce market in general, and the Company's customer base and
revenues in particular. Similar to the emergence of the credit card and
automatic teller machine ("ATM") industries, the Company and other organizations
serving the electronic commerce market must educate users that electronic
transactions use encryption technology and other electronic security measures
that make electronic transactions more secure than paper-based transactions.
While the Company believes that it is utilizing proven applications designed for
premium data security and integrity to process electronic transactions, there
can be no assurance that the Company's use of such applications will be
sufficient to address the changing market conditions or the security and privacy
concerns of existing and potential customers. Adverse publicity raising concerns
about the safety or privacy of electronic transactions, or widely reported
breaches of the Company's or another provider's security, have the potential to
undermine consumer confidence in the technology and thereby have a materially
adverse effect on the Company's business. In addition, there can be no guarantee
that the Internet will continue to grow in acceptance or maintain its
reliability, or that new technologies will not supplant the Internet in part or
in whole.
UNCERTAIN GROWTH OF PROPORTION OF ELECTRONIC REMITTANCES
The Company's future financial performance will be materially affected by the
percentage of bill payments that can be cleared electronically. As compared with
making payment by paper check or by draft, the Company believes that electronic
payments: (i) cost much less to complete; (ii) give rise to fewer errors, which
are costly to resolve; and (iii) generate far fewer customer
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17
inquiries and therefore consume fewer customer care resources. Accordingly, the
Company's inability to continue to decrease the percentage of remittances
effected by paper documents would result in flat or decreased margins, and a
reversal of the current trend toward a smaller proportion of paper-based
payments would have a material adverse effect upon the Company's business,
operating results, and financial condition.
RISK OF INABILITY TO ADAPT TO RAPID TECHNOLOGICAL CHANGE; RISK OF DELAYS
The Company's success is highly dependent on its ability to develop new and
enhanced services, and related products that meet changing customer
requirements. The market for the Company's services, however, is characterized
by rapidly changing technology, evolving industry standards, emerging
competition and frequent new and enhanced software, service and related product
introductions. In addition, the software market is subject to rapid and
substantial technological change. The Company, to remain successful, must be
responsive to new developments in hardware and semiconductor technology,
operating systems, programming technology and computer capabilities. In many
instances, the new and enhanced services, products, and technologies are in the
emerging stages of development and marketing, and are subject to the risks
inherent in the development and marketing of new software, services, and
products. The Company may not successfully identify new service opportunities,
and develop and bring new and enhanced services and related products to market
in a timely manner; there can be no assurance that any such services, products
or technologies will develop or will be commercially successful, that the
Company will benefit from such developments or that services, products or
technologies developed by others will not render the Company's services and
related products noncompetitive or obsolete. If the Company is unable, for
technological or other reasons, to develop and introduce new services and
products in a timely manner in response to changing market conditions or
customer requirements, or if new or enhanced software, services and related
products do not achieve a significant degree of market acceptance, the Company's
business, operating results and financial condition would be materially
adversely affected.
CHANGES IN REGULATION OF ELECTRONIC COMMERCE AND RELATED FINANCIAL SERVICES
Management believes that the Company is not required to be licensed by the
Office of the Comptroller of the Currency, the Federal Reserve Board, or other
federal or state agencies that regulate or monitor banks or other types of
providers of electronic commerce services. There can be no assurance that a
federal or state agency will not attempt to regulate providers of electronic
commerce services, such as the Company, which could impede the Company's ability
to do business in the regulator's jurisdiction. The Company is subject to
various laws and regulations relating to commercial transactions generally, such
as the Uniform Commercial Code, and may be subject to the electronic funds
transfer rules embodied in Regulation E, promulgated by the Federal Reserve
Board. Given the expansion of the electronic commerce market, the Federal
Reserve Board might revise Regulation E or adopt new rules for electronic funds
transfer affecting users other than consumers. Because of growth in the
electronic commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the electronic commerce market, and it
is possible that Congress or individual states could enact laws regulating the
electronic 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 Automated 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.
COMPETITION IN ELECTRONIC COMMERCE AND RELATED FINANCIAL SERVICES
Portions of the electronic commerce market are becoming increasingly
competitive. The Company expects to face growing competition in certain areas of
the EBPP market. Although few companies have focused their efforts as service
bureau consolidators in the EBPP industry, new service bureau companies could
emerge and compete for billers of all sizes. The Company believes that software
providers, consumer front ends, banks and Internet portals may provide
increasingly competitive billing 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 may
also compete for the EBPP business of billers. The Company expects competition
to increase from both established and emerging companies and that such increased
competition could materially adversely affect the Company's business, operating
results and financial condition. Moreover, the Company's
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18
current and potential competitors, many of whom have greater financial,
technical, marketing and other resources than the Company, may respond more
quickly than the Company to new or emerging technologies or could expand to
compete directly against the Company in any or all of its target markets.
Accordingly, it is possible that current or potential competitors could rapidly
acquire market share. There can be no assurance that the Company will be able to
compete against current or future competitors successfully or that competitive
pressures faced by the Company will not have a material adverse effect on its
business, operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its key management, marketing, service and related product
development and operational personnel, including its Chairman and Chief
Executive Officer, Michael R. Long; its President and Chief Operating Officer,
Louis A. Hoch; its Executive Vice President and Chief Financial Officer, Terri
A. Hunter; and its Senior Vice President of Sales and Marketing, Tony L.
Diamond. The Company's operations could be affected adversely if, for any
reason, any of these officers ceased to be active in the Company's management.
The Company maintains proprietary nondisclosure and non-compete agreements with
all of its key employees. The success of the Company depends to a large extent
upon its ability to retain and continue to attract highly skilled personnel.
Competition for employees in the electronic commerce industry is intense, and
there can be no assurance that the Company will be able to attract and retain
enough qualified employees. If the Company experiences significant growth, it
may become increasingly difficult to hire, train and assimilate the new
employees needed. The Company's potential inability to retain and attract key
employees could have a material adverse effect on the Company's business,
operating results and financial condition.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly results of operations may fluctuate significantly as a
result of a number of factors, including changes in the Company's pricing
policies or those of its competitors, relative rates of acquisition of new
customers, delays in the introduction of new or enhanced services, software and
related products by the Company or by its competitors or market acceptance of
such services and products, other changes in operating expenses, personnel
changes and general economic conditions. These factors will impact the Company's
operating results. Fluctuations in operating results could result in volatility
in the price of the Company's common stock.
RISK OF PRODUCT DEFECTS
The software products utilized by the Company could contain errors or "bugs"
that could adversely affect the performance of services or damage a user's data.
In addition, as the Company increases its share of the electronic commerce
services market, software reliability and security demands will increase. The
Company attempts to limit its potential liability for warranty claims through
technical audits and limitation-of-liability provisions in its customer
agreements. There can be no assurance that the 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.
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19
RISK OF SYSTEM FAILURE
The Company's operations are dependent on its ability to protect its computer
equipment against damage from fire, earthquake, power loss, telecommunications
failure or similar event. Any damage or failure that causes interruptions in the
Company's operations could have a material adverse effect on the Company's
business, operating results and financial condition. The Company's property and
business interruption insurance may not be adequate to compensate the Company
for all losses that may occur.
LIMITED PROTECTION OF PROPRIETARY SERVICES
The Company regards some of its services as proprietary and relies primarily on
a combination of trademark and trade secret laws, employee and third party
non-disclosure agreements, and other intellectual property protection methods to
protect its services. Existing intellectual property laws afford only limited
protection, and it may be possible for unauthorized third parties to copy the
Company's services and related products or to reverse engineer or obtain and use
information that the Company regards as proprietary. There can be no assurance
that the Company's competitors will not independently develop services and
related products that are substantially equivalent or superior to those of the
Company.
VOLATILITY OF STOCK PRICE
The market price of the Company's common stock is subject to significant
fluctuations in response to variations in quarterly operating results, the
failure of the Company to achieve operating results consistent with securities
analysts' projections of the Company's performance, and other factors. The stock
market has experienced extreme price and volume fluctuations and volatility that
has particularly affected the market prices of many technology, emerging growth
and developmental stage companies. Such fluctuations and volatility have often
been unrelated or disproportionate to the operating performance of such
companies. Factors such as announcements of the introduction of new or enhanced
services or related products by the Company or its competitors, announcements of
joint development efforts or corporate partnerships in the electronic commerce
market, market conditions in the technology, banking, telecommunications and
other emerging growth sectors, and rumors relating to the Company or its
competitors may have a significant impact on the market price of the Company's
common stock.
CONTROL BY PRINCIPAL STOCKHOLDERS
As of December 31, 2001, the directors and officers of the Company and their
affiliates collectively own approximately 12% of the outstanding shares of the
Company's common stock. As a result, these stockholders are able to exercise
significant influence over matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON MARKET PRICE
As of December 31, 2001, the Company had 20,538,526 shares of common stock
outstanding. The Company anticipates that it may need future equity financing to
meet certain operational and strategic requirements. Such future equity
financing may have a significant dilutive effect on the Company's stock price.
ANTI-TAKEOVER PROVISIONS; CERTAIN PROVISIONS OF NEVADA LAW; CERTIFICATE OF
INCORPORATION, BYLAWS, AND STOCKHOLDER RIGHTS PLAN
On October 4, 2000, the Company approved a stockholder rights plan to protect
stockholders in the event of an unsolicited attempt to acquire the Company in a
manner that would not be in the best interests of its stockholders. This
stockholder rights plan could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, control of the Company. The Company's Board of Directors is also
classified into three classes of directors serving staggered three-year terms.
Such classification of the Board of Directors expands the time required to
change the composition of a majority of directors and may tend to discourage a
proxy contest or other takeover bid for the Company. The issuance of common
stock under a stockholder rights plan could decrease the amount of earnings and
assets available for distribution to the holders of the Company's common stock
or could adversely affect the rights and powers, including voting rights, of the
holders of the Company's common stock. In certain circumstances, such issuance
could have the effect of decreasing the market price of the Company's common
stock.
DIFFICULTY IN MANAGEMENT OF GROWTH
The Company may experience a period of rapid growth that could place a
significant strain on its resources. The Company's ability to manage growth
successfully will require the Company to continue to improve its operational,
management and financial systems and controls as well as to expand its work
force. A significant increase in the Company's customer base would necessitate
the hiring of a significant number of additional customer care and technical
support personnel as well as computer software developers and technicians,
qualified candidates for which, at the time needed, may be in short supply. In
addition, the
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20
expansion and adaptation of the Company's computer and administrative
infrastructure will require substantial operational, management and financial
resources. Although the Company believes that its current infrastructure is
adequate to meet the needs of its customers in the foreseeable future, there can
be no assurance that the Company will be able to expand and adapt its
infrastructure to meet additional demand on a timely basis, at a commercially
reasonable cost, or at all. If the Company's management is unable to manage
growth effectively, hire needed personnel, expand and adapt its computer
infrastructure or improve its operational, management, and financial systems and
controls, the Company's business, operating results, and financial condition
could be materially adversely affected.
ACQUISITION-RELATED RISKS
In the future, the Company may pursue acquisitions of complementary service or
product lines, technologies or businesses. Future acquisitions by the Company
could result in potentially dilutive issuance of equity securities, the
incurrence of debt and contingent liabilities, and amortization expenses related
to goodwill and other intangible assets, any of which could materially adversely
affect the Company's business, operating results and financial condition. In
addition, acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies, services and products of the
acquired companies, the diversion of management's attention from other business
concerns, risks of entering markets in which the Company has no or limited
direct prior experience, and the potential loss of key employees of the acquired
company. From time to time, the Company evaluates potential acquisitions of
businesses, services, products or technologies. The Company has no present
commitments or agreements with respect to any material acquisition of other
businesses, services, products or technologies. In the event that such an
acquisition were to occur, however, there can be no assurance that the Company's
business, operating results and financial condition would not be materially
adversely affected.
UNLIKELY PAYMENT OF DIVIDENDS
The Company has paid no cash dividends and has no present plan to pay cash
dividends, intending instead to reinvest its earnings, if any. However, payment
of future cash dividends will be determined from time to time by its Board of
Directors, based upon its future earnings, financial condition, capital
requirements and other factors. The Company is not presently subject to any
restriction on its present or future ability to pay such dividends.
DEPENDENCE UPON CONTRACTS WITH BILLERS
The Company's business is dependent upon performing under the terms of
agreements with billers. Although the Company is unaware of any circumstance
that would prevent the operational ability to perform these agreements, there
can be no assurance that the Company might not be able to fully perform under
these agreements or that other factors may prevent billers from processing
billing information through the Company.
DEPENDENCE UPON CONTRACTS WITH TRADING PARTNERS
The Company's business is dependent upon executing and maintaining agreements
with distribution and payment partners, such as CheckFree Services Corporation
and Paymentech, Inc., to provide dependable financial services for customers of
billers. Such financial services include ACH processing through the client's
bank and delivery of good funds to the Company for remittance to the billers.
There can be no assurance that any of the distribution or payment partners will
be able to perform under these agreements in the future.
ANTICIPATED BILLING SYSTEM EXPENDITURES
To facilitate and support the growth anticipated in its business, the Company
plans to make certain expenditures in its operations over the next one to three
years. These expenditures are expected to be made in the areas of software
development, licensing, hardware and related staffing. The Company believes that
it will be able to fund these expenditures with internally generated funds and
financing, but there can be no assurance that such funds will be generated or
spent in these areas.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's current investment portfolio. Certain of the
Company's marketable securities are designated as "available for sale" and
accordingly are presented at fair value on the balance sheets. The Company
generally invests its excess cash in high-quality short-term fixed income
securities. Fixed-rate securities may have their fair market value adversely
impacted by a rise in interest rates, and the Company may suffer losses in
principal if forced to sell securities that have declined in market value due to
changes in interest rates.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors ............................................ 23
Consolidated Balance Sheets as of December 31, 2001 and 2000 .............. 24
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 and
from inception to December 31, 2001 ..................................... 25
Consolidated Statement of Changes in Shareholders' Equity
from inception to December 31, 2001 ..................................... 26
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 and
from inception to December 31, 2001 ..................................... 29
Notes to Consolidated Financial Statements ................................ 30
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22
REPORT OF INDEPENDENT AUDITORS
To Board of Directors and Shareholders of Billserv, Inc.
We have audited the accompanying consolidated balance sheets of Billserv, Inc.
and subsidiaries (a development stage company) as of December 31, 2001 and 2000,
and the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the three years in the period ended December 31, 2001
and the period from inception (July 30, 1998 through December 31, 2001). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Billserv, Inc. and
subsidiaries at December 31, 2001 and 2000, and the consolidated results of
their operations and their cash flows for the three years in the period ended
December 31, 2001, and the period from inception (July 30, 1998 through December
31, 2001), in conformity with accounting principles generally accepted in the
United States.
ERNST & YOUNG LLP
San Antonio, Texas
February 5, 2002
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23
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2001 2000
------------------- -------------------
Assets:
Cash and cash equivalents $ 6,192,550 $ 6,171,822
Investments 236,948 1,013,900
Accounts receivable, net 437,677 782,537
Prepaid expenses and other 225,795 596,546
Related party notes receivable 162,154 283,738
------------------- -------------------
Total current assets 7,255,124 8,848,543
Property and equipment, net of accumulated
depreciation and amortization of $2,718,953
and $1,178,813 for 2001 and 2000, respectively 3,701,205 4,518,347
Intangible asset, net of accumulated amortization of
$37,500 and $22,500 for 2001 and 2000, respectively 37,500 52,500
Long-term investments - 1,000,920
Other assets 421,307 870,232
------------------- -------------------
Total assets $ 11,415,136 $ 15,290,542
=================== ===================
Liabilities & shareholders' equity:
Current liabilities:
Accounts payable $ 201,513 $ 726,804
Accrued expenses and other current liabilities 664,200 896,772
Current portion of obligations under capital leases 148,228 181,128
Current portion of deferred revenue 490,829 252,833
Short-term borrowings - 1,500,000
------------------- -------------------
Total current liabilities 1,504,770 3,557,537
Obligations under capital leases, less current portion - 148,428
Deferred revenue, less current portion 161,800 573,167
Shareholders' equity:
Common stock, $.001 par value, 200,000,000 shares authorized; 20,538,526
issued and outstanding at December 31, 2001, 15,527,870 issued and
outstanding at December 31, 2000 20,539 15,528
Additional paid-in capital 45,909,410 36,758,450
Accumulated other comprehensive income - 13,109
Deficit accumulated during the development stage (36,181,383) (25,775,677)
------------------- -------------------
Total shareholders' equity 9,748,566 11,011,410
------------------- -------------------
Total liabilities and shareholders' equity $ 11,415,136 $ 15,290,542
=================== ===================
See notes to consolidated financial statements.
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24
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Year ended Year ended July 30, 1998
December 31, December 31, December 31, (Inception) to
2001 2000 1999 December 31, 2001
------------------- -------------------- -------------------- --------------------
Revenues $ 2,968,678 $ 650,023 $ 55,438 $ 3,674,139
Cost of revenues 4,995,161 3,690,843 127,345 8,813,349
---------------- ----------------- ----------------- -----------------
Gross margin (2,026,483) (3,040,820) (71,907) (5,139,210)
Operating expenses:
Research and development 760,082 767,751 906,532 2,434,365
Selling and marketing 2,084,941 4,586,823 1,750,615 8,510,677
General and administrative 4,338,374 3,677,834 1,987,307 10,204,428
Depreciation and amortization 1,555,626 940,995 270,908 2,768,088
Non-cash expense related to the issuance
of warrants - 7,488,000 491,428 7,979,428
---------------- ----------------- ----------------- -----------------
Total operating expenses 8,739,023 17,461,403 5,406,790 31,896,986
---------------- ----------------- ----------------- -----------------
Operating loss (10,765,506) (20,502,223) (5,478,697) (37,036,196)
Other income (expense), net:
Interest income 355,262 687,724 73,270 1,116,256
Interest expense (40,079) (140,651) (67,521) (247,564)
Equity in earnings of investee 7,676 - - 7,676
Other income (expense) 36,941 (900) - 35,354
---------------- ----------------- ----------------- -----------------
Total other income (expense), net 359,800 546,173 5,749 911,722
Loss before income taxes and cumulative
effect of accounting change (10,405,706) (19,956,050) (5,472,948) (36,124,474)
Income taxes - - - -
---------------- ----------------- ----------------- -----------------
Net loss before cumulative effect of
accounting change (10,405,706) (19,956,050) (5,472,948) (36,124,474)
Cumulative effect of a change in accounting
principle, net of taxes - (52,273) - (52,273)
---------------- ----------------- ----------------- -----------------
Net loss $ (10,405,706) $ (20,008,323) $ (5,472,948) $ (36,176,747)
================= ================== ================== ==================
Net loss per common share before
cumulative effect of accounting change-
basic and diluted $ (0.58) $ (1.35) $ (0.50) $ (2.58)
Cumulative effect of accounting change-
basic and diluted - - - -
---------------- ----------------- ----------------- -----------------
Net loss per common share - basic and
diluted $ (0.58) $ (1.35) $ (0.50) $ (2.58)
================= ================== ================== ==================
Weighted average common shares
outstanding - basic and diluted 18,017,051 14,793,622 10,876,096 13,999,930
================= ================== ================== ===================
See notes to consolidated financial statements.
-------------------------------------------------------------------------------------------------------------------------
25
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Deficit
Accumulated
Common Stock Additional During the Other Total
------------ Paid - In Development Comprehensive Shareholders'
Shares Amount Capital Stage Income Equity
------------ ------------ -------------- ------------- --------------- -----------------
Balance at July 30, 1998 (date of
inception) 1,000 $ - $ - $ - $ - $ -
Acquisition of Shares and Reverse Merger,
December 9, 1998 10,029,000 10,030 - (4,636) - 5,394
Net Loss From Inception (July 30, 1998)
to December 31, 1998 - - (289,770) - (289,770)
------------ ------------ -------------- ------------- --------------- -----------------
Balance at December 31, 1998 10,030,000 10,030 - (294,406) - (284,376)
Shares issued under Reg. S,
June 1999 ($5.60 per share) 946,428 946 5,299,054 - - 5,300,000
Issuance of Common Stock Warrants,
May 1999 - - 356,583 - - 356,583
Issuance of Common Stock Warrants,
August 1999 - - 134,845 - - 134,845
Issuance of Common Stock, net of issuance
costs, October 1999 ($3.25 per share) 1,250,791 1,251 3,725,173 - - 3,726,424
Issuance of Common Stock, net of issuance
costs, October 1999, in Exchange for
Debt ($3.25 per share) 153,846 154 490,057 - - 490,211
Issuance of Common Stock, net issuance
costs, December 1999 ($5.50 per share) 732,000 732 3,689,872 - - 3,690,604
Net Loss for the Year Ended
December 31, 1999 - - - (5,472,948) - (5,472,948)
------------ ------------ -------------- ------------- --------------- -----------------
Balance at December 31, 1999 13,113,065 13,113 13,695,584 (5,767,354) - 7,941,343
Equity Issuance Costs - - (8,465) - - (8,465)
Exercise of Warrants, January 2000
($3.75 per share) 15,400 15 57,735 - - 57,750
Exercise of Warrants, February 2000
($3.75 per share) 126,969 127 476,007 - - 476,134
-------------------------------------------------------------------------------------------------------------------------
26
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Deficit
Accumulated
Common Stock Additional During the Other Total
------------ Paid - In Development Comprehensive Shareholders'
Shares Amount Capital Stage Income Equity
------------ ------------ -------------- ------------- --------------- -----------------
Exercise of Warrants, February 2000
($4.45 per share) 52,426 $ 53 $ 232,984 $ - $ - $ 233,037
Exercise of Warrants, March 2000
($3.25 per share) 22,515 23 73,147 - - 73,170
Exercise of Warrants, March 2000
($6.86 per share) 11,032 11 75,648 - - 75,659
Exercise of Warrants, March 2000
($6.18 per share) 145,054 145 895,911 - - 896,056
Exercise of Warrants, March 2000
($6.73 per share) 2,318 2 15,607 - - 15,609
Exercise of Warrants, March 2000
($3.75 per share) 138,385 138 518,806 - - 518,944
Stock Option Exercise, March 2000
($2.81 per share) 900 1 2,530 - - 2,531
Exercise of Warrants, March 2000
($3.75 per share) 673,076 673 2,523,362 - - 2,524,035
Exercise of Warrants, April 2000
($3.75 per share) 326,961 327 1,225,777 - - 1,226,104
Issuance of Common Stock, Net of Issuance
Costs, June 2000 ($11.375 per share) 879,121 879 9,564,621 - - 9,565,500
Value of Common Stock Warrants granted in
Connection with Issuance of Common
Stock - - 7,488,000 - - 7,488,000
Stock Option Exercise, June 2000
($2.81 per share) 500 1 1,405 - - 1,406
Issuance of Common Stock, July 2000
($6.56 per share) 17,848 18 117,075 - - 117,093
Equity Issuance Costs - - (56,876) - - (56,876)
Stock Option Exercise, August 2000
($2.81 per share) 300 - 844 - - 844
Stock Option Exercise, September 2000
($4.37 per share) 2,000 2 8,748 - - 8,750
Equity Issuance Costs - - (150,000) - - (150,000)
Comprehensive Loss:
Unrealized Gain on Investments - - - - 13,109 13,109
Net Loss for the Year Ended
December 31, 2000 - - - (20,008,323) - (20,008,323)
-----------------
Comprehensive Loss (19,995,214)
------------ ------------ -------------- ------------- --------------- -----------------
Balance at December 31, 2000 15,527,870 15,528 36,758,450 (25,775,677) 13,109 11,011,410
-------------------------------------------------------------------------------------------------------------------------
27
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Deficit
Accumulated
Common Stock Additional During the Other Total
------------ Paid - In Development Comprehensive Shareholders'
Shares Amount Capital Stage Income Equity
------------ ------------ -------------- ------------- --------------- -----------------
Issuance of Common Stock, January 2, 2001
($2.18 per share) 69,299 69 150,866 - - 150,935
Stock Option Exercise, January 31, 2001
($4.38 per share) 8,000 8 34,992 - - 35,000
Issuance of Common Stock, net of issuance
costs, March 28, 2001 ($2.50 per share) 2,885,462 2,885 6,594,746 - - 6,597,631
Issuance of Common Stock, July 6, 2001
($1.74 per share) 47,895 49 83,406 - - 83,455
Issuance of Common Stock, net of issuance
costs, November 27, 2001 ($1.25 per
share) 2,000,000 2,000 2,286,950 - - 2,288,950
Comprehensive Loss:
Unrealized Gain on Investments - - - - (13,109) (13,109)
Net Loss for the Year Ended
December 31, 2001 - - - (10,405,706) - (10,405,706)
-----------------
Comprehensive Loss (10,418,815)
------------ ------------ -------------- ------------- --------------- -----------------
Balance at December 31, 2001 20,538,526 $ 20,539 $ 45,909,410 $(36,181,383) $ - $ 9,748,566
============ ============ ============== ============= =============== =================
See notes to consolidated financial statements.
-------------------------------------------------------------------------------------------------------------------------
28
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
July 30, 1998
(Inception) to
2001 2000 1999 December 31, 2001
------------------- ------------------- ------------------- -------------------
Cash flows from operating activities:
Net loss $ (10,405,706) $ (20,008,323) $ (5,472,948) $ (36,176,747)
Adjustments to reconcile net loss to net
cash used in operating activities:
Issuance of common stock warrants - 7,488,000 491,428 7,979,428
Depreciation and amortization 1,555,626 940,955 270,908 2,768,048
Gain on sale of investments (36,070) - - (36,070)
Equity in earnings of investee (7,676) - - (7,676)
Cumulative effect of change in accounting
principle - 52,273 - 52,273
Changes in current assets and current liabilities:
(Increase) decrease in accounts receivable 344,860 (772,310) (10,227) (437,677)
(Increase) decrease in related party notes
receivable 121,584 (253,516) (6,222) (162,154)
(Increase) decrease in prepaid expenses
and other 377,551 5,004 (346,414) 1,779
Increase (decrease) in accounts payable and
accrued expenses and other current
liabilities (757,863) 735,458 851,212 1,020,713
Decrease in related party accounts payable - - (150,000) (150,000)
Increase (decrease) in deferred revenue (173,371) 768,727 - 595,356
------------------- ------------------- ------------------- -------------------
Net cash used in operating activities (8,981,065) (11,043,732) (4,372,263) (24,552,727)
Cash flows from investing activities:
Purchase of property and equipment (722,748) (3,652,712) (1,052,459) (5,448,028)
Purchase of investments - (7,864,759) (275,496) (8,140,255)
Proceeds from sales and maturities of investments 2,028,680 5,863,048 - 7,891,728
Long-term deposits, net 218,641 (764,496) (45,041) (590,896)
Other investing activities 2,577 - (86,884) (78,913)
------------------- ------------------- ------------------- -------------------
Net cash provided by (used in) investing
activities 1,527,150 (6,418,919) (1,459,880) (6,366,364)
Cash flows from financing activities:
Advance from shareholders - - 1,500,000 2,000,000
Repayment to shareholders - - (2,000,000) (2,000,000)
Proceeds from notes payable and short-term
borrowings - 1,500,000 1,000,000 2,500,000
Principal payments for notes payable (1,500,000) - (500,000) (2,000,000)
Principal payments for capital lease obligations (181,328) (512,231) (135,291) (828,850)
Exercise of warrants - 6,096,498 - 6,096,498
Issuance of common stock, net of issuance costs 9,155,971 9,480,783 12,707,239 31,343,993
------------------- ------------------- ------------------- -------------------
Net cash provided by financing activities 7,474,643 16,565,050 12,571,948 37,111,641
------------------- ------------------- ------------------- -------------------
Net increase (decrease) in cash and cash
equivalents 20,728 (897,601) 6,739,805 6,192,550
Cash and cash equivalents, beginning of period 6,171,822 7,069,423 329,618 -
------------------- ------------------- ------------------- -------------------
Cash and cash equivalents, end of period $ 6,192,550 $ 6,171,822 $ 7,069,423 $ 6,192,550
=================== =================== =================== ===================
Supplemental information:
Cash paid for interest $ 52,027 $ 139,755 $ 28,933 $ 220,715
Non-cash investing and financing activities:
Purchases of equipment under capital leases $ - $ 278,080 $ 563,707 $ 841,787
Conversion of debt to equity $ - $ - $ 500,000 $ 500,000
See notes to consolidated financial statements.
-------------------------------------------------------------------------------------------------------------------------
29
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Billserv, Inc., formerly known as billserv.com, Inc., and its subsidiaries
(collectively, "Billserv" or "the Company"), provide electronic bill presentment
and payment ("EBPP") services to companies generating recurring bills, primarily
in the United States. The Company also provides related consulting and
Internet-based customer care interaction services. In addition, the Company
operates an Internet bill presentment and payment portal for consumers under the
domain name WWW.BILLS.COM.
BASIS OF PRESENTATION
The Company's principal activities since inception have included research and
development, raising of capital and organizational activities. The Company has
recently increased its activities in the areas of obtaining billing clients and
implementing EBPP capabilities for those billers. The Company remained a
development stage company through 2001, as recurring revenue related to EBPP
activity had not reached a significant level. The Company expects to continue to
incur losses during the next several quarters of operations as it works toward
achieving profitability. The Company plans to meet its future capital
requirements primarily through revenues from operations. Management believes
that there will be adequate liquidity to fund its operations and anticipated
cash needs for fiscal 2002. However, material shortfalls or variances from
anticipated performance or unforeseen expenditures could require the Company to
seek alternative sources of capital or to limit expenditures for operating or
capital requirements. If such a shortfall in liquidity should occur, the Company
believes it has both the intent and the ability to take the necessary actions to
preserve its liquidity through the reduction of expenditures.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation. These reclassifications had no impact on operating loss as
previously reported.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, bills.com, Inc. and
billserv.com-canada, Inc. All significant intercompany accounts and transactions
have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with maturities of
three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially expose the Company to credit risk consist
of cash and cash equivalents, investments and accounts receivable. The Company
is exposed to credit risk on its cash, cash equivalents and investments in the
event of default by the financial institutions or the issuers of these
investments to the extent of the amounts recorded on the balance sheet in excess
of amounts that are insured by the FDIC. Trade receivables potentially subject
the Company to concentrations of credit risk. The Company's customer base
operates in a variety of industries and is geographically dispersed, however,
the relatively small number of customers increases the risk. The Company closely
monitors extensions of credit and has not experienced significant credit losses
in the past. Credit losses have been provided for in the consolidated financial
statements and have been within management's expectations. The Company recorded
bad debt expense of $21,000 and $10,000 for 2001 and 2000, respectively, and
recorded bad debt write-offs of $12,069 to its allowance for doubtful accounts
in 2001. There were no provisions made for bad debt expense in 1999 or
write-offs recorded to the allowance for doubtful accounts in 2000. At December
31, 2001 and 2000, the balance of the allowance for doubtful accounts was
$18,931 and $10,000, respectively.
- --------------------------------------------------------------------------------
30
One billing customer accounted for approximately 23% and 40% of total
consolidated revenues for the years ended December 31, 2001 and 2000,
respectively. This customer is planning to develop an in-house EBPP solution
during 2002 utilizing Billserv's transition plan that allows the customer to
move from an outsourced solution with Billserv to an in-house solution. The
resulting loss of transaction revenues is expected to be mitigated by fees
generated from consulting services provided to this customer related to
transitioning their EBPP capabilities to an in-house solution. In addition, the
Company recognized $173,000 of non-recurring revenue in 2000 attributable to a
single customer for which we are no longer providing services. Concentration of
credit was not a significant risk in 1999 as total revenues were only $55,438.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities are reflected in the accompanying consolidated financial statements
at cost, which approximates fair value because of the short-term maturity of
these instruments.
INVESTMENTS
The Company's investments consist primarily of commercial paper, repurchase
agreements and investment-grade corporate bonds. The Company classifies these
investments as "available-for-sale," "trading" or "held-to-maturity" securities
in accordance with Statement of Financial Accounting Standards ("SFAS") 115,
"Accounting for Certain Investments in Debt and Equity Securities." The Company
has not had any investments classified as "trading" or "held-to-maturity"
securities. Investments classified as "available-for-sale" securities are
carried at fair value, with unrealized holding gains and losses reported as a
separate component of shareholders' equity (See Note 2). Realized gains and
losses on sales of available-for-sale securities are determined based on the
amortized cost of such securities using the specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed on a straight-line method over the estimated useful lives of the
related assets, ranging from three to seven years. Leasehold improvements are
amortized over the lesser of the estimated useful lives or remaining lease
period. Expenditures for maintenance and repairs are charged to expense as
incurred.
INTANGIBLE ASSET
The cost of the intangible asset is being amortized on a straight-line basis
over a five-year period.
REVENUE RECOGNITION
Revenue consists of implementation fees, hosting and transaction fees, and fees
for consulting services. Revenue from implementation fees that do not represent
a separate earnings process is recognized over the term of the related service
contract, generally three to five years. Hosting and transaction fees are
recognized as revenue as the related services are provided. Consulting fees are
recognized on a time and materials basis when services are rendered.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
ADVERTISING COSTS
The cost of advertising is expensed as incurred. The Company incurred $19,000,
$1,394,000 and $439,000 in advertising costs for the years ended December 31,
2001, 2000 and 1999, respectively.
FOREIGN OPERATIONS
Foreign operations began in 2000, however the impact financially of expanding
internationally is not significant at December 31, 2001. Australia and Canada
are the only foreign countries in which the Company is currently operating. The
Company's Australia operations include a 50% interest in a corporate joint
venture to provide EBPP services. The Company accounts for this investment under
the equity method. Gains and losses resulting from foreign currency transactions
denominated in a currency other than the functional currency are included in
income and have not been significant to the Company's consolidated operating
results in any year.
- --------------------------------------------------------------------------------
31
INCOME TAXES
Income taxes are determined using the liability method (see Note 12). Under this
method, deferred tax assets and liabilities are recorded based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
COMPREHENSIVE LOSS
The Company's comprehensive loss is comprised of net loss and unrealized gains
and losses on investments classified as available-for-sale.
STOCK-BASED COMPENSATION
The Company applies the intrinsic value method in accounting for its stock
option and stock purchase plans. Accordingly, no compensation expense has been
recognized for options granted with an exercise price equal to market value at
the date of grant or in connection with the employee stock purchase plan. The
pro forma effects of fair value accounting for stock-based compensation costs on
net loss and loss per share are disclosed in Note 13.
NET LOSS PER SHARE
Basic and diluted losses per common share are calculated by dividing net loss by
the weighted average number of common shares outstanding during the period.
Common stock equivalents, which consist of stock options and warrants, were
excluded from the computation of the weighted average number of common shares
outstanding for purposes of calculating diluted loss per common share because
their effect was antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations",
which addresses the initial recognition of goodwill and other intangible assets
acquired in a business combination and requires that all future business
combinations be accounted for under the purchase method of accounting. In July
2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets",
which addresses the recognition and measurement of other intangible assets
acquired outside of a business combination whether acquired individually or with
a group of assets. In accordance with these statements, goodwill and certain
intangible assets are no longer amortized, but are subject to at least an annual
assessment of impairment. The Company will adopt these statements on a
prospective basis on January 1, 2002. Management does not believe the adoption
of these statements will have an adverse impact on the financial statements of
the Company.
NOTE 2. FINANCIAL INSTRUMENTS
The following is a summary of available-for-sale investments at December 31,
2001 and 2000:
December 31, 2001 December 31, 2000
----------------------------------- -----------------------------------
Gross Gross
Amortized unrealized Fair Amortized unrealized Fair
Cost Gains Value Cost Gains Value
--------- ---------- --------- --------- ---------- ---------
Time deposits $ 236,948 $ 0 $ 236,948 $ 335,000 $ 0 $ 335,000
Corporate bonds 0 0 0 2,001,711 13,109 2,014,820
--------- ---- --------- ---------- ------- ---------
$ 236,948 $ 0 $ 236,948 $2,336,711 $13,109 $2,349,820
========= ==== ========= ========== ======= ==========
Included in the above table are securities with fair values totaling $236,948
and $1,013,900 at December 31, 2001 and 2000, respectively, which are classified
as short-term investments and $1,335,920 at December 31, 2000 which are
classified as long-term assets in the accompanying consolidated balance sheets.
All short-term investments mature within one year. At December 31, 2001 and
2000, short-term and long-term investments includes restricted time deposits of
$236,948 and $335,000, respectively, which is used as collateral on capital
leases (see Note 8).
- --------------------------------------------------------------------------------
32
NOTE 3. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101, "Revenue
Recognition in Financial Statements," which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements. The
implementation of SAB 101 requires the Company's revenue generated from up-front
implementation fees that do not represent a separate earnings process to be
recognized over the term of the related service contract. Prior to December 31,
1999, the Company recognized revenue generated from such up-front fees upon
completion of an implementation project. The Company adopted SAB 101 as of
January 1, 2000, and accordingly, changed its revenue recognition policy for
up-front implementation fees. The cumulative effect of this accounting change
totaled $52,273. This amount was recognized as a non-cash after-tax charge
during the first quarter of 2000. The cumulative effect was recorded as deferred
revenue and is being recognized as revenue over the remaining contractual
service periods.
NOTE 4. ISSUANCE OF CAPITAL STOCK
Regulation S Issuance
On June 11, 1999, the Company issued 946,428 shares of common stock in exchange
for $5.3 million in cash. The stock was issued pursuant to exemption under
Regulation S.
Private Placements
In October 1999 and December 1999, the Company issued 1,404,637 and 732,000
shares of common stock, respectively, under a private placement offering (the
"1999 Offering"). The shares were issued at $3.25 and $5.50 per share,
respectively, which represented a discount upon the average reported closing
sale price of the common stock for the ten business days immediately preceding
the closing date. Net proceeds totaled approximately $7,907,000, net of offering
costs of $684,000, which included $526,000, or 6.5% of the 1999 Offering, paid
to the placement agent. Of the shares issued in October 1999, 153,846 were
issued in satisfaction of a $500,000 short-term note payable (See Note 10).
In accordance with the terms of the 1999 Offering, a registration statement on
Form SB-2 was filed with the SEC registering 3,782,360 shares of common stock.
This registration statement became effective on January 18, 2000. The registered
shares include the 2,136,637 shares issued in October and December 1999 and
1,645,723 shares which were issuable upon exercise of warrants to purchase
common stock issued to the holders of the shares issued in October and December
1999.
On June 2, 2000, the Company entered into an extended biller service provider
agreement with CheckFree Investment Corporation, CheckFree Services Corporation
and CheckFree Holdings Corporation ("CheckFree"). As part of this agreement,
CheckFree purchased 879,121 shares of the Company's common stock at $11.375 per
share totaling $10.0 million. Offering proceeds to the Company, net of issuance
costs, were approximately $9.5 million. In connection with this transaction, the
Company also issued warrants to purchase 2,179,121 shares of common stock, and
warrants to purchase up to an additional 2,801,903 shares if certain criteria
are met (See Note 14).
In March 2001, the Company issued 2,885,462 shares of common stock under a
private placement offering. The shares were issued at an undiscounted price of
$2.50 per share. Net proceeds totaled approximately $6.6 million, net of
offering costs of approximately $565,000, which included approximately $540,000,
or 7.5% of the Offering, paid to the placement agent. The Company subsequently
filed a registration statement with the SEC to register the shares issued in
this offering.
In November 2001, the Company issued 2,000,000 shares of common stock under a
private placement offering (the "2001 Offering"). The shares were issued at an
undiscounted price of $1.25 per share. Net proceeds totaled approximately $2.3
million, net of offering costs of approximately $211,000, which included
approximately $200,000, or 8% of the Offering, paid to the placement agent. The
Company subsequently filed a registration statement with the SEC to register the
shares issued in this offering. In connection with this transaction, the Company
also issued warrants to purchase 2,000,000 shares of common stock (See Note 14).
- --------------------------------------------------------------------------------
33
NOTE 5. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31, 2001 and
2000:
December 31, December 31,
2001 2000
------------------ -----------------
Furniture and fixtures $ 1,285,440 $ 1,283,564
Equipment 2,983,164 2,535,602
Software 1,613,759 1,394,990
Leasehold improvements 537,795 483,004
------------------ -----------------
6,420,158 697,160
Less: accumulated depreciation and
amortization (2,718,953) (1,178,813)
------------------ -----------------
Total property and equipment, net $ 3,701,205 $ 4,518,347
================== =================
For 2001, 2000 and 1999, the Company recorded $1,540,626, $925,995 and $263,408,
respectively, of depreciation expense related to fixed assets, including
amortization expense related to capital leases. Amortization expense related to
intangible assets was $15,000, $15,000 and $7,500 in 2001, 2000 and 1999,
respectively.
NOTE 6. OTHER ASSETS
At December 31, 2001 and 2000, other assets included a cash deposit of
approximately $413,000 and $516,000, respectively, related to the lease for its
corporate headquarters. Additionally, certificates of deposit totaling $335,000
used as collateral for long-term capital leases were included in other assets at
December 31, 2000 (see Note 8).
NOTE 7. ACCRUED EXPENSES
Accrued expenses consist of the following balances:
December 31, December 31,
2001 2000
----------------- -----------------
Accrued salaries $ 257,843 $ 332,337
Accrued vacation 122,501 183,703
Accrued property taxes 99,338 94,000
ESPP withholdings 40,745 151,172
Other accrued expenses 143,773 135,560
----------------- -----------------
Total $ 664,200 $ 896,772
================= =================
NOTE 8. OBLIGATIONS UNDER CAPITAL LEASES
Property held under capital leases is stated at the present value of minimum
lease payments at the inception of the related leases. Property held under a
capital lease is amortized on a straight-line basis over the estimated useful
life of the assets. Amortization of property held under capital leases is
included with depreciation expense. At both December 31, 2001 and 2000, there
was $498,946 of office and computer equipment held under capital leases. All of
the Company's capital leases are secured by certificates of deposit totaling
approximately $237,000 at December 31, 2001.
The following is a schedule of future minimum lease payments under capital
leases for the year ending December 31, 2002, together with the present value of
the minimum lease payments as of December 31, 2001:
Year ending December 31, 2002 $ 158,651
Less: amount representing interest (10,423)
-------------
Current portion of obligations under capital
leases $ 148,228
=============
These obligations are classified as capital leases due to the bargain purchase
option contained therein.
- --------------------------------------------------------------------------------
34
NOTE 9. OPERATING LEASES
In March 2000, the Company entered into a five-year operating lease for its
corporate headquarters at a rate of $98,000 per month. This lease provides the
Company a five-year renewal option. The lease required an initial cash deposit
of approximately $516,000. Additionally, the Company leases office space and
other equipment under non-cancelable operating leases. Rental expense under
operating leases for the year ended December 31, 2001, 2000 and 1999, was
$1,245,000, $681,000 and $116,000, respectively. Future minimum lease payments
required under operating leases, by year and in the aggregate, consist of the
following at December 31, 2001:
Year ending December 31,
2002 $1,195,446
2003 1,192,909
2004 1,177,803
2005 880,936
----------
Total minimum lease payments $4,447,094
==========
NOTE 10. DEBT
Note Payable
On August 6, 1999, the Company issued a one-year unsecured note payable for $1.0
million to an accredited investor, which accrued interest at 9% per annum,
payable quarterly. The proceeds of this note payable were allocated for use in
corporate operations and to supplement cash reserves until future equity
financing was obtained. In connection with the issuance of the note, a $20,000
loan origination fee was paid to a venture capital firm. On October 22, 1999,
153,846 shares of common stock were issued pursuant to the terms of the 1999
Offering (see Note 4) in satisfaction of $500,000 of the note. The remaining
portion of the note, or $500,000, was paid in cash on October 18, 1999.
Line of Credit
On June 9, 2000, the Company executed a working capital line of credit agreement
with a bank in the amount of $1,500,000. Advances under the line of credit
accrued interest at the prime rate minus 0.25%, with repayment terms of monthly
interest-only payments and principal due in July 2001. At December 31, 2000, the
line of credit was subject to an interest rate of 9.25%. The line of credit was
secured by certain investments of the Company. The Company borrowed $1,500,000
on this line of credit for the security deposit and leasehold improvements of
the Company's corporate headquarters and repaid the entire outstanding balance
plus accrued interest in January 2001. The line of credit expired in July 2001
and was not renewed.
NOTE 11. RELATED PARTY TRANSACTIONS
During 1999, the Company entered into an agreement ("Consulting Agreement") to
receive financial consulting, public relations services, advertising services
and investor relations services from a group of minority shareholders
("Consulting Group"). The agreement provided for services totaling $1.2 million
and was effective from November 1, 1998 to October 31, 1999. The Company paid
$1.0 million due to the Consulting Group under the agreement from the proceeds
of the Regulation S offering completed on June 11, 1999. The remaining $200,000
under the agreement was paid to the Consulting Group during the third quarter of
1999.
From time to time, the Company has made loans to certain officers of the
Company. These amounts are included in Related Party Notes Receivable. The
highest aggregate amount outstanding of loans due from officers was $230,000
during 2001 and 2000 and $25,000 during 1999.
On September 30, 1999, the Company loaned $25,000 to an officer of the Company.
The loan was repaid in full, including interest at 8% annually, during 2000.
In December 2000, an officer of the Company borrowed approximately $20,000 that
bears interest at a rate of 8% annually. The loan was repaid in full during
2001.
On August 16, 2000, an officer of the Company borrowed approximately $60,000
that bears interest at a rate of 8% annually. At December 31, 2001, $46,000 was
outstanding under this loan. On December 21, 2000, the Company entered into a
30-day promissory note with the same officer for $125,000. The promissory note
was repaid in full in January 2001, including interest at a rate of 8% annually.
- --------------------------------------------------------------------------------
35
During 2000, an officer of the Company borrowed approximately $35,000, of which
$25,000 was outstanding at December 31, 2000. During 2001, the Company loaned an
additional $94,000 to this officer prior to his resignation from the Company. At
December 31, 2001, the Company had an aggregate of $115,000 in notes receivable
bearing interest at 8% annually from this ex-officer.
During December 2000 and May 2001, the Company pledged $1.0 million and
$960,000, respectively, held as money market funds and certificates of deposit
to collateralize margin loans of four officers of the Company. The margin loans
are from an institutional lender and are secured by shares of the Company's
common stock held by these officers, one of whom was no longer employed by the
Company at December 31, 2001. The total balance of the margin loans
guaranteed by the Company was approximately $2.0 million at December 31,
2001. The Company has the unrestricted right to use the pledged funds for its
operations if necessary.
NOTE 12. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31 are as
follows:
2001 2000 1999
-------------------- ------------------- -------------------
Deferred Tax Assets:
--------------------
Warrant expense $ 2,713,006 $ 2,713,006 $ -
Deferred revenue 221,894 280,840 -
Start-up and organizational costs 167,042 242,432 283,075
Accrued expenses 42,748 108,155 -
Research credit 38,153 38,153 38,153
Amortization 8,925 5,525 2,210
Allowance for doubtful accounts 6,437 3,400 -
Trademark cost 636 721 774
Other 2,710 2,710 -
Net operating loss 9,195,720 5,562,499 1,683,551
-------------------- ------------------- -------------------
12,397,271 8,957,441 2,007,763
Valuation allowance (12,221,101) (8,800,051) (1,990,513)
-------------------- ------------------- -------------------
Total Deferred Tax Asset 176,170 157,390 17,250
Deferred Tax Liabilities:
-------------------------
Depreciation 104,773 75,694 11,558
Prepaid expenses 61,987 74,896 5,692
Equity in earnings of investee 2,610 - -
Other 6,800 6,800 -
-------------------- ------------------- -------------------
Total Deferred Tax Liabilities 176,170 157,390 17,250
-------------------- ------------------- -------------------
Net Deferred Tax Asset
(Liability) $ - $ - $ -
==================== =================== ===================
For the years ended December 31, 2001, 2000 and 1999, the Company generated net
operating losses for tax purposes of approximately $10.6 million, $12.0 million,
and $4.95 million, respectively. The loss for the year ended December 31, 2001
expires in 2022; the loss for the year ended December 31, 2000 expires in 2021;
and the loss for the year ended December 31, 1999 expires in 2020. The Company
also has a research and development credit of approximately $38,000 that expires
in 2015. Legislation regarding the research and development tax credit extended
that utilization period. However, use of the credit is suspended during certain
periods. The Company intends to utilize the research and development credit
during the applicable periods. For financial reporting purposes, a valuation
allowance of approximately $12.2 million has been recognized to offset the
deferred tax assets related to various temporary differences at December 31,
2001.
For the period from inception (July 30, 1998) through December 31, 2001, the
Company has net operating loss carryforwards for tax purposes of approximately
$27 million that begin to expire in year 2020. In October 1999, the Company
issued common stock pursuant to a private placement offering. As a result, an
ownership change occurred under Section 382 that limits the utilization of
pre-change net operating loss carryforwards. Approximately $3.5 million of the
total net operating loss is subject to the Section 382 limitations.
- --------------------------------------------------------------------------------
36
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is as follows:
2001 2000 1999
-------------------- ------------------- -------------------
Tax at US statutory rate -- 34% $ (3,537,940) $ (6,802,830) $ (1,860,802)
Valuation allowance 3,421,050 6,809,538 1,892,513
Permanent and other differences 116,890 31,445 6,442
Research credit - (38,153) (38,153)
-------------------- ------------------- -------------------
Income tax expense
$ - $ - $ -
==================== =================== ===================
NOTE 13. EMPLOYMENT BENEFIT PLANS Number Of Shares Weighted Average
Stock Option Plans
The Board of Directors and stockholders approved the 1999 Employee Comprehensive
Stock Plan ("Employee Plan") to provide qualified incentive stock options
("ISOs") and non-qualified stock options ("NQSOs") as well as restricted stock
to key employees. Under the terms of the Employee Plan, the exercise price of
incentive stock options must be equal to 100% of the fair market value on the
date of grant (or 110% of fair market value in the case of an ISO granted to a
10% stockholder/grantee). There is no price requirement for NQSOs, other than
that the option price must exceed the par value of the common stock. The Company
has reserved 5,000,000 shares of its common stock for issuance pursuant to the
Employee Plan.
The 1999 Non-Employee Director Plan ("Director Plan") was approved by the Board
of Directors and stockholders in 1999. Under the Director Plan, which is
administered by a committee of no less than two board members and two
disinterested persons, non-employee directors may be granted options to purchase
shares of common stock at 100% of fair market value on the date of grant. The
Company has reserved 500,000 shares of its common stock for issuance pursuant to
the Director Plan.
Activity under the Employee Plan and Director Plan from inception to December
31, 2001 is as follows:
Weighted Average
Number of Shares Exercise Price
-------------------- --------------------
Inception of Plans, January 1, 1999
Granted 1,091,300 $3.86
Cancelled (27,000) 3.93
Exercised - -
--------------------
Outstanding, December 31, 1999 1,064,300 3.86
Granted 2,075,075 5.56
Cancelled (236,500) 5.42
Exercised (3,700) 3.66
--------------------
Outstanding, December 31, 2000 2,899,175 4.95
Granted 2,045,162 0.97
Cancelled (646,032) 4.67
Exercised (8,000) 4.38
---------------------
Outstanding, December 31, 2001 4,290,305 $3.10
=====================
There was an aggregate of 1,197,995, 597,125, and 1,435,700 options to purchase
the Company's common stock available for future grants under the Employee and
Director Plans at December 31, 2001, 2000 and 1999, respectively. Exercisable
stock options amounted to 1,089,059 at a weighted average price of $4.62 and
300,373 at a weighted average price of $3.81 at December 31, 2001 and 2000,
respectively. There were no stock options exercisable at December 31, 1999.
- --------------------------------------------------------------------------------
37
Summarized information about stock options outstanding at December 31, 2001 is
as follows:
Options Outstanding Options Exercisable
------------------------------------- ------------------------------------
Weighted Average Weighted Weighted
Range of Exercise Options Remaining Average Exercise Number of Average Exercise
Prices Outstanding Contractual Life Price Options Price
- ----------------------- ----------------- ------------------- ----------------- ----------------- ------------------
$0.86-$0.88 1,851,300 9.83 $0.86 - -
$1.55-$2.09 892,012 9.05 $2.04 299,405 $2.04
$2.75-$4.88 695,967 7.55 $3.61 459,736 $3.62
$5.19-$7.84 494,850 8.11 $6.91 205,186 $6.67
$9.44-$11.88 356,176 8.29 $11.09 124,732 $11.10
----------------- -----------------
4,290,305 8.97 $3.10 1,089,059 $4.62
================= =================
The weighted average fair value of stock options at date of grant was $0.73,
$4.20 and $2.69 per option for options granted during fiscal years 2001, 2000,
and 1999, respectively. The fair value of each option granted was estimated
using the Black-Scholes option-pricing model, utilizing the following
assumptions:
2001 2000 1999
---- ---- ----
Dividend yield None None None
Expected volatility 119% 118% 102%
Risk-free interest rate 3.40% 5.22% 6.25%
Expected life 3.95 3.98 3.50
Had compensation expense been recorded based on the fair value at the grant date
for 2001, 2000 and 1999 stock option grants, net loss and net loss per share
would approximate the pro forma amounts below:
2001 2000 1999
---- ---- ----
Pro forma net loss $(13,188,701) $(23,778,759) $(6,476,551)
Pro forma net loss per common share - basic and diluted $ (0.73) $ (1.61) $ (0.60)
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. Additional awards in future years are anticipated.
Employee Stock Purchase Plan
The Company established the 1999 Employee Stock Purchase Plan ("ESPP") under the
requirements of Section 423 of the Internal Revenue Code (the "Code") to allow
eligible employees to purchase the Company's common stock at regular intervals.
Participating employees may purchase common stock through voluntary payroll
deductions at the end of each participation period at a purchase price equal to
85% of the lower of the fair market value of the common stock at the beginning
or the end of the participation period. Common stock reserved for future
employee purchases under the plan aggregated 864,958 shares at December 31,
2001. The first offering period under the ESPP began January 1, 2000. A total of
117,194 and 17,848 shares were issued under the ESPP in 2001 and 2000,
respectively, at prices ranging from $1.74 per share to $6.56 per share.
401(k) Plan
In May 1999, the Company adopted a defined contribution plan (the "401(k) Plan")
pursuant to Section 401(k) of the Code. All eligible full and part-time
employees of the Company who meet certain age requirements may participate in
the 401(k) Plan. Participants may contribute between 1% and 15% of their pre-tax
compensation, but not in excess of the maximum allowable under the Code. The
401(k) Plan allows for discretionary and matching contributions by the Company.
The Company made no contributions during fiscal 2001, 2000 and 1999.
NOTE 14. STOCK WARRANTS
On May 7, 1999, the Company contracted to issue warrants for the purchase of up
to 500,000 shares of common stock to a financial services reseller. Subject to
specific performance criteria, this reseller may earn the right to purchase
shares of common stock, at the closing bid price as of May 7, 1999 ($6.50), over
a three-year term. No warrants had been issued as of December 31, 2001.
- --------------------------------------------------------------------------------
38
On May 18, 1999, the Company contracted with an investment bank to provide
strategic and financial advisory services. In exchange for these advisory
services, a warrant to purchase 111,085 shares of the Company's common stock at
an exercise price of $6.75 per share (which represents the average closing price
of the stock over the twenty day period preceding May 18, 1999) was issued. The
warrant is exercisable for five years. This warrant was issued in accordance
with an exemption under Section 4(2) of the Securities Act of 1933, as amended,
because the transaction is by an issuer not involving a public offering. Using
the fair value-based method of accounting, the Company recorded $356,583 of
expense and a corresponding credit to additional paid-in capital related to the
issuance of this warrant.
As part of the August 1999 debt issuance, the Company issued a warrant to the
accredited investor for the purchase of 41,237 shares of the common stock at an
exercise price of $6.0625, which represents the average reported closing sale
price of the common stock for the ten business days immediately preceding the
loan agreement. The warrant is immediately exercisable and carries a term of
five years and piggyback registration rights. Using the fair value-based method
of accounting, the Company recorded $134,845 of expense and a corresponding
credit to paid-in-capital related to the issuance of this warrant.
In connection with the 1999 Offering (see Note 4), the Company issued warrants
to the twenty-one investors to purchase 1,404,637 shares of common stock at
$3.75 per share, or one warrant for each share issued. The warrants are
exercisable for three years from the date of issuance, or until October 14,
2002. The Company has the right to call the exercise of the warrants at any time
after six months after the date of the issuance and after the closing price of
the common stock exceeds $12.00 for a period of twenty consecutive trading days.
Upon such call notice, the holders of the warrants must exercise the warrants
within thirty days, after which time they may be redeemed for $.05 per warrant.
As part of the compensation for acting as placement agent for the 1999 Offering,
the Company issued warrants to the investment banker for the purchase of 36,924,
600, 18,900, 19,950, 8,890 and 3,500 shares of common stock. The warrants are
immediately exercisable, carry a five year term, exercise prices of $3.25,
$3.25, $8.00, $7.44, $7.41, and $7.31, respectively, piggyback registration
rights, and cashless exercise provision.
In connection with the CheckFree investment, the Company issued CheckFree
warrants to purchase 2,179,121 shares at $11.375 per share for entering into the
extended biller service provider agreement and investing $10.0 million. The
Company recorded $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, 2001, none
of these incentive warrants have vested.
In connection with the 2001 Offering (see Note 4), the Company issued warrants
to the eighteen investors to purchase 2,000,000 shares of common stock at $1.80
per share, or one warrant for each share issued. The warrants are exercisable
for five years from the date of issuance, or until November 27, 2006. The
Company has the right to call the exercise of the warrants at any time after six
months after the date of the issuance and after the closing price of the common
stock exceeds $5.40 for a period of twenty consecutive trading days. Upon such
call notice, the holders of the warrants must exercise the warrants within
thirty days, after which time they may be redeemed for $.05 per warrant.
At December 31, 2001, the outstanding vested warrants to purchase common stock
are as follows:
Shares of Common Exercise Aggregate Exercise Expiration
Stock Price Price Date
- --------------------------------------------------------------------------------
57,431 $ 3.75 $ 215,366 10/14/2002
20,000 3.75 75,000 10/25/2002
41,237 6.06 250,000 08/05/2004
250 3.25 813 10/14/2004
280 8.00 2,240 12/15/2004
8,890 7.41 65,875 12/20/2004
3,500 7.31 25,585 12/22/2004
2,179,121 11.38 24,798,397 06/02/2010
2,000,000 1.80 3,600,000 11/27/2006
---------- ------------
4,310,709 $ 29,033,276
========== ============
- --------------------------------------------------------------------------------
39
NOTE 15. COMMON STOCK LISTING
Billserv common stock began trading on the OTC BB operated by the National
Association of Securities Dealers on December 3, 1998. The NASD adopted
eligibility rules in 1999, which required clearance of comments by the SEC on
all SEC filings. The Company filed its initial filing on Form 10 with the SEC on
June 10, 1999 but, as of October 7, 1999, the SEC had not cleared its comment
period. In accordance with the OTC BB's phase-in schedule for the new
eligibility rules, the listing on the OTC BB was terminated. The Company's
common stock was quoted in the National Quotation Board's Electronic Pink Sheets
until December 7, 1999, when the SEC cleared the comment period and the stock
was relisted and traded on the OTC BB through March 13, 2000 at which time the
stock was approved for trading on the NASDAQ Small Cap Market. Subsequently the
stock was approved for trading on the NASDAQ National Market on July 31, 2000,
under the symbol "BLLS".
NOTE 16. SUBSEQUENT EVENTS (UNAUDITED)
In March 2002, the Company executed a working capital line of credit agreement
with a bank in the amount of $700,000. Advances under the line of credit accrue
interest at the prime rate minus 0.25%, with repayment terms of monthly
interest-only payments and principal due in June 2003. The line of credit is
secured by certain investments of the Company.
In March 2002, an ex-officer of the Company repaid the balance of his loans
totaling $115,000, plus accrued interest, to the Company.
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 2001 and 2000 is presented below.
2001
-----------------------------------------------------
First Second Third Fourth
-----------------------------------------------------
Revenue $ 509,409 $ 690,062 $ 831,893 $ 937,314
Gross margin (722,907) (536,188) (474,507) (292,881)
Net loss $(3,234,305) $(2,576,973) $(2,478,390) $(2,116,038)
Net loss per common share-
basic and diluted (a) $ (0.21) $ (0.14) $ (0.13) $ (0.11)
Weighted average shares 15,697,051 18,490,631 18,535,923 19,299,313
2000
------------------------------------------------------
First Second Third Fourth
------------------------------------------------------
Revenue $ 6,426 $ 45,208 $ 117,499 $ 480,890
Gross margin (464,265) (747,703) (953,708) (875,144)
Net loss $(2,071,213) $(10,184,683) $(3,770,212) $ (3,982,215)
Net loss per common share-
basic and diluted (a) $ (0.16) $ (0.68) $ (0.24) $ (0.26)
Weighted average shares 13,230,142 14,874,517 15,525,973 15,527,870
(a) Earnings per common share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly loss per
common share information may not equal the annual loss per common
share.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- --------------------------------------------------------------------------------
40
PART III
Certain information required by Part III is omitted from this Report in that we
will file our definitive Proxy Statement for our Annual Meeting of Stockholders
to be held May 23, 2002, pursuant to Regulation 14A of the Securities and
Exchange Act of 1934 (the "Proxy Statement") not later than 120 days after the
end of the fiscal year covered by this Report, and certain information included
in the Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is incorporated in this Item 10, by reference, that portion of the
Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders, which appears therein under the captions "Item 1: Election of
Directors," "Information Concerning Directors," and "Section 16(a) Beneficial
Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
There is incorporated in this Item 11, by reference, that portion of the
Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders, which appears under the caption "Compensation of Executive
Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated in this Item 12, by reference, that portion of the
Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders, which appears under the caption "Beneficial Ownership of Certain
Stockholders, Directors and Executive Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 2, 2000, the Company entered into an extended biller service provider
agreement with CheckFree Investment Corporation, CheckFree Services Corporation
and CheckFree Holdings Corporation ("CheckFree"). As part of this agreement,
CheckFree purchased 879,121 shares of the Company's common stock at $11.375 per
share totaling $10.0 million. Offering proceeds to the Company, net of issuance
costs, were approximately $9.5 million. In connection with the CheckFree
investment, the Company issued to CheckFree warrants to purchase 2,179,121
shares at $11.375 per share, thereby causing CheckFree to beneficially own more
than 5% of the Company's common stock. During 2001 and 2000, the Company paid
CheckFree approximately $175,000 and $100,000 for implementation and
distribution services related to the Company's provision of EBPP services to
billers.
On January 4, 2001, the Company retained PMG Capital to act as its placement
agent in connection with one or more private placement transactions, as well as
to perform other investment, strategic and financial advisory services for the
Company for a one-year term. As compensation for providing these services, the
Company paid PMG Capital a $50,000 initial retainer and a $5,000 monthly
retainer through August 2001. Under the agreement, the Company was obligated to
pay PMG Capital a fee equal to 7.5% of the total amount raised in a private
placement transaction.
Mr. Louis Hoch, President, Chief Operating Officer and a Director of the
Company, borrowed approximately $60,000 at a rate of 8% and entered into a
30-day promissory note for $125,000 at a rate of 8% on August 16, 2000 and
December 21, 2000, respectively. The largest amount owed to the Company by Mr.
Hoch during 2001 was approximately $184,000. Mr. Hoch used the proceeds of the
$60,000 loan for usual and customary living expenses. At December 31, 2001,
approximately $46,000 was outstanding under this loan. The $125,000 30-day
promissory note was incurred to allow Mr. Hoch to pay down a margin loan to an
institutional lender. This margin loan was secured by shares of the Company's
stock held by Mr. Hoch. The promissory note was repaid in full in January 2001,
including accrued interest.
Mr. David Jones, a former Executive Vice President and Director of the Company,
borrowed approximately $35,000 at a rate of 8% during 2000, of which $25,000 was
outstanding at December 31, 2000. During 2001, the Company loaned an additional
$94,000 at a rate of 8% to Mr. Jones prior to his resignation from the Company.
Mr. Jones used the proceeds of these loans for usual and customary living
expenses and to pay down a margin loan to an institutional lender. At December
31, 2001, the Company had an aggregate of $115,000 in notes receivable bearing
interest at 8%, which was the largest amount owed to the Company by Mr. Jones
during 2001. In March 2002, Mr. Jones repaid the balance of these loans in full,
including accrued interest.
- --------------------------------------------------------------------------------
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this Report
(1) Financial Statements
The financial statements listed in the index under Part II, Item 8
hereof are filed as part of this Report.
(2) Financial Statement Schedules
All financial statement schedules called for by Form 10-K are omitted
because they are inapplicable or the required information is shown in
the financial statements, or notes thereto, included herein.
(3) Exhibits
The exhibits listed below are filed as part of or incorporated by
reference in this Report.
Exhibit Description
- ------- -----------
3.1 Articles of Incorporation, as amended (incorporated by reference to
such exhibit in the Registrant's Registration Statement on Form SB-2,
filed December 29, 1999)
3.2 By-laws, as amended (incorporated by reference to such exhibit in the
Registrant's Registration Statement on Form SB-2, filed December 29,
1999)
4.1 Rights Agreement, dated October 4, 2000 (incorporated by reference to
such exhibit in the Registrant's Registration Statement on Form 8-A,
filed October 11, 2000)
10.1 1999 Employee Comprehensive Stock Plan, as amended (incorporated by
reference to such exhibit in the Registrant's Registration Statement
on Form S-8, filed February 11, 2002)
10.2 1999 Non-Employee Director Plan (incorporated by reference to such
exhibit in the Registrant's Definitive Proxy Statement, filed November
22, 1999)
10.3 1999 Employee Stock Purchase Plan (incorporated by reference to such
exhibit in the Registrant's Definitive Proxy Statement, filed November
22, 1999)
10.4 Form of Employment Agreement dated May 31, 2001, between the Company
and Executive Officers of the Company (with accompanying schedule
identifying the parties thereto and material details in which such
agreements differ with respect to the agreement filed herewith)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Ernst & Young LLP, Independent Auditors (filed herewith)
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended December 31, 2001.
- --------------------------------------------------------------------------------
42
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
BILLSERV, INC.
By: /s/ Michael R. Long
-----------------------
Michael R. Long
Chairman of the Board and
Chief Executive Officer
Date: March 29, 2002
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated on March 29, 2002.
By: /s/ Michael R. Long
------------------------
Michael R. Long
Chairman of the Board and
Chief Executive Officer (principal executive officer)
By: /s/ Louis A. Hoch
------------------------
Louis A. Hoch
President, Chief Operating Officer
and Director
By: /s/ Terri A. Hunter
------------------------
Terri A. Hunter
Executive Vice President, Chief Financial Officer
(principal financial and accounting officer) and Director
By: /s/ E. Scott Crist
------------------------
E. Scott Crist
Director
By: /s/ Roger R. Hemminghaus
------------------------
Roger R. Hemminghaus
Director
By: /s/ Peter G. Kirby
------------------------
Peter G. Kirby
Director
By: /s/ Richard B. Bergman
------------------------
Richard B. Bergman
Director
- --------------------------------------------------------------------------------
43