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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 September 30, 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
Payment Data Systems, 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)
12500 San Pedro, Suite 120
San Antonio, Texas 78216
(Address of principal executive offices)
(210) 249-4100
(Registrant's telephone number, including area code)
211 North Loop 1604 East, Suite 200
San Antonio, Texas 78232
(Former address of principal executive offices, changed since last report)
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 November 1, 2003, 20,722,656 shares of the registrant's common stock, $.001
par value, were outstanding.
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PAYMENT DATA SYSTEMS, Inc.
(FORMERLY BILLSERV, INC.)
INDEX
Part I - Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002 3
Consolidated Statements of Operations for the three and nine months
ended September 30, 2003 and 2002 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 4. Controls and Procedures 17
Part II - Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PAYMENT DATA SYSTEMS, INC.
(FORMERLY BILLSERV, INC.)
CONSOLIDATED BALANCE SHEETS
September 30, 2003 December 31, 2002
-------------------- ---------------------
(Unaudited) (Note 1)
Assets:
Current assets:
Cash and cash equivalents $ 613,655 $ 286,105
Cash pledged as collateral for related party obligations - 1,311,984
Accounts receivable, net 323,234 659,074
Prepaid expenses and other 213,819 257,810
-------------------- ---------------------
Total current assets 1,150,708 2,514,973
Property and equipment, net 262,456 324,651
Intangible asset, net 11,250 22,500
Other assets 30,282 -
Net property and equipment of discontinued operations - 1,847,139
-------------------- ---------------------
Total assets $ 1,454,696 $ 4,709,263
==================== =====================
Liabilities and stockholders' equity (deficit):
Current liabilities:
Accounts payable $ 620,645 $ 797,211
Accrued expenses and other current liabilities 250,863 707,741
Payable under related party guarantees - 1,278,138
Short-term borrowings - 1,800,000
Deferred revenue - 400,960
Obligations under capital leases of discontinued
operations - 70,483
-------------------- ---------------------
Total current liabilities 871,508 5,054,533
Stockholders' equity (deficit):
Common stock, $.001 par value, 200,000,000 shares authorized; 20,722,656
issued and outstanding at September 30, 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 (46,230,562) (47,136,060)
-------------------- ---------------------
Total stockholders' equity (deficit) 583,188 (345,270)
-------------------- ---------------------
Total liabilities and stockholders' equity (deficit) $ 1,454,696 $ 4,709,263
==================== =====================
See notes to interim consolidated financial statements.
3
PAYMENT DATA SYSTEMS, INC.
(FORMERLY BILLSERV, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
---------------- ---------------- --------------- ----------------
Revenues $ 29,342 $ 20,774 $ 82,413 $ 54,267
Cost of revenues 59,022 15,060 96,286 42,393
---------------- ---------------- --------------- ----------------
Gross margin (29,680) 5,714 (13,873) 11,874
Operating expenses:
Selling, general and administrative 455,784 646,594 1,281,035 1,895,839
Depreciation and amortization 29,827 47,215 98,461 144,710
---------------- ---------------- --------------- ----------------
Total operating expenses 485,611 693,809 1,379,496 2,040,549
---------------- ---------------- --------------- ----------------
Operating loss (515,291) (688,095) (1,393,369) (2,028,675)
Other income (expense), net:
Interest income 299 13,457 4,493 71,776
Interest expense (643) (454,096) (61,423) (467,378)
Other income (expense) 179,474 (17,981) 160,317 (54,889)
---------------- ---------------- --------------- ----------------
Total other income, net 179,130 (458,620) 103,387 (450,491)
---------------- ---------------- --------------- ----------------
Loss from continuing operations before
income taxes (336,161) (1,146,715) (1,289,982) (2,479,166)
Income taxes - - - -
---------------- ---------------- --------------- ----------------
Loss from continuing operations (336,161) (1,146,715) (1,289,982) (2,479,166)
Discontinued operations (Note 5):
Income (loss) from discontinued
operations, net of no income taxes 188,319 (1,128,990) (572,780) (3,838,351)
Gain on disposition of discontinued
operations, net of no income taxes 2,768,260 - 2,768,260 -
---------------- ---------------- --------------- ----------------
Net income (loss) $ 2,620,418 $ (2,275,705) $ 905,498 $ (6,317,517)
================ ================ =============== ================
Loss from continuing operations per
common share - basic and diluted $ (0.01) $ (0.06) $ (0.06) $ (0.12)
Income (loss) from discontinued
operations per common share - basic
and diluted $ 0.14 $ (0.05) $ 0.10 $ (0.19)
---------------- ---------------- --------------- ----------------
Net income (loss) per common share -
basic and diluted $ 0.13 $ (0.11) $ 0.04 $ (0.31)
================ ================ =============== ================
Weighted average common shares
outstanding - basic and diluted 20,722,656 20,602,074 20,710,634 20,587,093
See notes to interim consolidated financial statements.
4
PAYMENT DATA SYSTEMS, INC.
(FORMERLY BILLSERV, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30,
-----------------------------------
2003 2002
----------------- -----------------
Cash flows from operating activities:
Loss from continuing operations $ (1,289,982) $ (2,479,166)
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 98,461 133,460
Issuance of common stock warrants and convertible
debt - 425,509
Changes in current assets and current liabilities:
(Increase) decrease in accounts receivable 335,840 (264,342)
Decrease in related party notes receivables - 162,154
(Increase) decrease in prepaid expenses and other 43,991 (142,123)
Increase (decrease) in accounts payable,
accrued expenses and other current liabilities (617,194) 245,886
Decrease in deferred revenue (400,960) (182,256)
----------------- -----------------
Net cash used in continuing operations (1,829,844) (2,100,878)
Net cash used in discontinued operations (251,972) (3,465,943)
----------------- -----------------
Net cash used in operating activities (2,081,816) (5,566,821)
Cash flows from investing activities:
Purchases of property and equipment (25,016) (9,522)
Long-term deposits, net (30,282) 188,603
Proceeds from sale of equipment 4,224,108 -
Other investing activities - (6,126)
----------------- -----------------
Net cash provided by investing activities 4,168,810 172,955
Cash flows from financing activities:
Cash pledged as collateral for related party 1,311,984 662,155
obligations
Payments for related party obligations (1,278,138) -
Proceeds from notes payable - 2,145,000
Principal payments for notes payable (1,800,000) (645,000)
Principal payments for capital lease obligations - (136,784)
Financing costs, net - (207,703)
Issuance of common stock, net of issuance costs 6,710 63,235
----------------- -----------------
Net cash provided by (used in) financing activities (1,759,444) 1,880,903
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 327,550 (3,512,963)
Cash and cash equivalents, beginning of period 286,105 4,173,599
----------------- -----------------
Cash and cash equivalents, end of period $ 613,655 $ 660,636
================= =================
See notes to interim consolidated financial statements.
5
PAYMENT DATA SYSTEMS, INC.
(FORMERLY bILLSERV, INC.)
Notes to INTERIM Consolidated Financial Statements
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Payment Data
Systems, Inc. ("PDS" or the "Company"), formally known as Billserv, Inc., 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.
6
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported $ 2,620,418 $ (2,275,705) $ 905,498 $ (6,317,517)
Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (206,278) (289,887) (572,608) (1,407,597)
----------- ---------- ----------- ------------
Pro forma net income (loss) 2,414,140 (2,565,592) 332,980 (7,725,114)
=========== ========== =========== ============
Net income (loss) per common share
- - basic and diluted, as reported $ 0.13 $ (0.11) $ 0.04 $ (0.31)
Net income (loss) per common share
- - basic and diluted, pro forma $ 0.12 $ (0.12) $ 0.02 $ (0.38)
The effects of applying FAS 123 in this pro forma disclosure are not indicative
of future amounts. Additional awards in future years are anticipated.
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 September 30, 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 sold substantially all of its assets on July 25, 2003 (see
Note 5). The satisfactory completion of an additional investment in the Company
may be essential to provide sufficient cash flows to meet future 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.
7
Note 5. Discontinued Operations - Asset Sale
On July 25, 2003 (the "Closing") the Company sold substantially all of its
assets (the "Business") to Saro, Inc., a Delaware corporation (the "Purchaser"),
which is a wholly owned subsidiary of CyberStarts, Inc., a Delaware corporation
(the "Sale"). The aggregate selling price for the Business was $4,800,000 (the
"Purchase Price"), including $700,000 subject to certain earnout provisions,
plus the Purchaser's assumption of certain liabilities of the Company. The
Purchase Price was determined through extensive negotiations between the
Purchaser and the Company. The board of directors of the Company, in its
reasonable business judgment, approved the Purchase Price based upon the
following factors: 1) the extensive search for a purchaser of the Business; 2)
the number of offers made by potential purchasers for the Business; 3) the
Company's ability to raise other sources of capital to operate the Business; and
4) the future trends in the industry of the Business. The sale of the Business
was approved by a majority of the shareholders of PDS at a Special Meeting of
Shareholders held on July 14, 2003. The assets sold 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 carrying
value of these non-current assets was approximately $1,068,000 at July 25, 2003.
The Purchaser also assumed certain current and non-current liabilities with
carrying values of $83,000 and $30,000, respectively, at July 25, 2003. The
assets sold represent virtually all of the Company's assets, which it uses to
produce nearly all of its revenue; therefore, the Company has ceased its primary
operations and will continue to operate its bills.com consumer bill payment
portal and concentrate on building its electronic payments business. The results
of operations for the asset group disposed of have been reported as discontinued
operations in the accompanying statements of operations. During the quarters
ended September 30, 2003 and 2002, these discontinued operations provided
revenue of $357,000 and $807,000, respectively. During the nine months ended
September 30, 2003 and 2002, these discontinued operations provided revenue of
$2,155,000 and $3,245,000, respectively. The Company retained its accounts
receivable and related deferred revenue associated with the customers of the
Business, as well as certain accounts payable and accrued liabilities related to
the Business that the Company is responsible for but which it does not expect to
incur similar costs in the future. At September 30, 2003, the Company's balance
sheet included approximately $321,000 of net accounts receivable and
approximately $574,000 of current liabilities that related to the operations of
the Business.
At Closing, the Purchaser paid the Company $4,100,000 in cash. The Company may
earn an additional $700,000 based upon two earnouts calculated upon gross
revenues of the Business for the four consecutive quarters following the
Closing, the first quarter of which begins the first day of the first full month
after the Closing. The Sale of the Business qualifies as a change of control
under the employee agreements of certain officers of the Company, 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.
Subsequent to the Sale, the Company settled claims made under employee
agreements by the Chief Financial Officer and Chief Marketing Officer for cash
consideration of $200,000 in the aggregate, including approximately $30,000 that
is contingent on the Company meeting the earnout provisions of the Sale, and
terminated their respective employee agreements.
Note 6. Market Information
On July 29, 2003, the Company amended its articles of incorporation to change
its name to Payment Data Systems, Inc. The Company began trading on the Nasdaq
OTC market under a new symbol, PYDS, on August 20, 2003.
Note 7. Facilities Lease
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. In August 2003, the Company signed a
three-year lease for approximately 4,500 square feet that will serve as the
Company's headquarters.
Note 8. Stockholders' Equity
During the nine months ended September 30, 2003, the Company issued 43,857
shares of common stock pursuant to its Employee Stock Purchase Plan at a price
of $0.15 per share.
8
During the nine months ended September 30, 2003, the Company issued 75,000
shares of common stock to certain independent contractors performing services
for the Company. Such shares were issued pursuant to Section 506 of Regulation D
of the Securities and Exchange Act of 1933 as an issuance of unregistered
securities to a sophisticated investor. The Company recorded $16,250 of expense
related to the issuance of this stock.
Note 9. Legal Proceedings
On July 25, 2003, certain stockholders of the Company (such stockholders being
Mike Procacci, Jr., Mark and Stefanie McMahon, Anthony and Lois Tedeschi, Donna
and James Knoll, John E. Hamilton, III, William T. Hagan, Samuel A. Fruscione,
Dana Fruscione-Penzone, Gia Fruscione, Alicia Fruscione, Joseph Fruscione,
Robert Evans, John Arangio, Gary and JoAnne Gardner, Lee and Margaret Getson, G.
Harry Bonham, Jr., Gary Brewer, Bob Lastowski, Robert Filipe, Mitchell D.
Hovendick, Dr. John Diephold, Joseph Maressa, Jr., and Charles Brennan
(collectively, the "Plaintiffs")) commenced legal action against the Company,
Ernst & Young, LLP and certain of the Company's former directors (such directors
being Louis A. Hoch, Michael R. Long, David S. Jones, Roger Hemminghaus, E.
Scott Crist, Peter Kirby, Richard Bergman, and Terri A. Hunter (the "Defendant
Directors")) in the District Court of the 45th Judicial District, Bexar County,
Texas (the "Suit"). The Plaintiffs allege, as the Suit pertains to the Company,
that the Company, acting through the Defendant Directors, misstated in the
Company's 2000 and 2001 Form 10-Ks the Company's ability to use for operational
purposes certain Company funds pledged as security for margin loans of three
Company officers. The Plaintiffs seek economic and exemplary damages,
rescission, interest, attorneys' fees, and costs of court.
The Company believes the Suit to be without merit, and intends to vigorously
defend itself and the Defendant Directors.
9
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 Payment Data Systems,
Inc. ("PDS" or the "Company").
Overview
On July 25, 2003 (the "Closing") the Company sold substantially all of its
assets (the "Business") to Saro, Inc., a Delaware corporation (the "Purchaser"),
which is a wholly owned subsidiary of CyberStarts, Inc., a Delaware corporation
(the "Sale"). The aggregate selling price for the Business was $4,800,000 (the
"Purchase Price"), including $700,000 subject to certain earnout provisions,
plus the Purchaser's assumption of certain liabilities of the Company. The
Purchase Price was determined through extensive negotiations between the
Purchaser and the Company. The board of directors of the Company, in its
reasonable business judgment, approved the Purchase Price based upon the
following factors: 1) the extensive search for a purchaser of the Business; 2)
the number of offers made by potential purchasers for the Business; 3) the
Company's ability to raise other sources of capital to operate the Business; and
4) the future trends in the industry of the Business. The sale of the Business
was approved by a majority of the shareholders of PDS at a Special Meeting of
Shareholders held on July 14, 2003. The assets sold 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 carrying
value of these non-current assets was approximately $1,068,000 at July 25, 2003.
The Purchaser also assumed certain current and non-current liabilities with
carrying values of $83,000 and $30,000, respectively, at July 25, 2003. The
assets sold represent virtually all of the Company's assets, which it uses to
produce nearly all of its revenue; therefore, the Company has ceased its primary
operations and will continue to operate its bills.com consumer bill payment
portal and concentrate on building its electronic payments business. The results
of operations for the asset group disposed of have been reported as discontinued
operations in the accompanying statements of operations. During the quarters
ended September 30, 2003 and 2002, these discontinued operations provided
revenue of $357,000 and $807,000, respectively. During the nine months ended
September 30, 2003 and 2002, these discontinued operations provided revenue of
$2,155,000 and $3,245,000, respectively.The Company retained its accounts
receivable and related deferred revenue associated with the customers of the
Business, as well as certain accounts payable and accrued liabilities related to
the Business that the Company is responsible for but which it does not expect to
incur similar costs in the future. At September 30, 2003, the Company's balance
sheet included approximately $321,000 of net accounts receivable and
approximately $574,000 of current liabilities that related to the operations of
the Business.
Prior to the Sale, PDS provided 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 allowed companies to
outsource their electronic billing process, providing them a single point of
contact for developing, implementing and managing their EBPP process. PDS
offered services to consolidate customer billing information and then securely
deliver an electronic bill to the biller's own payment Web site hosted by PDS,
the consumer's e-mail inbox and numerous Internet bill consolidation Web sites,
such as those sponsored by financial institutions. Our EBPP services allowed
billers to establish an interactive, online relationship with their consumers by
integrating Internet customer care and direct marketing with the electronic
bill. PDS also provided Internet-based customer care interaction services and
professional services to assist with the implementation and maintenance of an
electronic bill offering. As a condition of the Sale to Saro, Inc., PDS and
certain principal employees of PDS agreed, for a period of two years, not to
compete in the business of providing electronic bill presentment services in
conjunction with bill payment solutions (the "Restricted Business"). Under such
non-compete provisions, PDS and the applicable officers are prohibited from
performing the Restricted Business 1) for
10
former Restricted Business customers of PDS; or 2) in geographic areas in which
PDS performed the Restricted Business prior to the Sale. The Company continues
to operate an Internet electronic payment processing service for consumers under
the domain name www.bills.com and provides integrated electronic payment
services, including credit and debit card-based processing services and
transaction processing via the ACH network.
Since inception, we have incurred operating losses each quarter, and as of
September 30, 2003, we have an accumulated deficit of $46.2 million. 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, grow and maintain our customer
base, implement a successful marketing 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.
We believe that our success will depend in large part on our ability to (a)
manage our operating expenses, (b) add quality customers 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 customer acquisition
activities and outsource some of our processing services to third parties to
allow us to maintain an efficient operating infrastructure and expand our
operations without significantly increasing our fixed operating expenses.
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 payment 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
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company'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 the
Company 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, the Company 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. The Company 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, the Company recognized revenue generated from
up-front fees upon completion of an implementation project. These up-front fees
are charged for the work involved in implementing the basic functionality
required to provide EBPP services to customers. These set-up procedures include
tasks such as
11
establishing connectivity, design and construction of the hosted Web site, and
conversion of the paper bill print stream to an electronic format. In December
1999, the SEC issued SAB 101, which requires that revenue generated from
up-front implementation fees that do not represent a separate earnings process
to be recognized over the term of the related service contract. The Company
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 was recorded as deferred
revenue to be recognized as revenue over the remaining contractual service
periods, which were primarily three to five years in length. At December 31,
2002, deferred revenue was $400,960. As of September 30, 2003, there was no
balance of deferred revenue due to the recognition of all remaining deferred
revenue in conjunction with the sale of the Business.
Bad Debt
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability or failure of its customers to make required
payments. There were no write-offs or bad debt expense recorded to the allowance
for doubtful accounts for the nine months ended September 30, 2003. At September
30, 2003 and December 31, 2002, the balance of the allowance for doubtful
accounts was $47,197. If the financial condition of these customers were to
deteriorate, resulting in an impairment of their ability to make contractual
payments, additional allowances may be required.
Valuation of Long-Lived and Intangible Assets
The Company assesses the impairment of long-lived and intangible assets whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors considered important which could trigger an impairment
review include the following: significant underperformance relative to
historical or projected future cash flows; significant changes in the manner of
use of the assets or the strategy of the overall business; and significant
negative industry trends. When management determines that the carrying value of
long-lived and intangible assets may not be recoverable, impairment is measured
as the excess of the assets' carrying value over the estimated fair value. An
impairment loss of $200,000 was recorded in the quarter ended June 30, 2003 and
an impairment loss of $855,000 was recorded in the quarter ended December 31,
2002.
Income Taxes
The Company accounts for income taxes using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109"). The liability method provides that the deferred tax assets
and liabilities are recorded based on the difference between the tax bases of
assets and liabilities and their carrying amount for financial reporting
purposes, as measured by the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Deferred tax assets are carried on
the balance sheet with the presumption that they will be realizable in future
periods when pre-taxable income is generated. Predicting the ability to realize
these assets in future periods requires a great deal of judgment by management.
It is our judgment that we cannot predict with reasonable certainty that the tax
assets carried on our balance sheet as of September 30, 2003 will be fully
realized in future periods. FAS 109 requires a valuation allowance to reduce the
deferred tax assets reported if, based on the weight of the evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. After consideration of all of the evidence, both positive and
negative, management determined that a valuation allowance at December 31, 2002
is necessary to reduce the deferred tax assets to the amount that will more
likely than not be realized. The change in valuation allowance for 2002 is a net
increase of $3.7 million. At December 31, 2002, the Company has available net
operating loss carryforwards of approximately $34.8 million, which expire
beginning in the year 2020.
12
Results of Continuing Operations
Subsequent to the Sale, our only continuing revenues were derived from the
operation of an Internet electronic payment processing service for consumers
under the domain name www.bills.com. The Company also provides integrated
electronic payment services to businesses, including credit and debit card-based
processing services as an Independent Sales Organization (ISO) and transaction
processing via the ACH network. We processed our first ACH transactions during
the quarter ended September 30, 2003, but the only component of our service
offering that generated significant revenue for this quarter was the bills.com
payment service. Total revenues for the quarter ended September 30, 2003
increased 41% to $29,342 from $20,774 for the quarter ended September 30, 2002.
Total revenues for the nine months ended September 30, 2003 increased 52% to
$82,413 from $54,267 for the nine months ended September 30, 2002. The increases
from the prior year periods were primarily attributable to an increase in the
number of consumers subscribing to the bills.com payment service. We anticipate
generating revenue from the processing of credit card transactions under an
existing electronic payment services contract during the fourth quarter of 2003.
Cost of revenues includes the cost of personnel dedicated to the creation and
maintenance of connections to third-party payment processors and fees paid to
such third-party providers for electronic payment processing services. Cost of
revenues was $59,022 and $15,060 for the quarters ended September 30, 2003 and
2002, respectively, and $96,286 and $42,393 for the nine months ended September
30, 2003 and 2002, respectively. The increases from the prior year periods are
due to the higher subscriber volume of the bills.com payment service and
implementation fees charged in the third quarter of 2003 by third-party payment
processors to initiate electronic payment processing services.
Selling, general and administrative expenses decreased to $455,784 and
$1,281,035 for the quarter and nine months ended September 30, 2003,
respectively, from $646,594 and $1,895,839 for the comparable periods of 2002,
respectively. The decreases in such expenses from the prior year periods were
primarily due to lower salary and benefit costs due to the personnel reductions
during 2002.
Depreciation and amortization decreased to $29,827 and $98,461 for the quarter
and nine months ended September 30, 2003, respectively, from $47,215 and
$144,710 for the comparable periods of 2002, respectively. These decreases were
due to lower depreciation related to certain assets that became fully
depreciated during 2002. We purchased $25,000 of software during the quarter
ended September 30, 2003 and anticipate making approximately $50,000 in capital
expenditures over the remaining three months of 2003.
Net other income was $179,130 for the quarter ended September 30, 2003, compared
to net other expense of $458,620 for the comparable quarter of 2002. Net other
income was $103,387 for the nine months ended September 30, 2003, as compared to
net other expense of $450,491 for the prior year period. These changes were
primarily attributable to $445,000 of interest expense recognized in the third
quarter of 2002 related to the Company's convertible debt and $165,000 of
consulting fees recognized in other income in the third quarter of 2003 for
transitional EBPP consulting services provided to the Company's former equal
partner in an EBPP joint venture in Australia. The joint venture was dissolved
as a result of the Company's sale of the Business during the third quarter of
2003. The changes from the prior year periods also reflect lower interest income
earned in 2003 as a result of lower invested balances.
Loss from continuing operations improved to $336,161 and $1,146,715 for the
quarter and nine months ended September 30, 2003, from $1,289,982 and $2,479,166
for the comparable periods of 2002, respectively, primarily as a result of the
overall decrease in total operating expenses and interest expense from the prior
year periods.
13
Results of Discontinued Operations
The following table presents the operating results of the Company's Business for
the three and nine-month periods ended September 30, 2002 and 2003, which are
reflected as discontinued operations in the Consolidated Statements of
Operations.
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
---------------- ---------------- --------------- ----------------
Service revenues:
Transaction revenues $ 155,047 $ 484,903 $ 1,273,931 $ 1,381,230
Implementation revenues 146,080 74,791 256,564 265,021
Consulting revenues 56,081 247,268 624,787 1,361,303
---------------- ---------------- --------------- ----------------
Total service revenues 357,208 806,962 2,155,282 3,007,554
Software license revenues - - - 238,000
---------------- ---------------- --------------- ----------------
Total revenues 357,208 806,962 2,155,282 3,245,554
Cost of service revenues 53,743 1,087,387 1,436,449 3,489,210
Cost of software license revenues - - - 228,000
---------------- ---------------- --------------- ----------------
Total cost of revenues 53,743 1,087,387 1,436,449 3,717,210
Gross margin 303,465 (280,425) 718,833 (471,656)
General and administrative 6,388 231,973 308,998 1,229,171
Selling and marketing 54,634 196,960 120,833 765,521
Research and development 10,615 114,044 82,555 391,517
Provision for impairment of assets - - 200,000 -
Depreciation and amortization 43,509 305,535 579,227 972,757
Equity in loss of unconsolidated
subsidiary - 53 - 7,729
---------------- ---------------- --------------- ----------------
Income (loss) from discontinued
operations $ 188,319 $ (1,128,990) $ (572,780) $ (3,838,351)
================ ================ =============== ================
Prior to the Sale, our revenues were principally derived from fees for
implementing EBPP capabilities, processing EBPP transactions and providing
related customer care, and consulting services. PDS also became a licensed
reseller of CheckFree's e-billing software in Australia during 2002. The
components of our service offering that generated revenue through July 25, 2003,
include:
o Internet billing services for EBPP through a PDS-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 and payment
location across the World Wide Web in addition to their existing
distribution points or biller direct site.
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.
Total revenues for the quarter ended September 30, 2003 decreased 56% to
$357,208 from $806,962 for the quarter ended September 30, 2002. Total revenues
for the nine months ended September 30, 2003 decreased 34% to $2,155,282 from
$3,245,554 for the nine months ended September 30, 2002. The decreases from the
prior year periods were partially attributable to the Sale of the Business,
which resulted in revenue generated by the Business being
14
recognized only through July 25, 2003 for the third quarter of 2003. This
decrease in revenues was partially offset by the increase in implementation fee
revenue, due to the recognition of the remaining balance of deferred revenue
upon the sale of the Business. The decrease from the prior year nine-month
period was also attributable to a decrease in consulting revenues, which
includes revenue from the licensing of the Company's gateway technology. The
Company's lack of any software license sales in 2003 as a reseller of
CheckFree's e-billing software in Australia also contributed to the decreases in
total revenue from the prior year nine-month period.
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 $53,743 and
$1,087,387 for the quarters ended September 30, 2003 and 2002, respectively, and
$1,436,449 and $3,717,210 for the nine months ended September 30, 2003 and 2002,
respectively. The decreases from the prior year periods were partially
attributable to the Sale of the Business, which resulted in costs of revenue
incurred by the Business being recognized only through July 25, 2003 for the
third quarter of 2003. The decreases were also attributable to lower salary and
benefit costs due to the personnel reductions during 2002. Also contributing to
the decrease was the absence of CheckFree software license costs in 2003 as
there were no related software license sales in the same period.
General and administrative expenses directly related to the Business consisted
of rent and costs of personnel providing support services for EBPP operations.
These expenses decreased to $6,388 and $308,998 for the quarter and nine months
ended September 30, 2003, respectively, from $231,973 and $1,229,171 for the
comparable periods of 2002, respectively. The decreases from the prior year
periods were partially attributable to the Sale of the Business, which resulted
in such expenses incurred by the Business being recognized only through July 25,
2003 for the third quarter of 2003. The decreases were also due to lower salary
and benefit costs due to the personnel reductions during 2002, and lower rental
expenses under the Company's amended lease agreement.
Selling and marketing expenses directly related to the Business decreased to
$54,634 and $120,833 for the quarter and nine months ended September 30, 2003,
respectively, from $196,960 and $765,521 for the comparable periods of 2002,
respectively. The decreases from the prior year periods were partially
attributable to the Sale of the Business, which resulted in such expenses
incurred by the Business being recognized only through July 25, 2003 for the
third quarter of 2003. The decreases were also due to reductions in our direct
sales staff.
Research and development expenses directly related to the Business consisted
primarily of the cost of personnel devoted to the design of new processes that
would 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 91% and 79% in the third quarter and first nine months of 2003 from
the prior year quarter and period, respectively. The decreases from the prior
year periods were partially attributable to the Sale of the Business, which
resulted in such expenses incurred by the Business being recognized only through
July 25, 2003 for the third quarter of 2003. The decreases were also due to a
focus on our core competencies in order to implement and service existing
products.
Depreciation and amortization decreased to $43,509 and $579,227 for the quarter
and nine months ended September 30, 2003, respectively, from $305,535 and
$972,757 for the comparable periods of 2002, respectively. These decreases were
partially attributable to the Sale of the Business, which resulted in
depreciation and amortization directly related to the Business being recognized
only through July 25, 2003 for the third quarter of 2003. The decreases were
also due to lower depreciation related to certain assets that became fully
depreciated during 2002.
Income from discontinued operations improved to $188,319 for the quarter ended
September 30, 2003, from a loss of $1,128,990 for the prior year quarter. Loss
from discontinued operations improved to $572,780 for the nine months ended
September 30, 2003, from a loss of $3,838,351 for the comparable period of 2002.
The improvements were primarily a result of the overall decrease in total
operating expenses from the prior year periods.
15
Liquidity and Capital Resources
At September 30, 2003, the Company's principal source of liquidity consisted of
$614,000 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
reduced expenditures for operating requirements, including a reduction of 36
employees in its workforce in November 2002, and completed the Sale of its
Business in July 2003. At Closing, the Purchaser paid the Company $4,100,000 in
cash. The Company may earn an additional $700,000 based upon two earnouts
calculated upon gross revenues of the Business for the four consecutive quarters
following the Closing, the first quarter of which begins the first day of the
first full month after the Closing. Even though the purchase transaction has
been completed, 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.
The satisfactory completion of an additional investment in the Company may be
essential to provide sufficient cash flows to meet future 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.
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 September 30, 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 $2.1 million and $5.6 million for the
nine months ended September 30, 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 continuing
operations for 2003.
Net cash provided by investing activities was $4.2 million for the nine months
ended September 30, 2003 and primarily reflected proceeds of approximately $4.2
million from the sale of the Business and other assets. We do not anticipate
making any significant capital expenditures during the remaining three months of
2003. Net cash provided by investing activities was $173,000 for the nine months
ended September 30, 2002 and primarily reflected capital expenditures of
approximately $10,000 for computer equipment and software offset by the return
of $189,000 of deposits which had been used to secure capital leases.
Net cash used in financing activities was $1.8 million for the nine months ended
September 30, 2003 and primarily reflected the repayment of the Company's
convertible debt as a condition of the sale of the Business and also included a
net return of $34,000 under the Company's guarantees of related party
obligations. Net cash provided by financing activities was $1.9 million for the
nine months ended September 30, 2002 and included the borrowing of $1.5 million
under a convertible debt agreement, and the return of $662,000 pledged as
collateral for margin loans of certain officers as discussed above.
16
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters discussed in
this 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 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.
Item 4. CONTROLS AND PROCEDURES
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-15(e) and
15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, the
Company's management, including the CEO and CFO concluded that the Company's
disclosure controls and procedures were effective as of September 30, 2003.
17
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 25, 2003, certain stockholders of the Company (such stockholders being
Mike Procacci, Jr., Mark and Stefanie McMahon, Anthony and Lois Tedeschi, Donna
and James Knoll, John E. Hamilton, III, William T. Hagan, Samuel A. Fruscione,
Dana Fruscione-Penzone, Gia Fruscione, Alicia Fruscione, Joseph Fruscione,
Robert Evans, John Arangio, Gary and JoAnne Gardner, Lee and Margaret Getson, G.
Harry Bonham, Jr., Gary Brewer, Bob Lastowski, Robert Filipe, Mitchell D.
Hovendick, Dr. John Diephold, Joseph Maressa, Jr., and Charles Brennan
(collectively, the "Plaintiffs")) commenced legal action against the Company,
Ernst & Young, LLP and certain of the Company's former directors (such directors
being Louis A. Hoch, Michael R. Long, David S. Jones, Roger Hemminghaus, E.
Scott Crist, Peter Kirby, Richard Bergman, and Terri A. Hunter (the "Defendant
Directors")) in the District Court of the 45th Judicial District, Bexar County,
Texas (the "Suit"). The Plaintiffs allege, as the Suit pertains to the Company,
that the Company, acting through the Defendant Directors, misstated in the
Company's 2000 and 2001 Form 10-Ks the Company's ability to use for operational
purposes certain Company funds pledged as security for margin loans of three
Company officers. The Plaintiffs seek economic and exemplary damages,
rescission, interest, attorneys' fees, and costs of court.
The Company believes the Suit to be without merit, and intends to vigorously
defend itself and the Defendant Directors.
Item 2. Changes in Securities and Use of Proceeds
Pursuant to Section 506 of Regulation D of the Securities and Exchange Act of
1933, the Company sold an aggregate of 112,500 shares of its unregistered common
stock, par value $0.001, to three independent contractors in consideration for
services completed on December 15, 2002, January 15, 2003, February 15, 2003,
March 15, 2003, April 15, 2003, and May 15, 2003. The offers and sales the
subject hereof satisfied the terms and conditions of Sections 501, 502, and 506
of the Securities and Exchange Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders
At the Special Meeting of Stockholders held on July 14, 2003, the following
matters were adopted by the margins indicated:
1. To elect director Louis A. Hoch to serve until the 2006 Annual Meeting of
Stockholders.
For: 18,054,816
Withheld: 746,140
2. To approve the asset purchase transaction whereby Saro, Inc., a wholly
owned subsidiary of Cyberstarts, Inc., would purchase substantially all of
the assets and assume certain liabilities of the Company.
For: 11,631,971
Against: 582,954
Abstain: 17,180
3. To change the Company's name from "Billserv, Inc." to "Payment Data
Systems, Inc.".
For: 17,830,673
Against: 919,408
Abstain: 50,875
18
4. To ratify the appointment of Ernst & Young, LLP as the independent auditors
for the Company for the fiscal year ending December 31, 2003.
For: 17,747,648
Against: 1,011,233
Abstain: 42,075
The following directors continued their term of office subsequent to the Annual
Meeting: Michael R. Long, Terri A. Hunter and Peter G. Kirby.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
3.1 Articles of Incorporation, as amended on July 29, 2003 (filed herewith )
10.1 Asset Purchase Agreement between the Company and Saro, Inc. dated May 15,
2003 (incorporated by reference to Appendix A in the Registrant's
Definitive Proxy Statement, filed June 19, 2003)
10.2 First Amendment to Asset Purchase Agreement dated July 25, 2003 (filed
herewith)
10.3 Standard Office Lease between the Company and Frost National Bank, Trustee
for a Designated Trust, dated August 22, 2003 (filed herewith)
31.1 Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 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 July 29, 2003, the Company filed a report on Form 8-K regarding the
sale of substantially all of its assets to Saro, Inc. On September 26,
2003, the Company filed an amendment to this report to include certain
pro forma financial information pursuant to Item 7 of the Form 8-K.
On August 11, 2003, the Company filed a report on Form 8-K regarding
legal action commenced against the Company and certain of its current
and former directors by certain shareholders of the Company.
On August 19, 2003, the Company filed a report on Form 8-K regarding
the change in the Company's stock symbol to "PYDS."
On September 18, 2003, the Company filed a report on Form 8-K regarding
the resignation of its Chief Financial Officer and Director.
Items 3 and 5 are not applicable and have been omitted.
19
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.
PAYMENT DATA SYSTEMS, Inc.
By: /s/ Michael R. Long
-------------------------------
Michael R. Long
Chief Executive Officer
and Chief Financial Officer
(Duly authorized and principal financial and accounting officer)
Date: November 14, 2003
20