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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 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 number)
211 North Loop 1604 East, Suite 200
San Antonio, TX 78232
(Address of principal executive offices)
(210) 402-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of 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 requirement for
the past 90 days. Yes |X| No |_|
At May 1, 2003, 20,722,656 shares of the registrant's common stock, $.001 par
value, were outstanding.
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BILLSERV, INC.
INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002 ......................................... 3
Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002 ................................. 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 ................................. 5
Notes to Consolidated Financial Statements ...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...... 12
Item 4. Controls and Procedures ......................................... 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................ 13
Signature ............................................................... 14
Certifications .......................................................... 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BILLSERV, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited) (Note 1)
Assets:
Current assets:
Cash and cash equivalents $ 166,749 $ 286,105
Cash pledged as collateral for related party obligations -- 1,311,984
Accounts receivable, net 727,667 659,074
Prepaid expenses and other 162,288 257,810
------------ ------------
Total current assets 1,056,704 2,514,973
Property and equipment, net 1,853,034 2,171,790
Intangible asset, net 18,750 22,500
------------ ------------
Total assets $ 2,928,488 $ 4,709,263
============ ============
Liabilities and stockholders' equity (deficit):
Current liabilities:
Accounts payable $ 1,150,009 $ 797,211
Accrued expenses and other current liabilities 639,289 707,741
Payable under related party guarantees -- 1,278,138
Current portion of obligations under capital leases 31,315 31,315
Current portion of deferred revenue 335,527 309,492
Short-term borrowings 1,800,000 1,800,000
------------ ------------
Total current liabilities 3,956,140 4,923,897
Obligations under capital leases, less current portion 39,168 39,168
Deferred revenue, less current portion 57,448 91,468
Stockholders' equity:
Common stock, $.001 par value, 200,000,000 shares
authorized; 20,722,656 issued and outstanding at
March 31, 2003, 20,603,799 issued and outstanding at
December 31, 2002 20,723 20,604
Additional paid-in capital 46,793,027 46,770,186
Accumulated deficit (47,938,018) (47,136,060)
------------ ------------
Total stockholders' equity (deficit) (1,124,268) (345,270)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 2,928,488 $ 4,709,263
============ ============
See notes to interim consolidated financial statements.
3
BILLSERV, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended March 31,
------------------------------
2003 2002
------------ ------------
Revenues $ 903,739 $ 1,129,672
Cost of revenues 717,041 1,205,096
------------ ------------
Gross margin 186,698 (75,424)
Operating expenses:
General and administrative 554,524 964,693
Selling and marketing 25,811 322,587
Research and development 39,550 138,675
Depreciation and amortization 322,506 424,000
------------ ------------
Total operating expenses 942,391 1,849,955
------------ ------------
Operating loss (755,693) (1,925,379)
Other income (expense), net:
Interest income 4,168 35,977
Interest expense (44,393) (5,622)
Equity in earnings of
unconsolidated subsidiary -- 2,180
Other income (expense) (6,040) 214
------------ ------------
Total other income, net (46,265) 32,749
------------ ------------
Loss before income taxes (801,958) (1,892,630)
Income taxes -- --
------------ ------------
Net loss $ (801,958) $ (1,892,630)
============ ============
Net loss per common share - basic and
diluted $ (0.04) $ (0.09)
Weighted average common shares
outstanding - basic and diluted 20,686,189 20,577,813
See notes to interim consolidated financial statements.
4
BILLSERV, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $ (801,958) $(1,892,630)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 322,506 424,000
Equity in earnings of unconsolidated subsidiary -- (2,180)
Changes in current assets and current liabilities:
Increase in accounts receivable (68,593) (48,723)
Decrease in related party notes receivables -- 134,605
(Increase) decrease in prepaid expenses and other 95,522 (83,239)
Increase in accounts payable, accrued expenses
and other current liabilities 284,346 126,815
Decrease in deferred revenue (7,985) (181,994)
----------- -----------
Net cash used in operating activities (176,162) (1,523,346)
Cash flows from investing activities:
Purchases of property and equipment -- (658,045)
Other investing activities -- (6,126)
----------- -----------
Net cash used in investing activities -- (664,171)
Cash flows from financing activities:
Cash pledged as collateral for related party
obligations 1,311,984 104,157
Payments for related party obligations (1,278,138) --
Proceeds from notes payable -- 300,000
Principal payments for capital lease obligations -- (49,684)
Issuance of common stock, net of issuance costs 22,960 39,145
----------- -----------
Net cash provided by financing activities 56,806 393,618
----------- -----------
Net decrease in cash and cash equivalents (119,356) (1,793,899)
Cash and cash equivalents, beginning of period 286,105 4,173,599
----------- -----------
Cash and cash equivalents, end of period $ 166,749 $ 2,379,700
=========== ===========
See notes to interim consolidated financial statements.
5
BILLSERV, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Billserv, Inc.
(the "Company") have been prepared without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying consolidated financial statements reflect all
adjustments of a normal recurring nature considered necessary to present fairly
the Company's financial position, results of operations and cash flows for such
periods. The accompanying interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002. Results of operations for interim periods are not necessarily
indicative of results that may be expected for any other interim periods or the
full fiscal year. Certain prior period amounts have been reclassified to conform
to the current year presentation. In prior fiscal years, the Company had been in
the development stage, but is no longer considered to be a development stage
company.
The consolidated balance sheet at December 31, 2002 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
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.
Note 2. Stock-Based Compensation
The Company applies the intrinsic value method under the recognition and
measurement provisions of APB No. 25, "Accounting for Stock Issued to
Employees", in accounting for its stock option and stock purchase plans.
Accordingly, no stock-based employee compensation expense has been recognized
for options granted with an exercise price equal to the market value of the
underlying common stock on the date of grant or in connection with the employee
stock purchase plan. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of FASB No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"), to stock-based employee compensation.
Three Months Ended March 31,
2003 2002
---- ----
Net loss, as reported $ (801,958) $ (1,892,630)
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (190,974) (637,019)
----------- ------------
Pro forma net loss (992,932) (2,529,649)
=========== ============
Net loss per common share - basic and diluted, as reported $ (0.04) $ (0.09)
Net loss per common share - basic and diluted, pro forma $ (0.05) $ (0.12)
The effects of applying FAS 123 in this pro forma disclosure are not indicative
of future amounts. Additional awards in future years are anticipated.
6
Note 3. Related Party Transactions
As of December 31, 2002, the Company had pledged $1.3 million to collateralize
certain margin loans of three officers and an ex-officer of the Company. The
margin loans are from institutional lenders and are secured by shares of the
Company's common stock held by these individuals. The pledged funds were
classified as Cash pledged as collateral for related party obligations on the
Company's balance sheet at December 31, 2002. During the fourth quarter of 2002,
the Company recognized a loss of $1,278,000 and recorded a corresponding payable
related to the probable loss. During the quarter ended March 31, 2003, the
institutional lenders applied $1,278,000 of the pledged funds being held to
satisfy the outstanding balances of the loans and released the remaining $34,000
for return to the Company. The total balance of the margin loans guaranteed by
the Company was zero at March 31, 2003. The Company may institute litigation or
arbitration concerning these matters, which may result in the assertion of
claims by these officers under their employee agreements. The ultimate outcome
of this matter cannot presently be determined.
Note 4. Going Concern
The Company has incurred substantial losses since inception and has experienced
a material shortfall from anticipated revenues, which has led to a significant
decrease in its cash position and a deficit in working capital. Also, the
Company defaulted under its convertible debt agreement during the fourth quarter
of 2002 and was unsuccessful in its attempt to access its funds held as
collateral to guarantee certain executive margin loans (see Note 3) after
attempting to retrieve such funds during the fourth quarter of 2002.
Consequently, the Company believes that its current available cash along with
anticipated revenues may be insufficient to meet its anticipated cash needs for
the foreseeable future. Accordingly, the Company reduced expenditures for
operating requirements, including a reduction of 36 employees in its workforce
in November 2002, and is currently aggressively pursuing strategic alternatives,
including investment in or sale of the Company or its primary assets. The
satisfactory completion of a sale or additional investment in the Company is
essential or the Company has no other alternative that will provide sufficient
cash flows to meet current operating requirements. The sale of additional equity
or convertible debt securities would result in additional dilution to the
Company's stockholders, and debt financing, if available, may involve
restrictive covenants which could restrict operations or finances. There can be
no assurance that financing will be available in amounts or on terms acceptable
to the Company, if at all. If the Company cannot raise funds, on acceptable
terms, or achieve positive cash flow, it may not be able to continue to exist,
conduct operations, grow market share, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, any of which
would negatively impact its business, operating results and financial condition.
Note 5. Subsequent Events
On April 16, 2003, CyberStarts, Inc., a financial services technology holding
company, signed a letter of intent to acquire certain assets of the Company.
Under the agreement, CyberStarts will pay $4.8 million to purchase certain
Billserv assets. The acquisition is subject to the negotiation and execution of
definitive agreements, and approval by Billserv's shareholders. Currently, the
assets to be purchased represent the Company's proprietary technology
infrastructure along with certain third party software and hardware platforms
and certain furniture and fixtures that support its service offerings, including
its eServ and eConsulting products. The assets to be sold represent virtually
all of the Company's assets, which it uses to produce nearly all of its revenue,
therefore, in the event the purchase transaction is consummated, the Company
will cease its primary operations and continue to operate its bills.com consumer
bill payment portal and concentrate on building its electronic payments
presence. During the quarters ended March 31, 2003 and 2002, these remaining
operations that are expected to continue provided revenue of $24,000 and
$15,000, respectively.
In March 2003, the Company's amended five-year operating lease for its corporate
headquarters was terminated by the lessor for nonpayment of rent. Subsequently,
the lessor executed a monthly lease with no renewal option for approximately
25,000 square feet with the Company.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations contains forward-looking statements that involve a number of risks
and uncertainties. Actual results in future periods may differ materially from
those expressed or implied in such forward-looking statements. This discussion
should be read in conjunction with the unaudited interim consolidated financial
statements and the notes thereto included in this report, and the Company's
Annual Report on Form 10-K for the year ended December 31, 2002. All references
to "we," "us" or "our" in this Form 10-Q mean Billserv, Inc. ("Billserv" or the
"Company").
Overview
We provide electronic bill presentment and payment ("EBPP") and related services
to companies that generate recurring bills, primarily in the United States. EBPP
is the process of sending bills to consumers securely through the Internet and
processing Internet payment of bills utilizing an electronic transfer of funds.
Our service offering allows companies to outsource their electronic billing
process, providing them a single point of contact for developing, implementing
and managing their EBPP process. Billserv offers services to consolidate
customer billing information and then securely deliver an electronic bill to the
biller's own Billserv-hosted payment Web site, the consumer's e-mail inbox and
numerous Internet bill consolidation Web sites, such as those sponsored by
financial institutions. Our EBPP services allow billers to establish an
interactive, online relationship with their consumers by integrating Internet
customer care and direct marketing with the electronic bill. We provide
professional services to assist with the implementation and maintenance of an
electronic bill offering. The Company also provides Internet-based customer care
interaction services and operates an Internet bill presentment and payment
portal for consumers under the domain name www.bills.com.
We generated our first full year of revenues in 2000 and therefore have a
relatively limited operating history on which to base an evaluation of our
businesses and prospects. Our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stages of growth, 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 continue as a
going concern. To address these risks, we must, among other things, maintain our
customer base, implement a successful cost reduction strategy, continue to
maintain 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 March
31, 2003, we have an accumulated deficit of $47.9 million. The Company expects
to continue to incur losses for the foreseeable future 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 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 in order to increase revenue. 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. The components of our service offering, all of which are
currently available to customers and have generated revenue to date, include:
o Internet billing services for EBPP through a Billserv-hosted payment
Web site, secure direct delivery to the consumer's email inbox, or
distribution via bill aggregators.
o Internet-enabled, interactive customer care services on an in-house
or outsourced basis.
o Professional consulting services for EBPP billers or software
vendors needing value-added resources to deliver customized EBPP
services, including payment gateway services that provide billers
who are already participating in EBPP using in-house software a
single distribution point to virtually any bill presentment
8
and payment location across the World Wide Web in addition to their
existing distribution points or biller direct site. Gateway
technology may also be embedded as an OEM (original equipment
manufacturer) component within vendors' software or service
offerings 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 Licensing of CheckFree e-billing software as an authorized reseller
in Australia only.
o Online bill payment and management services for consumers through
the bills.com Internet portal.
As a result of our limited operating history and the emerging nature of the
markets in which we compete, we are unable to precisely forecast our revenues.
Our current and future expense levels are based largely on our investment plans
and estimates of future revenues. Revenue and operating results will depend on
the volume of transactions processed and related services rendered. The timing
of such services and transactions and our ability to fulfill a customer's
demands are difficult to forecast. Although we systematically budget for planned
outlays and maintain tight controls on our expenditures, we may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in revenues in relation to our
planned expenditures could have a material adverse effect on our business,
prospects, financial condition and results of operations. Further, we may make
certain pricing, service, marketing or acquisition decisions that could have a
material adverse effect on each or all of these areas.
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. Billserv also became a licensed reseller of CheckFree's
e-billing software in Australia during 2002. Revenues by type for the three
months ended March 31, 2003 and 2002 are as follows:
Three Months Ended March 31,
-----------------------------
2003 2002
---------- ----------
Service revenues:
Implementation revenues $ 51,419 $ 100,680
Transaction revenues 583,237 468,202
Consulting revenues 269,083 560,790
---------- ----------
Total revenues $ 903,739 $1,129,672
========== ==========
Revenues for the quarter ended March 31, 2003 decreased 20% to $903,739 from
$1,129,672 for the quarter ended March 31, 2002. The decrease from the prior
year quarter was primarily attributable to a decrease in consulting revenues,
which includes revenue from the licensing of the Company's gateway technology.
The decrease in consulting revenues was partially offset by the increase in
transaction fee revenue, which grew due to an increase in the number of
implemented billers and volume of transactions. As of March 31, 2003, we had 128
billers under contract who were in various stages of development, including 118
billers that were in full production or pilot stages, as compared to 92 billers
in full production or pilot stages at March 31, 2002.
Cost of revenues includes the cost of personnel dedicated to the design of
electronic bill templates, creation of connections to third-party aggregators
and payment processors, testing and quality assurance processes related to
implementation and presentment, as well as professional staff dedicated to
providing contracted services to EBPP customers under consulting arrangements.
Cost of revenues also includes fees paid for presentation of consumer bills on
Web sites powered by aggregators and processing of payments for EBPP
transactions by third party providers. Cost of revenues was $717,041 and
$1,205,096 for the quarters ended March 31, 2003 and 2002, respectively. The
decrease is primarily the result of lower salary and benefit costs due to the
reduction of personnel during 2002.
General and administrative expenses decreased to $554,524 for the quarter ended
March 31, 2003, from $964,693 for the first quarter of 2002. The decrease in
such expenses from the prior year quarter is principally due to lower salary and
benefit costs due to the reduction of personnel during 2002, which contributed
43% to the decrease, and lower rental expenses under the Company's amended lease
agreement, which contributed 34% to the decrease.
9
Selling and marketing expenses decreased to $25,811 for the quarter ended March
31, 2003, from $322,587 for the first quarter of 2002. The decrease from the
prior year quarter was primarily the result of reductions in our direct sales
staff, which contributed 89% to the decrease from the prior year quarter, as
well as lower related travel expenses, which contributed 5% to the decrease from
the prior year quarter. 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 significant decrease in the amount of
expenses related to our direct sales channel.
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, new customer care and direct
marketing services, additional business-to-consumer applications, and
integration of third-party applications. These expenses decreased 71% in the
first quarter of 2003 from the prior year quarter due to a focus on our core
competencies in order to implement and service existing products.
Depreciation and amortization decreased to $322,506 for the quarter ended March
31, 2003, as compared to $424,000 for the first quarter of 2002. This decrease
was due to lower depreciation related to certain assets that became fully
depreciated during 2002. We did not purchase any property and equipment during
the quarter ended March 31, 2003 and do not anticipate making any significant
capital expenditures over the remaining nine months of 2003.
Net other expense was $46,265 for the quarter ended March 31, 2003, compared to
net other income of $32,749 for the first quarter of 2002. This change is
primarily attributable to higher interest expense related to the convertible
debt issued in the third quarter of 2002 and lower interest income earned in
2003 as a result of lower invested balances.
Net loss improved to $801,958 for the quarter ended March 31, 2003, from
$1,892,630 for the first quarter of 2002 primarily as a result of the overall
decrease in total operating expenses from the prior year quarter.
Liquidity and Capital Resources
At March 31, 2003, the Company's principal source of liquidity consisted of
$167,000 of cash and cash equivalents, compared to $286,000 of cash and cash
equivalents at December 31, 2002. The Company has incurred substantial losses
since inception and has experienced a material shortfall from anticipated
revenues, which has led to a significant decrease in its cash position and a
deficit in working capital. Also, the Company defaulted under its convertible
debt agreement during the fourth quarter of 2002 and was unsuccessful in its
attempt to access its funds held as collateral to guarantee certain executive
margin loans after attempting to retrieve such funds during the fourth quarter
of 2002. Consequently, the Company believes that its current available cash and
cash equivalents along with anticipated revenues may be insufficient to meet its
anticipated cash needs for the foreseeable future. Accordingly, the Company is
currently aggressively pursuing strategic alternatives, including investment in
or sale of the Company or its primary assets. The satisfactory completion of a
sale or additional investment in the Company is essential or the Company has no
other alternative that will provide sufficient cash flows to meet current
operating requirements. The sale of additional equity or convertible debt
securities would result in additional dilution to the Company's stockholders,
and debt financing, if available, may involve restrictive covenants which could
restrict operations or finances. There can be no assurance that financing will
be available in amounts or on terms acceptable to the Company, if at all. If the
Company cannot raise funds, on acceptable terms, or achieve positive cash flow,
it may not be able to continue to exist, conduct operations, grow market share,
take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, any of which would negatively impact its business,
operating results and financial condition.
On April 16, 2003, CyberStarts, Inc., a financial services technology holding
company, signed a letter of intent to acquire certain assets of the Company.
Under the agreement, CyberStarts will pay $4.8 million to purchase certain
Billserv assets. The acquisition is subject to the negotiation and execution of
definitive agreements, and approval by Billserv's shareholders. Currently, the
assets to be purchased represent the Company's proprietary technology
infrastructure along with certain third party software and hardware platforms
and certain furniture and fixtures that support its service offerings, including
its eServ and eConsulting products. The assets to be sold represent virtually
all of the Company's assets, which it uses to produce nearly all of its revenue,
therefore, in the event the purchase
10
transaction is approved and consummated, the Company will cease its primary
operations and continue to operate its bills.com consumer bill payment portal
and concentrate on building its electronic payments presence. During the
quarters ended March 31, 2003 and 2002, these remaining operations that are
expected to continue provided revenue of $24,000 and $15,000, respectively. In
the event that the purchase transaction is consummated, the Company believes
that its remaining cash after payment of existing liabilities along with
anticipated future revenues may be insufficient for it to continue as a going
concern.
As of December 31, 2002, the Company had pledged $1.3 million to collateralize
certain margin loans of three officers and an ex-officer of the Company. The
margin loans are from institutional lenders and are secured by shares of the
Company's common stock held by these individuals. The pledged funds were
classified as Cash pledged as collateral for related party obligations on the
Company's balance sheet at December 31, 2002. During the quarter ended March 31,
2003, the institutional lenders applied $1,278,000 of the pledged funds being
held to satisfy the outstanding balances of the loans and released the remaining
$34,000 for return to the Company. The total balance of the margin loans
guaranteed by the Company was zero at March 31, 2003. The Company may institute
litigation or arbitration concerning these matters, which may result in the
assertion of claims by these officers under their employee agreements. The
ultimate outcome of this matter cannot presently be determined.
Net cash used in operating activities was $176,000 and $1.5 million for the
quarters ended March 31, 2003 and 2002, respectively. The Company plans to focus
on expending its resources prudently given its current state of liquidity and
does not expect to achieve positive cash flow from operations for 2003 as a
result of lower than anticipated revenue growth.
There were no investing activities for the quarter ended March 31, 2003 due to
the Company's current state of liquidity. We do not anticipate making any
significant capital expenditures during the remaining nine months of 2003. Net
cash used in investing activities was $664,000 for the quarter ended March 31,
2002 and primarily reflected capital expenditures for computer equipment and
software, which amounted to approximately $658,000 in the first three months of
2002.
Net cash provided by financing activities was $57,000 for the quarter ended
March 31, 2003 and included a net return of $34,000 under the Company's
guarantees of related party obligations. Net cash provided by financing
activities of $394,000 for the quarter ended March 31, 2002 included a $300,000
draw under the Company's line of credit.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters discussed in
our Form 10-Q include certain forward-looking statements within the meaning of
Section 27A of the Securities Act, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
all statements regarding our and management's intent, belief and expectations,
such as statements concerning our future and our operating and growth strategy.
Investors are cautioned that all forward-looking statements involve risks and
uncertainties including, without limitation, the factors set forth under the
Risk Factors section of Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, of the Annual Report on Form 10-K
for the year ended December 31, 2002 and other factors detailed from time to
time in our filings with the Securities and Exchange Commission. One or more of
these factors have affected, and in the future could affect, our businesses and
financial results in the future and could cause actual results to differ
materially from plans and projections. We believe that the assumptions
underlying the forward-looking statements included in this Form 10-Q will prove
to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved. All forward-looking statements made in
this Form 10-Q are based on information presently available to our management.
We assume no obligation to update any forward-looking statements.
11
Item 3. 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- to intermediate-term
fixed income securities. Fixed-rate securities may have their fair market value
adversely impacted by a rise in interest rates, and the Company may suffer
losses in principal if forced to sell securities which have declined in market
value due to changes in interest rates.
Item 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this Quarterly Report on Form
10-Q, an evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design
and operation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934). Based on that
evaluation, the Company's CEO and CFO concluded that the Company's disclosure
controls and procedures were effective in ensuring that material information
relating to the Company with respect to the period covered by this report was
made known to them. Since the date of their evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
12
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number 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)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
(b) Reports on Form 8-K:
On March 18, 2003, the Company filed a report on Form 8-K regarding
the resignation of three Directors of the Company.
Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BILLSERV, INC.
By: /s/ Terri A. Hunter
-------------------------------
Terri A. Hunter
Executive Vice President and
Chief Financial Officer
(Duly authorized and principal financial and accounting officer)
Date: May 14, 2003
14
CERTIFICATIONS
I, Michael R. Long, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Billserv, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Michael R. Long
---------------------------
Michael R. Long
Chief Executive Officer
15
I, Terri A. Hunter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Billserv, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Terri A. Hunter
---------------------------
Terri A. Hunter
Chief Financial Officer
16