SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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billserv.com, Inc.
(Exact name of issuer as specified in its charter)
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Nevada
(State or other jurisdiction of incorporation or organization)
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14607 San Pedro Ave., Suite 100
San Antonio, Texas 78232
210.402.5000
(Address, including zip code, and telephone number, including area code
of issuer's principal executive offices)
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Timothy N. Tuggey
Arter & Hadden LLP
700 N. St Mary's St. #800
San Antonio, Texas 78205
210.354.4300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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I.R.S. Employer Identification Number
98-0190072
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Approximate date of proposed commencement of sale to the public: From time to
time after the Registration Statement becomes effective. If any of the
securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box [X]
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CALCULATION OF REGISTRATION FEE
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Proposed
Amount of Maximum Proposed Maximum Amount of
Title of Each Class of Shares To be Offer Price Aggregate Offering Registration
Securities to be Registered Registered Per Unit(1) Price Fee
- --------------------------- ------------- ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Common Stock 3,782,360(2) $7.34 $27,762,522 $7,718
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(1) Estimated solely for purposes of calculating the registration fee based
upon the average of the bid and asked price on December 23, 1999. Warrants
for shares hereby registered may be exercised at $3.25, $3.75, $6.06,
$6.75, $7.31, $7.41, $7.44, and $8.00.
(2) Includes 1,645,723 shares issuable on exercise of warrants.
The Company hereby amends the Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Acts of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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BILLSERV.COM, INC.
3,782,360 SHARES OF COMMON STOCK
The security holders named under "Selling Security Holders" below have advised
(the "Company") that they may from time to time sell or otherwise dispose of
3,782,360 shares of the Company's Common Stock (the "Common Stock" or "Share")
to which this Prospectus relates, of which 1,645,723 Shares are issuable upon
exercise of Warrants to purchase common stock (the "Warrants"), (collectively
the "Secondary Shares"), at prices then obtainable. The Company will not receive
any of the proceeds from the sale of Common Stock by such security holders other
than amounts received upon exercise of the Warrants in accordance with their
terms. Such security holders, and any securities dealers or brokers to or
through which they effect sales of the above shares of Common Stock, may be
deemed to be underwriters with respect to such securities within the meaning of
the Securities Act of 1933, and any profits realized by such persons may be
deemed to be underwriting commissions.
The Company's Common Stock is quoted on the NASD OTC BB under the symbol BLLS.
On December 23, 1999, the closing bid quotation for the Common Stock was $7.31.
These securities have not been approved or disapproved by the securities and
exchange commission nor has the commission passed upon the accuracy or adequacy
of this prospectus. Any representation to the contrary is a criminal offense.
These securities involve a high degree of risk. See "Risk Factors" immediately
following this summary for a discussion of certain risk factors that should be
considered by prospective investors of the securities offered hereby.
The date of this prospectus is January 13, 2000.
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TABLE OF CONTENTS
PROSPECTUS SUMMARY......................................................... 4
RISK FACTORS............................................................... 6
USE OF PROCEEDS............................................................ 16
DETERMINATION OF OFFERING PRICE............................................ 16
SELLING STOCKHOLDERS ...................................................... 17
PLAN OF DISTRIBUTION ...................................................... 18
DIRECTORS AND EXECUTIVE OFFICERS........................................... 20
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 23
EXECUTIVE COMPENSATION..................................................... 24
DESCRIPTION OF SECURITIES.................................................. 26
INTEREST OF NAMED EXPERT AND COUNSEL....................................... 26
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITY............................................................. 27
DESCRIPTION OF BUSINESS.................................................... 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION AND PLAN OF OPERATION....................................... 35
PROPERTIES AND EQUIPMENT................................................... 41
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 41
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................... 43
FINANCIAL STATEMENTS....................................................... 44
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AVAILABLE INFORMATION
Prior to filing the registration statement on Form SB-2 of which this Prospectus
is a part, the Company has been subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). As such,
billserv.com Inc. is a "reporting company."
The Company has filed with the Commission a registration statement on Form SB-2
of which this Prospectus is a part. This registration statement or any part
thereof, together with all other reports and other information filed by
billserv.com may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street N.W., Judiciary Plaza,
Washington, D.C. 20549. Copies of such material may be obtained from the Public
Reference Section of the Commission's Washington, D.C. office at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at http://www.sec.gov.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
The discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. A number of important factors could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as those
discussed elsewhere in this Prospectus. Investors should carefully consider the
information set forth under "Risk Factors".
The company intends to furnish its shareholders with annual reports containing
audited financial statements certified by its independent public accountants and
quarterly reports containing unaudited financial statements for each of the
first three quarters of each fiscal year.
PROSPECTUS SUMMARY
billserv.com, Inc. (the "Company") is a service bureau clearinghouse in the
electronic bill presentment and payment ("EBPP") industry. EBPP is the process
of presenting a bill in a secure environment on the Internet and allowing the
customer to pay the bill through the electronic transfer of funds. EBPP is
alternatively referred to as "Internet billing" or "Ebilling."
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As a startup enterprise, with approximately 50 employees, the Company earned its
first operating revenues in the fourth quarter of 1999. The Company intends to
generate four principal revenue streams: Internet billing services ("EServ"),
Internet publishing of statements ("EPublishing"), customer care services
through Internet and traditional telephony technologies ("ECare"), and
professional services associated with the implementation and maintenance of
these Internet technologies ("EConsulting"). The Company is currently capable of
providing services in each of these areas, although ECare services are available
only on a limited basis. In addition, the Company is developing an Internet
portal with EBPP capabilities.
The security holders named under "Selling Security Holders" below have advised
the Company that they may from time to time sell or otherwise dispose of
3,782,360 shares of the Common Stock to which this Prospectus relates, of which
1,604,486 Shares are issuable upon exercise of the Warrants, (collectively the
"Secondary Shares"), at prices then obtainable. The Company will not receive any
of the proceeds from the sale of Common Stock by such security holders other
than amounts received upon exercise of the Warrants in accordance with their
terms. Such security holders, and any securities dealers or brokers to or
through which they effect sales of the above shares of Common Stock, may be
deemed to be underwriters with respect to such securities within the meaning of
the Securities Act of 1933, and any profits realized by such persons may be
deemed to be underwriting commissions. The exercise price for 1,404,637 of the
1,645,723 Warrants is $3.75 per share. The remaining 199,849 Warrants were
issued to Pennsylvania Merchant Group ("PMG"), placement agent for the common
stock on other warrants. In addition to these Warrants, the Company has also
issued a Warrant to Kingship, Ltd. for the purchase of 41,237 Common Shares.
If all of these Warrants are exercised in full the Company would receive
proceeds of $6,389,165. To the extent such exercise occurs, the Company intends
to use such funds for general corporate expenditures.
The Company has registered the Secondary Shares to provide the holders thereof
with freely tradeable securities, but the registration of such shares does not
necessarily mean that any of such shares will be offered or sold by the holders
thereof. The Selling Stockholders may from time to time offer and sell all or a
portion of the Secondary Shares, in negotiated transactions or otherwise, at
prices then prevailing or related to the then current market price or at
negotiated prices. The Secondary Shares may be sold directly or through brokers
or dealers, or in a distribution by one or more underwriters on a firm
commitment or best efforts basis. To the extent required, the names of any agent
or broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution." Each of the
Selling Stockholders reserves the sole right to accept or reject, in whole or in
part, any proposed purchase of the Secondary Shares to be made directly or
through agents. The Selling Stockholders and any agents or broker-dealers that
participate with the Selling Stockholders in the distribution of Secondary
Shares may be deemed to be "underwriters" within the meaning
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of the Securities Act of 1933, as amended (the "Securities Act"), and any
commissions received by them and any profit on the resale of the Secondary
Shares may be deemed to be underwriting commissions or discounts under the
Securities Act. The Company will not receive any of the proceeds from the sale
of any Secondary Shares by the Selling Stockholders but has agreed to bear the
expenses of registration of the Secondary Shares, other than commissions and
discounts of agents or broker-dealers and transfer taxes, if any.
The following table sets forth certain selected financial data of billserv.com,
Inc. as of and for the nine months ended September 30, 1999, and as of and for
the period from inception (July 30, 1998) through December 31, 1998. The
information contained in the following table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and related notes included
elsewhere herein.
JULY 30, 1998
NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, 1999 DECEMBER 31, 1998
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Revenues $ - $ -
Net loss (3,991,349) (289,770)
Net loss per common share -
basic and diluted (0.38) (0.03)
Total assets 3,406,243 407,530
RISK FACTORS
The securities offered herein (the "Secondary Shares") involve a high
degree of risk. Accordingly, before deciding to purchase, investors should
carefully consider the following risk factors along with the other matters
discussed herein.
LACK OF OPERATING HISTORY; LIMITED RELEVANCE OF HISTORICAL FINANCIAL
INFORMATION. The Company was organized in 1998 and has only recently begun
operations as a public company. The Company has not been profitable; nor has the
Company generated any significant revenue. Through September 30, 1999, the
Company's accumulated deficit
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was $4,291,055. Accordingly, all information included herein may not necessarily
reflect the results of operations, financial position and cash flows of the
Company in the future.
POSSIBLE VIOLATION OF SECURITIES LAWS. On or about December 3, 1998, the
Company, then under the control of former management, and then known as Goldking
Resources, Inc., concluded an offering of approximately 5.3 million shares of
the Company's common stock. This transaction was completed through the
cancellation of approximately 6.2 million shares, held by shareholders who
tendered their shares to the Company, followed by the Company's issuance of 5.3
million shares to 15 new shareholders, who paid par value to the Company for
such shares, in the total amount of approximately $5,300.00. The new
shareholders also paid an additional $300,000 to the shareholders who had agreed
to cancel their shares. Subsequently, some of these new shareholders sold the
shares into the secondary market. The Company timely filed a Form D reporting
this transaction to the SEC, and claimed exemption under Rule 504. The SEC has
challenged the validity of this claimed exemption.
The Company disputes the following assertions, but it is possible that the
issuance of shares described above may have violated provisions of the federal
and state securities laws which subject the Company to fines, penalties or other
regulatory enforcement action. There can be no assurance that the SEC or
applicable state authorities will not pursue any enforcement action. The Company
disputes any such liability.
Additionally, while the Company also disputes the following assertions, it is
possible that shareholders who purchased the shares described above may have the
right under state and federal securities laws to require the Company to
repurchase their shares, for the amount originally paid, plus interest. The
Company disputes any such liability.
Based upon the best information available to the Company at this time, the
Company has calculated a range of possible, but disputed, exposure that exists
for the Company in light of the disputed civil liabilities described above.
Accordingly, in the event these disputed civil liabilities were successfully
asserted, the Company could be liable to the 15 new shareholders, and to any
shareholder that immediately purchased from these 15 shareholders, in an amount
ranging from approximately $5,300 up to approximately $2.9 million, plus
interest. This range of possible exposure is calculated by reference to the
average closing price for a share of the Company's common stock, weighted for
reported daily volume, during December 1998 and January 1999; the number of
shares possibly sold during the same period of time; and the closing price of
one share on December 11, 1999. The foregoing range could be adjusted higher or
lower depending upon adjustments to any of the referenced items, and as any new
information becomes available to the Company.
UNCERTAIN RELIABILITY, GROWTH AND CONSUMER ACCEPTANCE OF THE INTERNET, INTERNET
TECHNOLOGY, AND ELECTRONIC COMMERCE. The electronic commerce market is a
relatively new and growing service industry. If the electronic commerce market
fails to grow or grows slower than anticipated, or if the Company, despite an
investment of
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significant resources, is unable to adapt to meet changing customer requirements
or technological changes in this emerging market, or if the Company's services
and related products do not maintain a proportionate degree of acceptance in
this growing market, the Company's business, operating results, and financial
condition could be materially adversely affected. Additionally, the security and
privacy concerns of existing and potential customers may inhibit the growth of
the electronic commerce market in general, and the Company's customer base and
revenues in particular. Similar to the emergence of the credit card and
automatic teller machine ("ATM") industries, the Company and other organizations
serving the electronic commerce market must educate users that electronic
transactions use encryption technology and other electronic security measures
that make electronic transactions more secure than paper-based transactions.
While the Company believes that it is utilizing proven applications designed for
premium data security and integrity to process electronic transactions, there
can be no assurance that the Company's use of such applications will be
sufficient to address the changing market conditions or the security and privacy
concerns of existing and potential customers. Adverse publicity raising concerns
about the safety or privacy of electronic transactions, or widely reported
breaches of the Company's or another providers security, have the potential to
undermine consumer confidence in the technology and thereby have a materially
adverse effect on the Company's business. In addition, there can be no guarantee
that the Internet will continue to grow in acceptance or maintain its
reliability, or that new technologies might supplant the Internet in part or in
whole.
UNCERTAIN GROWTH OF PROPORTION OF ELECTRONIC REMITTANCES. The Company's future
financial performance will be materially affected by the percentage of bill
payments which can be cleared electronically. Accordingly, the Company's
inability to continue to decrease the percentage of remittances effected by
paper documents will result in flat or decreased margins, and a reversal of the
current trend toward a smaller proportion of paper-based payments would have a
material adverse effect upon the Company's business, operating results, and
financial condition.
RISK OF INABILITY TO ADAPT TO RAPID TECHNOLOGICAL CHANGE; RISK OF DELAYS. The
Company's success is highly dependent on its ability to develop new and enhanced
services, and related products that meet changing customer requirements. At
present, the Company's four principal products, EServ, eCare, EPublishing and
EConsulting are available, although ECare services remain available only on
limited basis. Nonetheless, the market for the Company's services is
characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new and enhanced software, service and related
product introductions. In addition, the software market is subject to rapid and
substantial technological change. The Company, to remain successful, must be
responsive to new developments in hardware and semiconductor technology,
operating systems, programming technology, and computer capabilities. In many
instances, the new and enhanced services, products, and technologies are in the
emerging stages of development and marketing, and are subject to the risks
inherent in the development and marketing of new software, services, and
products. The Company may not successfully identify new service opportunities,
and develop and bring new and
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enhanced services and related products to market in a timely manner; there can
be no assurance that any such services, products or technologies will develop or
will be commercially successful, that the Company will benefit from such
developments or that services, products, or technologies developed by others
will not render the Company's services, and related products noncompetitive or
obsolete. If the Company is unable, for technological or other reasons, to
develop and introduce new services and products in a timely manner in response
to changing market conditions or customer requirements, or if new or enhanced
software, services, and related products do not achieve a significant degree of
market acceptance, the Company's business, operating results, and financial
condition would be materially adversely affected.
CHANGES IN REGULATION OF ELECTRONIC COMMERCE AND RELATED FINANCIAL SERVICES.
Management believes that the Company is not required to be licensed by the
Office of the Comptroller of the Currency, the Federal Reserve Board, or other
federal or state agencies that regulate or monitor banks or other types of
providers of electronic commerce services. There can be no assurance that a
federal or state agency will not attempt to regulate providers of electronic
commerce services, such as the Company, which could impede the Company's ability
to do business in the regulator's jurisdiction. The Company is subject to
various laws and regulations relating to commercial transactions generally, such
as the Uniform Commercial Code, and may also be subject to the electronic funds
transfer rules embodied in Regulation E, promulgated by the Federal Reserve
Board. Given the expansion of the electronic commerce market, it is possible
that the Federal Reserve might revise Regulation E or adopt new rules for
electronic funds transfer affecting users other than consumers. Because of
growth in the electronic commerce market, Congress has held hearings on whether
to regulate providers of services and transactions in the electronic commerce
market, and it is possible that Congress or individual states could enact laws
regulating the electronic commerce market. If enacted, such laws, rules and
regulations could be imposed on the Company's business and industry and could
have a material adverse effect on the Company's business, operating results, and
financial condition.
UNCERTAINTY OF ACH ACCESS. The ACH Network is a nationwide batch-oriented
electronic funds transfer system which provides for the interbank clearing of
electronic payments for participating financial institutions. The Federal
Reserve rules provide that the ACH system is available only through a bank. To
access the Network, customers of the Company will authorize the Company to
originate an ACH entry. As the originator, the Company forwards transaction data
to the Originating Depository Financial Institution ("ODFI"), which is a
participating financial institution that must abide by the provisions of the ACH
Operating Rules and Guidelines. The ODFI sorts and transmits the file to an ACH
Operator. The Arizona Clearing House Association, Federal Reserve, New York
Automated Clearing House, and Visa USA act as ACH Operators, central clearing
facilities through which financial institutions transmit or receive ACH entries.
The ACH Operator then distributes the ACH file to the Receiving Depository
Financial Institution, the bank of the customer, which makes the funds available
to the customer. If the Federal
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Reserve rules were to change to further restrict or modify access to the ACH,
the Company's business could be materially adversely affected.
INTENSE COMPETITION IN ELECTRONIC COMMERCE AND RELATED FINANCIAL SERVICES.
Portions of the electronic commerce market are becoming increasingly
competitive. The Company expects to face significant competition in all of its
customer markets. Although few companies have focused their efforts as service
bureau consolidators in the EBPP industry, the Company expects that new service
bureau companies will emerge and compete for the small to medium size biller
business. The Company further believes that software providers, consumer front
ends, banks and Internet portals will provide increasingly competitive billing
solutions for small to medium size billers. In addition, a number of banks have
developed, and others in the future may develop, home banking services in-house.
The Company believes that banks will also compete for the EBPP business of small
to medium size billers.
The Company expects competition to increase from both established and emerging
companies and that such increased competition will result in reduced transaction
costs which could materially adversely affect the Company's business, operating
results, and financial condition. Moreover, the Company's current and potential
competitors, many of whom have significantly greater financial, technical,
marketing, and other resources than the Company, may respond more quickly than
the Company to new or emerging technologies or could expand to compete directly
against the Company in any or all of its target markets. Accordingly, it is
possible that current or potential competitors could rapidly acquire significant
market share. There can be no assurance that the Company will be able to compete
against current or future competitors successfully or that competitive pressures
faced by the Company will not have a material adverse effect on its business,
operating results, and financial condition.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. The Company currently
plans to meet its capital requirements primarily through issuance of equity
securities, capital lease financing, and in the longer term, revenue from
operations. The Company recently concluded equity financing through the Selling
Security Holders, with proceeds to the Company in the amount of $7,905,251.
However, the Company anticipates the need to raise additional funds through
public or private debt or equity financing in order to take advantage of
unanticipated opportunities, including more rapid expansion or acquisitions of
complementary businesses or technologies, or to develop new or enhanced services
and related products, or otherwise respond to unanticipated competitive
pressures. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the then current stockholders of the
Company may be reduced and such equity securities may have rights, preferences
or privileges senior to those of the holders of the Company's common stock.
There can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or are
not available on acceptable terms, the Company may not be able to take advantage
of unanticipated opportunities, develop new or enhanced services and related
products or otherwise respond to unanticipated competitive pressures and the
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Company's business, operating results, and financial condition could be
materially adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
degree upon the continued contributions of its key management, marketing,
service and related product development and operational personnel, including its
Chairman and Chief Executive Officer, Michael R. Long; its President and Chief
Operating Officer, Louis A. Hoch; its Senior Vice President of Business
Development, David S. Jones; its Chief Financial Officer, Lori K. Turner; its
General Counsel, Marshall N. Millard; and its Vice President of Business
Development, Randy Kauftheil. The Company's operations could be affected
adversely if, for any reason, any of these officers ceased to be active in the
Company's management. The Company maintains proprietary nondisclosure and
non-compete agreements with all of its key employees. The Company intends to
secure key person life insurance policies on Mr. Long. The success of the
Company depends to a large extent upon its ability to retain and continue to
attract highly skilled personnel. Competition for employees in the electronic
commerce industry is intense, and there can be no assurance that the Company
will be able to attract and retain enough qualified employees. If the business
of the Company grows, it may become increasingly difficult to hire, train and
assimilate the new employees needed. The Company's inability to retain and
attract key employees could have a material adverse effect on the Company's
business, operating results, and financial condition.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly results of
operations may fluctuate significantly as a result of a number of factors,
including changes in the Company's pricing policies or those of its competitors,
relative rates of acquisition of new customers, delays in the introduction of
new or enhanced services, software, and related products by the Company or by
its competitors or market acceptance of such services and products, other
changes in operating expenses, personnel changes, and general economic
conditions. These factors will impact the Company's operating results.
Fluctuations in operating results could result in volatility in the price of the
Company's common stock.
RISK OF PRODUCT DEFECTS. The software products utilized by the Company could
contain errors or "bugs" that could adversely affect the performance of services
or damage a user's data. In addition, as the Company increases its share of the
electronic commerce services market, software reliability and security demands
will increase. The Company attempts to limit its potential liability for
warranty claims through limitation-of-liability provisions in its customer
agreements. There can be no assurance that the measures taken by the Company
will prove effective in limiting the Company's exposure to warranty claims.
Despite the existence of various security precautions, the Company's computer
infrastructure may be also vulnerable to viruses or similar disruptive problems
caused by its customers or third parties gaining access to the Company's
processing system.
EROSION OF REVENUE FROM SERVICES. The profitability of the Company's business
depends, to a substantial degree, upon billers electing to continue to
periodically renew contracts. In the event that a substantial number of these
customers were to decline to
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renew these contracts for any reason, the Company's revenues and profits would
be adversely affected. Sales of the Company's services are dependent upon
customer demand for the services, which is affected by pricing decisions, the
competition of similar products and services, and reputation of the products and
services for performance. Most of the Company's services are likely to be sold
within the utilities and financial services industries, and poor performance by
the Company in performing its services has the potential to undermine the
Company's reputation and affect future sales of other services. A substantial
decrease in revenue from services would have a material adverse effect upon the
Company's business, operating results, and financial condition.
RISK OF LOSS FROM RETURNED TRANSACTIONS, MERCHANT FRAUD OR ERRONEOUS
TRANSMISSIONS. The Company relies upon the Federal Reserve's ACH for electronic
fund transfers and conventional paper check and draft clearing systems for
settlement of payments by check or drafts. In its use of these established
payment clearance systems, the Company generally bears the same credit risks
normally assumed by other users of these systems arising from returned
transactions caused by insufficient funds, stop payment orders, closed accounts,
frozen accounts, unauthorized use, disputes, theft, or fraud. In addition, the
Company also assumes the risk of merchant fraud and transmission errors when it
is unable to have erroneously transmitted funds returned by an unintended
recipient. Merchant fraud includes such actions as inputting false sales
transactions or false credits.
RISK OF SYSTEM FAILURE. The Company's operations are dependent on its ability to
protect its computer equipment against damage from fire, earthquake, power loss,
telecommunications failure or similar event. Any damage or failure that causes
interruptions in the Company's operations could have a material adverse effect
on the Company's business, operating results, and financial condition. The
Company's property and business interruption insurance may not be adequate to
compensate the Company for all losses that may occur.
RISK OF YEAR 2000 OPERATIONAL DEFECTS. The Company has completed the process of
determining whether or not its products, its internal systems, computers and
software, and the products and systems of its critical vendors and suppliers are
Year 2000 compliant. Based upon the Company's review, and because the Company's
systems and software are relatively new, management believes that the Company's
internal systems and those of its critical vendors and suppliers, are Year 2000
compliant. Accordingly, the Company does not currently expect that costs
associated with Year 2000 compliance will have a material effect on operations
or financial position. Although the Company believes that its Year 2000 review
has identified all material Year 2000 issues, there can be no absolute assurance
that the Company identified and resolved all such issues. If the Company
discovers Year 2000 problems in the future, it may not be able to develop,
implement, or test remediation or contingency plans in a timely or
cost-effective manner.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISK OF THIRD PARTY INFRINGEMENT
CLAIMS. The Company regards some of its services as proprietary and relies
primarily on
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a combination of trademark and trade secret laws, employee and third party
non-disclosure agreements, and other intellectual property protection methods to
protect its services. Existing intellectual property laws afford only limited
protection, and it may be possible for unauthorized third parties to copy the
Company's services and related products or to reverse engineer or obtain and use
information that the Company regards as proprietary. There can be no assurance
that the Company's competitors will not independently develop services and
related products that are substantially equivalent or superior to those of the
Company.
LIMITED PRIOR MARKET. Prior to December 3, 1998, there was no public market for
the Company's common stock, and no public market may be developed or sustained
for such stock. The Company's Shares are now traded NASD OTC BB. There can be no
assurance that an active or liquid trading market in the Company's common stock
will develop or be sustained.
LIMITED LIQUIDITY OF STOCK. The lack of a prior, liquid market for the Company's
shares may make it difficult for shareholders to sell their shares in the
Company. Prior to December 3, 1998, there was no public market for the Company's
common stock, and no public market may be developed or sustained for such stock.
There can be no assurance that an active or liquid trading market in the
Company's common stock will develop or be sustained. The Company's Shares are
now traded on the NASD OTC BB. Moreover, the Company's stock may qualify as a
"penny stock" under the Penny Stock Suitability Reform Act of 1990. The
liquidity of penny stock is affected by specific disclosure procedures to be
followed by all broker-dealers, including but not limited to, determining the
suitability of the stock for a particular customer, and obtaining a written
agreement from the customer to purchase the stock.
VOLATILITY OF STOCK PRICE. The market price of the Company's common stock is
subject to significant fluctuations in response to variations in quarterly
operating results, the failure of the Company to achieve operating results
consistent with securities analysts' projections of the Company's performance,
and other factors. The stock market has experienced extreme price and volume
fluctuations and volatility that has particularly affected the market prices of
many technology, emerging growth, and developmental stage companies. Such
fluctuations and volatility have often been unrelated or disproportionate to the
operating performance of such companies. Factors such as announcements of the
introduction of new or enhanced services or related products by the Company or
its competitors, announcements of joint development efforts or corporate
partnerships in the electronic commerce market, market conditions in the
technology, banking, telecommunications and other emerging growth sectors, and
rumors relating to the Company or its competitors may have a significant impact
on the market price of the Company's common stock.
CONTROL BY PRINCIPAL STOCKHOLDERS. Currently, the directors and executive
officers of the Company and their affiliates collectively own approximately 32%
of the outstanding shares of the Company's common stock. As a result, these
stockholders are able to
13
<PAGE>
exercise significant influence over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may have the effect of delaying or
preventing a change in control of the Company.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON MARKET PRICE.
Currently, the Company has 13,113,065 shares of the Company's common stock
outstanding. Six million one hundred thirty-six thousand six hundred
thirty-seven 6,136,637 shares are restricted pursuant to Rule 144; and 946,428
are restricted under Regulation S; but 6,030,000 are not. Furthermore, under the
terms of a private placement concluded in December of 1999, the Company is
obligated to seek registration of 2,136,637 common shares and 1,645,723 shares
underlying warrants. Sales of substantial amounts of unrestricted shares in the
public market or the prospect of such sales could adversely affect the market
price of the Company's Common Stock.
ANTI-TAKEOVER PROVISIONS; CERTAIN PROVISIONS OF NEVADA LAW; CERTIFICATE OF
INCORPORATION, BY-LAWS, AND STOCKHOLDER RIGHTS PLAN. Certain provisions of
Nevada law, the Company's Certificate of Incorporation, Bylaws, and a proposed
stockholder rights plan could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, control of the Company. In 1999, the Company's approved an amendment to
the Company's Bylaws, to provide for the Board of Directors to be divided into
three classes of directors serving staggered three-year terms. Such
classification of the Board of Directors expands the time required to change the
composition of a majority of directors and may tend to discourage a proxy
contest or other takeover bid for the Company. The Company also intends to seek
shareholder approval to allow issuance of rights to acquire common stock under
certain conditions, without any further vote or action by the stockholders. The
issuance of common stock under a stockholder rights plan could decrease the
amount of earnings and assets available for distribution to the holders of the
Company's common stock or could adversely affect the rights and powers,
including voting rights, of the holders of the Company's common stock. In
certain circumstances, such issuance could have the effect of decreasing the
market price of the Company's common stock.
DIFFICULTY IN MANAGEMENT OF GROWTH. The Company may experience a period of rapid
growth which could place a significant strain on its resources. The Company's
ability to manage growth successfully will require the Company to continue to
improve its operational, management and financial systems and controls as well
as to expand its work force. A significant increase in the Company's customer
base would necessitate the hiring of a significant number of additional customer
care and technical support personnel as well as computer software developers and
technicians, qualified candidates for which, at the present time, are in short
supply. In addition, the expansion and adaptation of the Company's computer and
administrative infrastructure will require substantial operational, management,
and financial resources. Although the Company believes that its current
infrastructure is adequate to meet the needs of its customers in the foreseeable
future, there can be no assurance that the Company will be able to expand and
adapt its infrastructure to meet additional demand on a timely basis, at a
commercially reasonable
14
<PAGE>
cost, or at all. If the Company's management is unable to manage growth
effectively, hire needed personnel, expand and adapt its computer infrastructure
or improve its operational, management, and financial systems and controls, the
Company's business, operating results, and financial condition could be
materially adversely affected.
ACQUISITION-RELATED RISKS. In the future, the Company may pursue acquisitions of
complementary service or product lines, technologies, or businesses. Future
acquisitions by the Company could result in potentially dilutive issuance of
equity securities, the incurrence of debt and contingent liabilities, and
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's business, operating
results, and financial condition. In addition, acquisitions involve numerous
risks, including difficulties in the assimilation of the operations,
technologies, services, and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or limited direct prior experience, and the
potential loss of key employees of the acquired company. From time to time, the
Company evaluates potential acquisitions of businesses, services, products, or
technologies. The Company has no present commitments or agreements with respect
to any material acquisition of other businesses, services, products, or
technologies. In the event that such an acquisition were to occur, however,
there can be no assurance that the Company's business, operating results, and
financial condition would not be materially adversely affected.
UNLIKELY PAYMENT OF DIVIDENDS. The Company has paid no cash dividends and has no
present plan to pay cash dividends, intending instead to reinvest its earnings,
if any. However, payment of future cash dividends will be determined from time
to time by its Board of Directors, based upon its future earnings, financial
condition, capital requirements and other factors. The Company is not presently
subject to any restriction on its present or future ability to pay such
dividends.
DEPENDENCE UPON CONTRACTS WITH BILLERS. The Company's business is dependent upon
performing under the terms of agreements with billers. Although the Company is
unaware of any circumstance which would prevent the enforcement of these
agreements, there can be no assurance that the Company might not be able to
fully perform under these agreements or that other factors may prevent billers
from processing billing information through the Company.
DEPENDENCE UPON CONTRACTS WITH TRADING PARTNERS. The Company's business is
dependent upon executing and maintaining agreements with front ends such as
CheckfreeTM, TranspointTM, and IntuitTM to provide dependable financial services
for customers of billers. Such financial services include ACH processing through
the customer's bank and delivery of good funds to the Company for remittance to
the billers. There can be no assurance that any of the front ends will be able
to perform under these agreements in the future.
15
<PAGE>
ANTICIPATED BILLING SYSTEM EXPENDITURES. To facilitate and support the growth
anticipated in its business, the Company plans to make significant expenditures
in its operations over the next one to three years. These expenditures are
expected to be made in the areas of software development, licensing, hardware,
and related staffing. The Company believes that it will be able to fund these
expenditures with internally generated funds and financing, but there can be no
assurance that such funds will be generated or spent in these projects.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of shares of
Common Stock in the public market could adversely affect the market price for
the Company's Common Stock, which could have a direct impact on the value of the
Shares.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE. This registration statement
contains certain forward-looking statements and information relating to the
Company that are based on the beliefs of the Company's management as well as
assumptions made by and assumptions made by and information currently available
to the Company's management. When used in this document, the words "anticipate,"
"believe," "estimate," "expect," and "intend" and similar expressions, as they
relate to the Company or its management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including the risk factors described in this
registration statement. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of any Secondary
Shares by the Selling Stockholders but has agreed to bear the expenses of
registration of the Secondary Shares, other than commissions and discounts of
agents or broker-dealers and transfer taxes, if any. No assurance can be given
that any or all of the Warrants will be exercised. Accordingly, as far as can be
determined as of the date of the Prospectus, the proceeds received by the
Company upon exercise of Warrants, if any, will be used for general corporate
purposes and for working capital which may include payment of salaries, rent,
research and development, purchase of inventory and marketing expenses. Such
proceeds would aggregate $6,389,165 if all the Warrants were exercised.
DETERMINATION OF OFFERING PRICE
The Common Stock is quoted and traded on the NASD OTC BB under the trading
symbol "BLLS." The trading does not constitute, nor should it be considered, an
established public trading market for the Common Stock. See "Risk Factors--
Shares Eligible for Future Sale."
16
<PAGE>
The following table sets forth the high ask and low bid for the Shares of
billserv.com, Inc. for the periods indicated. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions, and may
not necessarily represent actual transactions.
Calendar Quarter Bid Prices
Ended Low High
-----------------------------------------------
December 31, 1998(1) 2 3/8 3 3/8
March 31, 1999 2 3/4 8 5/8
June 30, 1999 4 1/4 10 1/8
September 30, 1999 3 13/16 7 3/4
December 31, 1999 3 8 13/32
(1) No previous periods are reported as the Company was initially traded
publicly in the fourth quarter 1998.
The Company has 13,113,065 shares of common stock outstanding, including the
2,136,637 shares issued pursuant to private placement and registered hereby. Of
this total amount, 6,030,000 of such shares are nonrestricted; 6,136,637 of such
shares are restricted pursuant to Rule 144; and 946,428 shares are restricted
pursuant to Regulation S. As of December 23, 1999, the number of holders of
record of the common stock, $.001 par value, of the Company was approximately
4,348.
The Company is not aware of any public market for the Warrants. The exercise
price for the 1,645,723 Warrants currently outstanding was determined by
considering several factors, including the current market price for the
Company's stock.
SELLING STOCKHOLDERS
The following table sets forth the name, number of Shares of Common Stock and
the number of Shares underlying the Warrants owned by each Selling Stockholder.
Since the Selling Stockholders may sell all, a portion or none of their Shares,
no estimate can be made of the aggregate number of Shares that are offered
hereby or that will be owned by each Selling Stockholder upon completion of the
offering to which this Prospectus relates. The Shares offered by this Prospectus
may be offered from time to time by the Selling Stockholders named below:
RELATIONSHIP NUMBER OF PERCENTAGE OF
NAME TO ISSUER SHARES (1) OWNERSHIP (2)
- ---- --------- ---------- -------------
Barnett & Co. None 603,076 4.086%
Briggs & Stratton (Retirement Acct) None 184,692 1.251%
Curt Byerly & Joan Byerly None 30,800 0.209%
Donaldson Lufkin Jenrette
Securities Corp. as Custodian
FBO Frank J. Campbell None 61,384 0.416%
Dr. John H. Diepold None 30,800 0.209%
Robert D. Evans None 161,538 1.095%
William T. Hagan None 31,230 0.212%
17
<PAGE>
Bill Hodde and Martha S. Hodde None 107,692 0.730%
Mitchell D. Hovendick None 30,800 0.209%
Lighthouse Capital, L.P. None 276,770 1.875%
London Pacific Diversified Growth None 53,846 0.365%
NILE None 301,538 2.043%
The Paisley Fund, L.P. None 89,230 0.605%
The Paisley Pacific Fund None 352,308 2.387%
Leonid C. Prince None 24,554 0.166%
Michael Procacci, Jr. None 61,600 0.417%
Charles M. Robins None 19,692 0.133%
Toupro Inc. None 30,800 0.209%
William D. Williams & Thelma C.
Williams None 9,232 0.063%
Jeffrey & Denise Hamren None 40,000 0.271%
Kingship, Ltd. None 348,929(3) 2.364%
Pennsylvania Merchant Group None 199,849 1.354%
Michele Acito None 10,000 0.068%
Charles Brennan, Jr. and Annette
Brennan None 10,000 0.068%
Mario D'Alonso None 10,000 0.068%
Donaldson, Lufkin Jenrette
Securities Corp. as Custodian
FBO James D'Amore None 15,000 0.102%
Jeffrey S. Hamren and Denise C.
Hamren None 10,000 0.068%
Bill Hodde and Martha S. Hodde None 80,000 0.542%
Sharon Jemal None 50,000 0.339%
Leslie J. Leff None 50,000 0.339%
Richard Leff and Lorraine Leff None 15,000 0.102%
Ron Leff None 50,000 0.339%
Lighthouse Capital, L.P. None 50,000 0.339%
Robert J. McLaughlin and Maureen
McLaughlin None 10,000 0.068%
Margaret McNamara None 2,000 0.014%
The Paisley Fund, L.P. None 100,000 0.678%
The Paisley Pacific Fund None 200,000 1.355%
Michael Procacci None 20,000 0.136%
P.M. Procacci and Mary Procacci None 10,000 0.068%
Donaldson, Lufkin, Jenrette
Securities Corp. as Custodian
FBO Philip J. Procacci None 10,000 0.068%
Peter S. Rawlings None 10,000 0.068%
Anthony Tedeschi and Lois Tedeschi None 15,000 0.102%
Jan Vyas and Medhavini Nyas None 5,000 0.034%
(1) Includes ownership of Shares issuable upon exercise of Warrants.
(2) Assumes ownership percentage of Shares after exercise of all Warrants.
18
<PAGE>
(3) A Warrant for 41,237 Shares was issued to this investor in partial
consideration for a bridge loan made prior to the private placement.
PLAN OF DISTRIBUTION
This Prospectus relates to (i) the offer and sale or other distribution from
time to time of up to 1,645,723 Warrant Shares if, and to the extent that,
holders of the Warrants exercise the Warrants and (ii) the offer and sale or
other distribution from time to time of up to 2,136,637 Common Shares by the
holders thereof. The Company has registered the Secondary Shares to provide the
holders thereof with freely tradeable securities, but the registration of such
shares does not necessarily mean that any of such shares will be offered or sold
by the holders thereof.
The Company will not receive any proceeds from the offering of the Secondary
Shares by the Selling Stockholders. The Selling Stockholders may from time to
time sell all or a portion of the Secondary Shares through the NASD OTC BB, in
negotiated transactions or otherwise, at prices then prevailing or related to
the then current market price or at negotiated prices. The Secondary Shares may
be sold directly or through brokers or dealers, or in a distribution by one or
more underwriters on a firm commitment or best-efforts basis. The methods by
which the Secondary Shares may be sold include (i) a block trade (which may
involve crosses) in which the broker or dealer so engaged will attempt to sell
the securities as agent but may position and resell a portion of the block as
principal to facilitate the transaction, (ii) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus, (iii) ordinary brokerage transactions and transactions in which the
broker solicits purchasers, and (iv) privately negotiated transactions. The
Selling Stockholders may from time to time deliver all or a portion of the
Secondary Shares to cover a short sale or sales made after the date of this
Prospectus, or upon the exercise or closing of a call equivalent position or a
put equivalent position entered or established after the date of this
Prospectus. The Selling Stockholders and any broker-dealers participating in the
distribution of the Secondary Shares may be deemed to be "underwriters" within
the meaning of the Securities Act, and any profit on the sale of the Secondary
Shares by the Selling Stockholders and any commissions received by any such
broker-dealers may be deemed to be underwriting commissions or discounts under
the Securities Act. The Selling Stockholders may sell all or any portion of the
Secondary Shares in reliance upon Rule 144 under the Securities Act.
At a time a particular offer of Secondary Shares is made, a Prospectus
Supplement, if required, will be distributed that will set forth the name of any
dealers or agents and any commissions and other terms constituting compensation
from the Selling Stockholders and any other required information. The Secondary
Shares may be sold from time to time at varying prices determined at the time of
sale or at negotiated prices. In order to comply
19
<PAGE>
with the securities laws of certain states, if applicable, the Secondary Shares
may in such circumstances be sold only through registered or licensed brokers or
dealers. In addition, in certain states, the Secondary Shares may not be sold
unless they have been registered or qualified for sale in such state or an
exemption from such registration or qualification requirement is available and
is complied with.
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth the directors and executive officers and key employees
of the Company as of December 15, 1999, their respective ages, the year in which
each was first elected or appointed a director, and any other office in the
Company held by each director.
1. DIRECTORS AND EXECUTIVE OFFICERS
Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME OF DIRECTOR/ POSITION HELD
OFFICER AGE POSITION HELD SINCE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Michael R. Long 55 Director, Chairman and C.E.O. December, 1998
Louis A. Hoch 34 Director, President and C.O.O. December, 1998
David S. Jones 26 Director and Executive Vice President December, 1998
Lori A. Turner 42 Treasurer, Vice President and C.F.O. December, 1998
Marshall Millard 37 Secretary, Vice President and December, 1998
General Counsel
E. Scott Crist 36 Director January, 1999
Roger R. Hemminghaus 62 Director April, 1999
</TABLE>
20
<PAGE>
2. FAMILY RELATIONSHIPS
No family relationship exists between or among any of the directors, executive
officers, and significant employees, as defined below, of the Company or any
person contemplated to become such.
3. BUSINESS EXPERIENCE
MICHAEL R. LONG, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Mr. Long became Chairman and Chief Executive Officer of the Company as of
December 1998. Mr. Long has over 29 years of senior executive management and
systems development experience in six publicly traded companies, as well as
successfully operating his own systems consulting business. In the past five
years, Mr. Long has held positions at U.S. Long Distance Corp., as Vice
President of Management Information Systems from December 1993 to August 1996;
Billing Concepts, Inc., as Vice President of Information Technologies from
August 1996 to June 1997, and Andersen Consulting as Business Development
Director, Financial Services, from October 1997 to December 1998. Anderson
Consulting is a worldwide consulting firm and affiliate of Arthur Andersen
accounting firm. Billing Concepts, Inc. is a leading operator of comprehensive
billing systems that collect long distance charges from telephone users on
behalf of more than 1,300 telephone companies.
LOUIS A. HOCH, DIRECTOR, PRESIDENT AND CHIEF OPERATING OFFICER
Mr. Hoch joined the Company as President and Chief Operating Officer in December
1998. Mr. Hoch's background has been primarily in the telecommunications
industry in which he has over 10 years of experience. Most recently, from April
to December 1998, Mr. Hoch was the Subject Matter Expert for Call Centers in
Telecom, at Andersen Consulting. His leadership in the call center industry was
acknowledged by Andersen Consulting when it classified his processes and
technology architecture to be one of their guidelines for best practices in call
center development. While employed at Billing Concepts, Inc. from June 1991 to
April 1998, Mr. Hoch successfully built large billing systems that were proven
flexible enough to sustain exponential growth in record volumes, and call
centers that integrated the latest in technology and processes. During his
tenure at Billing Concepts, Mr. Hoch held successive positions; as a Tech
Support Representative, Program Analyst, Program Manager, MIS Manager, and
finally, Director of Information Technology. Mr. Hoch holds a B.B.A. in Computer
Information Systems and an M.B.A. in International Business Management, both
from Our Lady of the Lake University. He is certified as a Computer Professional
(CCP) by the Institute for Certification of Computing Professionals (ICCP).
21
<PAGE>
DAVID S. JONES, DIRECTOR AND EXECUTIVE VICE-PRESIDENT
Mr. Jones joined the Company in December 1998. He has been active in the
Internet billing industry almost since its inception. While employed at
Billing Concepts, Inc., from 1997-98, Mr. Jones was responsible for defining
strategic direction involving Internet technology. Mr. Jones has played an
essential role in the development of the necessary relationships needed to be
effective in the Internet billing marketplace, and has been directly involved
in the marketing of the Company's products. Mr. Jones continues to manage
the ongoing development of systems for the Company. From 1996 to 1997, Mr.
Jones owned and operated his own business which provided ongoing service and
support to automated teller facilities for various financial institutions.
From 1993 to 1996, Mr. Jones was general manager of a specialty beverage
operation in San Antonio. He has completed business finance and general
business studies at Millikin University and the University of Texas at Austin.
LORI A. TURNER, TREASURER, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Lori A. Turner, C.P.A., joined the Company as Chief Financial Officer in
December 1998. Prior to joining the Company, Ms. Turner served as Treasurer and
Chief Financial Officer at Docucon, Inc. She held various positions at Docucon,
including Controller, Vice-President, Finance, and Assistant Secretary from 1990
until her departure in 1999. From 1984 through 1989, Ms. Turner held various
financial positions at Fuddruckers, Inc., a fast-food restaurant chain. Prior to
joining Fuddruckers, she worked as a consultant for Fuddruckers and other firms.
Ms. Turner holds a M.B.A. from the University of Texas at San Antonio.
MARSHALL MILLARD, SECRETARY, VICE PRESIDENT AND GENERAL COUNSEL
Mr. Millard also joined the Company in December 1998. He possesses over 10 years
experience in providing legal counsel to publicly-traded and privately-held
companies. Mr. Millard has extensive experience in negotiating and preparing
strategic alliances, mergers and acquisitions, financing agreements and other
business contracts and has a strong background in litigation and appeals. He is
licensed to practice law in the Supreme Court and all lower courts in the State
of Texas, the Western District of Texas and the Fifth Circuit Court of Appeals.
He earned a Juris Doctor degree from St. Mary's University School of Law, in
1987, where he served as a Senior Associate Editor for the ST. MARY'S LAW
JOURNAL. Mr. Millard has held corporate counsel positions at Southwestern Bell
Telephone, a subsidiary of SBC Communications, 1993; U.S. Long Distance Corp.
(now owned by Qwest Communications International), 1993-1996; and Billing
Concepts, 1996-1998.
E. SCOTT CRIST, DIRECTOR
Mr. Crist became a director of the Company in January 1999. He is the President
and Chief Executive Officer of Telscape International, Inc., one of the world's
fastest growing
22
<PAGE>
multinational carriers of voice, video and data services. Prior to joining
Telscape, Mr. Crist was a founder of Orion Communications, Inc., a long distance
company, where he served as President. He also previously served a President and
Chief Executive Officer of Matrix Telecom, a long distance company which ranked
number seven on the Inc. Magazine list of the 500 fastest growing companies in
1995. Mr. Crist also founded D.S. Communications, a domestic long distance
company, where he served as President and Chief Executive Officer. Mr. Crist
holds a M.B.A. from the J.L. Kellogg School at Northwestern University, and a
B.S., magna cum laude, in Electrical Engineering, with a Telecommunications
Design emphasis, from North Carolina State University.
ROGER R. HEMMINGHAUS, DIRECTOR
Mr. Hemminghaus became a director of the Company in April 1999. He currently
serves as Chairman of the Board of Directors of Ultramar Diamond Shamrock Corp.,
having retired in January 1999 as Chief Executive Officer of the same company.
He also serves as a director for Luby's Cafeterias, Inc.; New Centuries
Energies; and The Nature Conservancy of Texas. From 1996 to January 1999, Mr.
Hemminghaus served as Chairman and Chief Executive Officer of Ultramar Diamond
Shamrock Corp, following the merger of Ultramar Corporation and Diamond
Shamrock, Inc. Prior to this merger, Mr. Hemminghaus served as Chairman, Chief
Executive and President of Diamond Shamrock, Inc., where he had been employed
since 1984. Mr. Hemminghaus also serves on the National Executive Board of the
Boy Scouts of America, and various non-profit boards in Texas. He is a graduate
of Auburn University, where he received a B.S. in Chemical Engineering.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
1. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Company has no non-management, beneficial owners of more than five percent
(5%) of the outstanding amount of its Common Stock.
2. SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to the share ownership
of the Company's Common Stock by its officers and directors, both individually
and as a group, and by the record and/or beneficial owners of more than 5
percent of the outstanding amount of such stock:
23
<PAGE>
SHARES OWNED BENEFICIALLY AND OF RECORD
PERCENT OF CLASS
<TABLE>
<CAPTION>
TITLE OF AMOUNT & NATURE OF PERCENT OF OWNERSHIP
CLASS NAME AND ADDRESS BENEFICIAL OWNERSHIP AS OF DECEMBER 22, 1999 (1)
- -------- --------------------- -------------------- ---------------------------
<S> <C> <C> <C>
Common Michael R. Long (2)
Stock 15546 Clover Ridge
San Antonio, TX 78248 1,183,333 9.02%
Common Louis A. Hoch (3)
Stock 15138 Grayoak Forest
San Antonio, TX 78248 1,191,334 9.09%
Common David S. Jones (4)
Stock 11530 Vance Jackson
San Antonio, TX 78230 1,183,333 9.02%
Common Lori Turner
Stock 11205 Woodridge Forest
San Antonio TX 78249 100,000 0.768%
Common Marshall Millard
Stock 18123 Summer Knoll
San Antonio, TX 78258 150,000 1.1%
Common All directors, officers
Stock and employees as a group (5)
( 9 persons) 4,008,000 30.56
</TABLE>
(1) ALL OWNERSHIP IS STATED AS OF DECEMBER 22, 1999. IN 1999, THE COMPANY
OPTIONS TO PURCHASE 924,600 SHARES OF COMMON STOCK TO VARIOUS EXECUTIVE
OFFICERS, DIRECTORS AND EMPLOYEES, INCLUDING THOSE LISTED ABOVE. THESE
OPTIONS ARE NOT REFLECTED IN THE TABLE SET FORTH ABOVE. SEE EXECUTIVE
COMPENSATION BELOW.
(2) MICHAEL R. LONG IS THE CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF
EXECUTIVE OFFICER OF THE COMPANY.
(3) LOUIS A. HOCH, IS THE CHIEF OPERATING OFFICER, PRESIDENT AND A DIRECTOR
OF THE COMPANY.
(4) DAVID S. JONES IS THE EXECUTIVE VICE PRESIDENT AND A DIRECTOR OF THE
COMPANY.
(5) ALL STOCK HELD BY OFFICERS AND/OR DIRECTORS IS RESTRICTED PER RULE 144.
EXECUTIVE COMPENSATION
A. EXECUTIVE OFFICER COMPENSATION
No executive officer of the Company received or accrued cash compensation in
excess of $20,000 during fiscal year ended 1998. The following tables sets forth
all compensation
24
<PAGE>
paid by the Company during the fiscal year ending December 31, 1998 to all
executive officers of the Company:
NAME OF PRINCIPAL RESTRICTED
POSITION YEAR SALARY (1) STOCK AWARDS (2)
- -------------------------------------------------------------------------------
Michael R. Long 1998 $ 14,835 1,183,333
Chairman and C.E.O.
Louis A. Hoch 1998 $ 11,868 1,183,334
President and C.O.O.
David S. Jones 1998 $ 14,840 1,183,333
Executive Vice President
Marshall Millard 1998 $ 7,318 150,000
Secretary, Vice President
and General Counsel
Lori A. Turner 1998 $ NA 100,000
Treasurer, Vice President
and C.F.O.
(1) Each of the named executives have entered into an employment agreement
with the Company. These agreements have a three (3) year term and
provide for an annual salary, bonuses at the discretion of the Board of
Directors, and health benefits. The figures reflected are stated for
December 1998. In 1999, each of the named officers are to receive 1999
salary compensation as follows: Mr. Long, $150,000; Mr. Hoch, $140,000;
Mr. Jones, $120,000; Ms. Turner, $100,000; and Mr. Millard, $100,000.
(2) This table reflects only common stock ownership granted in connection with
the executive's employment arrangement with the Company. In 1999, subject
to shareholder approval, the officers named have been awarded the
following number of options to purchase shares of common stock of the
Company: Mr. Long, 100,000; Mr. Hoch, 100,000; Mr. Jones, 100,000; Ms.
Turner, 40,000; and Mr. Millard, 40,000. The option price in each case is
$2.81 per share.
B. COMPENSATION OF DIRECTORS
In 1998, the directors of the Company were not compensated for their services in
that capacity. In 1999, the Company intends to seek shareholder approval of a
director's compensation plan, which would provide for certain stock options,
plus out-of-pocket expenses.
Subject to stockholder approval of the director's compensation plan, the Company
has awarded options to purchase common stock of the Company to Messrs. Crist and
Hemminghaus. Mr. Crist holds 40,000 options with an exercise price of $2.81 per
share;
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Mr. Hemminghaus holds 80,000 options with an exercise price of $5.18 per share.
The options vest over a three year period.
DESCRIPTION OF SECURITIES
The Company's Articles of Incorporation, as amended, authorizes 200,000,000
shares of Common Stock, par value $0.001 per share. As of December 22, 1999, the
Company had 13,113,065 shares of Common Stock issued and outstanding held by
approximately 4,348 record holders. In addition, the Company has issued and
outstanding 1,645,723 warrants convertible into 1,645,723 Shares Common Stock.
Each holder of Common Stock is entitled to one vote for each share owned of
record on all matters voted upon by stockholders, and a majority vote of the
outstanding shares present at a stockholders' meeting is required for most
actions to be taken by stockholders. Directors of the Company are elected by a
plurality. The holders of the Common Stock do not have cumulative voting rights.
Accordingly, the holders of a majority of the voting power of the shares voting
for the election of directors can elect all of the directors if they choose to
do so. The Common Stock bears no preemptive rights, and is not subject to
redemption, sinking fund or conversion provisions.
Holders of Common Stock are entitled to receive dividends if, as and when
declared by the Company's Board of Directors out of funds legally available. Any
dividends declared with respect to shares of Common Stock will be paid pro rata
in accordance with the number of shares of Common Stock held by each
stockholder. However, the Company, in its present line of business, has never
declared or paid any cash dividends on the Common Stock. For the foreseeable
future, the Company expects to retain any earnings to finance the operation and
expansion of the Company's business. In addition, it is anticipated that the
terms of future debt and/or equity financing may restrict the payment of cash
dividends. Therefore, the payment of any cash dividends on the Common Stock is
unlikely.
INTEREST OF NAMED EXPERT AND COUNSEL
The Company has not hired any "expert" or "counsel" on a contingent basis or
that will receive a direct or indirect interest in the Company, or who was a
promoter, director, officer or employee of the Company.
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DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABLITY
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers or persons controlling
the Company, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
The Company has agreed to indemnify each Selling Shareholder, its officers,
directors and constituent partners, if any, and each person controlling (within
the meaning of the Securities Act) such Selling Shareholder, against all claims,
losses, damages or liabilities (or actions in respect thereof) suffered or
incurred by any of them, to the extent such claims, losses, damages or
liabilities arise out of or are based upon any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus or any related
registration statement incident to this Registration, or any omission (or
alleged omission) to state therein a material fact required to be stated herein
or necessary to make the statements herein not misleading, or any violation by
the Company of any rule or regulation promulgated under the Securities Act
applicable to the Company and relating to actions or inaction required of the
Company in connection with any such Registration. The Company has agreed to
reimburse each Selling Shareholder, its officers, directors and constituent
partners, if any, and each person who controls any such Selling Shareholder, for
any reasonable, documented legal and other expenses incurred in connection with
investigating or defending any such claim, loss, damage, liability or action.
Each Selling Shareholder has agreed to indemnify the Company, each of its
directors and officers, each placement agent and underwriter, if any, of the
Company's securities covered by this Registration Statement, each person who
controls the Company or such underwriter within the meaning of the Securities
Act, and each other Selling Shareholder, each of its officers, directors and
constituent partners and each person controlling such other Selling Shareholder,
against all claims, losses, damages and liabilities (or actions in respect
thereof) suffered or incurred by any of them and arising out of or based upon
any untrue statement (or alleged untrue statement) of a material fact contained
in this Registration Statement or related prospectus, or any omission (or
alleged omission) to state herein a material fact required to be stated herein
or necessary to make the statements herein not misleading; and will reimburse
the Company, such other Selling Shareholders, such directors, officers,
partners, persons, placement agent, underwriters and controlling persons for any
reasonable, documented legal and other expenses incurred in connection with
investigating or defending any such claim, loss, damage, liability or action.
The Company has also agreed to indemnify and hold harmless the placement agent,
Pennsylvania Merchant Group ("PMG"), and its affiliates, directors, officers,
controlling persons, and employees from and against all claims, damages. Losses,
liabilities and
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expenses as the same are incurred, relating to or arising from PMG's involvement
in the private placement of the securities subject to this Registration
Statement.
DESCRIPTION OF BUSINESS
A. COMPANY HISTORY
billserv.com is a Nevada corporation with its principal offices currently
located at 14607 San Pedro Ave., Suite 100, San Antonio, Texas 78232. Additional
information about the Company may be obtained at the Company's Internet address,
HTTP://WWW.BILLSERV.COM. The Company offices may be contacted by telephone at
210-402-5000.
The Company was incorporated on June 4, 1998 as a mineral development company,
under the name Goldking Resources, Inc. The principal asset of the company was a
mineral claim located in British Columbia, Canada. After the Company (then under
prior management) further analyzed the cost involved in developing the mineral
claim, it determined that the Company would have greater value as a corporate
vehicle for other operations. Accordingly, the Company obtained NASD OTC
Bulletin Board ("OTC BB") trading status, and on December 3, 1998, acquired and
merged with billserv.com, Inc., a company incorporated in Texas in July 30, 1998
("billserv-Texas"), with business plans to operate in the Internet billing
industry, but having no substantial assets, revenues or operations.
billserv-Texas was owned in its entirety by the current management directors of
the Company, who were not affiliated with any of the officers, directors or
shareholders of Goldking Resources.
On December 3, 1998, Goldking Resources, Inc. combined with billserv-Texas,
changed its name to billserv.com, Inc. and began trading on the OTC BB, under
the symbol BLLS. By virtue of this reverse merger, in which Goldking Resources
(now known as billserv.com, Inc.) was the surviving entity, the Company was able
to position itself into an emerging high-growth market, and billserv-Texas was
able to merge with and into a company already trading on the NASD OTC BB.
Concurrent with the merger with billserv-Texas, the Company secured advances of
$2.0 million over a five month period from Messrs. James R. King, Robert D.
Smith and Richard M. Jeffs, all of Vancouver, BC, Canada (hereinafter the
"Consulting Group"). The Company also entered into a Consulting Agreement with
this Group for the provision of investor relations, fundraising assistance and
public relations services. The initial advances by the Consulting Group were
subsequently repaid from Regulation S equity financing of $5.3 million.
On or about October 15, 1999 and December 22, 1999, the Company obtained
additional equity financing, net of expenses, totaling $7,905,251 from the
Selling Shareholders, in exchange for which the Company issued the Secondary
Shares registered hereby.
B. GENERAL OVERVIEW OF BUSINESS
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billserv.com, Inc. (the "Company") is a service bureau clearinghouse in the
electronic bill presentment and payment ("EBPP") industry. EBPP is the process
of presenting a bill in a secure environment on the Internet and allowing the
customer to pay the bill through the electronic transfer of funds. EBPP is
alternatively referred to as "Internet billing" or "Ebilling."
As a startup enterprise, with approximately 50 employees, the Company expects to
earn its first operating revenues in the fourth quarter of 1999. The Company
intends to generate four principal revenue streams: Internet billing services
("EServ"), Internet publishing of statements ("EPublishing"), customer care
services through Internet and traditional telephony technologies ("ECare"), and
professional services associated with the implementation and maintenance of
these Internet technologies ("eConsulting"). The Company is currently capable of
providing services in each of these areas, although ECare services are available
only on a limited basis. In addition, the Company is developing an Internet
portal with EBPP capabilities.
Through September 30, 1999, the Company has expended $600,389 on research and
development of its products and services. Of the four principal product and
service areas, only ECare is available on a limited basis, as the Company
intends to develop, build and staff a customer care center which integrates
Internet and traditional telephony capabilities. While development costs for
this product are extremely difficult to project, and may change as more
definitive plans are developed, the Company estimates expenditures ranging from
$3,000,000 to $4,000,000 for the development and construction of its first
customer care center.
The Company has entered into strategic service or marketing agreements with
Transpoint, LLP, an EBPP consolidator and aggregator owned by Microsoft
Corporation; First Data Corporation, and Citibank Check Free Corporation; Bank
of America; CyberCash, Inc., an Internet payment technologies leader; and
NETDelivery Corporation, an electronic data management enterprise. These
agreements are in addition to the Company's existing agreement with Checkfree
Corporation.
Additionally, the Company has secured service agreements to provide its EServ
product to National Computer Print, Inc., one of the nation's largest print and
mail companies; Sallie Mae Corporation, the nation's leading provider of
financial services for post-secondary education; Ultramar Diamond Shamrock
Corporation, a major independent petroleum refining, petroleum product and
convenience merchandise concern; PC Free, Inc., a strategic bundler of computer
hardware and software; and UDP, Inc., which provides billing and messaging
services in the telecommunications industry. Each of these agreements involve
two phases of service by the Company. The first phase is a piloting period,
during which the customer and Company systems are analyzed and tested. The
second phase of service is operational, involving the actual delivery of the
EServ product to the biller/customer and its customers. Currently, the Company
is experiencing a 3-4 month piloting phase with its initial customers. The
duration of this phase is expected to
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be reduced over time with each additional Company customer, as historical and
operating history will indicate potential, recurring customer service issues,
for future reference. In the fourth quarter of 1999, the Company will generate
its initial operating revenue for the EServ product, as some of its initial
customers completed the piloting phase of service.
The Company primarily targets middle market billers that produce monthly
recurring bills to their customer base. Examples of these billers include
utilities, credit card issuers, security monitoring services, financial
services, cable service providers and communications providers. The Company also
targets traditional print-house service companies that require assistance in
their conversion to Internet billing.
In a typical scenario, the Company will analyze a biller's existing billing
system and enable the biller to transmit its print stream to the Company for
electronic bill processing. The Company will then process the billing
information from the biller's print stream and transmit the data to a selected
consumer "front end," an Internet website destination where the consumer has
chosen to receive bills in an electronic medium. Examples of front ends, also
called aggregators, include Check Free, Transpoint, Bank of America the biller's
website, the consumer's bank website, and Internet portals such as Yahoo,
Excite, Lycos, AOL and others. After receiving the bill on its chosen website,
the consumer may review and pay the bill by selecting the available payment
option on the website. Payment is completed through ACH (Automated Clearing
House) transfer of funds as directed by the consumer and enabled by the
consumer's chosen front end.
The Company will charge a volume-sensitive transaction fee for each bill or
statement presented electronically over the Internet. Pricing is also reflective
of the multi-year term commitment selected by the biller. The Company also
charges a set-up fee for implementing Internet billing capabilities for the
biller.
The Company believes a biller can achieve substantial savings by utilizing the
electronic billing services offered by the Company instead of continuing to
publish paper-based bills. These savings are primarily realized in reduced
printing, mailing and handling costs.
The Company believes that consumers will increasingly demand to receive and pay
their bills over the Internet, particularly at a single front end website
individually selected by the consumer. The Company believes it has an advantage
in the EBPP market in that it can assist a biller in presenting a bill to any
consumer at any Internet website chosen by that consumer. In this regard, the
Company functions as a clearinghouse for selected consumer front ends. By
contrast, the Company believes that today a biller is forced to either choose
one particular consumer front end, and therefore one website, or build its own
EBPP capabilities and manage all of the various front end relationships itself,
an undertaking which involves considerable time and costs, and displaces the
biller's resources from its core business functions.
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The Company believes that a biller's statement, as presented on a consumer's
chosen website, provides targeted marketing opportunities for that biller and
third party advertisers. Just as paper-based bills received by consumers often
contain marketing inserts and product offerings, the electronic bill provides
for electronic bill inserts. The Company believes that the biller can achieve
additional revenues by providing consumers with purchasing opportunities on its
bill space.
The Company believes that today it has few competitors in its role as an EPBB
service bureau clearinghouse of small to medium size billers. The Company,
however, expects that competition will increase dramatically in the near future.
The Company expects to have increased competition from front ends, traditional
print and mail companies, and existing and new market entrants.
Electronic presentment of statements, or EPublishing, enables a company to
provide business-to-business distribution of traditional paper-based statements
over the Internet. An example of such statements includes those sent by
investment or fund managers to brokers. The Company believes that statement
producers can achieve substantial time and cost savings by transferring
publishing and distribution functions to an Internet-based service provider.
The Company believes it can also generate revenues from customer care center
operations, whether those operations are generated from billers' outsourced
customer care functions or from marketing opportunities from electronic bill
marketing inserts. The Company therefore plans to build Internet-enabled
customer interaction centers to capitalize on these marketing opportunities.
The Company offers professional consulting services to assist billers, statement
producers, call center operators and other Internet business participants in
establishing and maintaining their own customized Internet billing, presentment
or communications systems.
In April 1999, the Company announced that it was establishing its own Internet
portal at the website WWW.BILLS.COM. The operations of the Internet portal have
been organized under "bills.com, Inc.," a Delaware corporation which will
operate as a wholly-owned subsidiary of the Company. The Company expects that
the Internet portal of bills.com will be operational during the first quarter of
2000, and will be available for consumer use and interaction thereafter.
Consumers may currently register with bills.com by visiting the website and
entering applicable billing information.
The core function of bills.com is to operate as an Internet bill presentment and
payment service for consumers. In this regard, bills.com will operate a consumer
front end, similar to CheckFree. In addition, bills.com will provide other
on-line features such as stock quotes, mortgage quotes, loan applications and
approvals, banking, shopping, news, weather, sports and other features. In this
connection, bills.com has recently entered into
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an agreement with InfoSpace.com to develop these on-line features, some of which
have been implemented.
bills.com expects to earn revenues through Internet banner advertising on its
website, as well as through sponsorship agreements with other Internet portals.
The Company believes that companies will purchase space on its bills.com website
in order to take advantage of the potentially large number of consumers who will
use the site as an Internet bill presentment and payment service. The Company's
bills.com subsidiary currently possesses no relationship with other
Internet-based enterprises, nor has the Company sought any such relationships;
however, the Company intends to seek relationships this year with other Internet
portals which may result in payments of annual sponsorship fees to bills.com in
exchange for providing links to their respective Internet portals.
C. INDUSTRY OVERVIEW
Internet usage has increased dramatically in the last decade. As a result, many
new personal and commercial applications have been developed for Internet users
and increasingly consumers are conducting business through Internet
applications. The Company believes that Internet billing will be one of the next
significant applications of the Internet. Companies such as CheckFree and
Transpoint have been established in order to develop Internet billing into a
commercially viable alternative to paper-based billing and payment systems.
Research indicates that there are approximately 110 million households in the
United States with each receiving an average of twelve (12) bills per month.
Assuming an average charge of $0.40 for each EBPP transaction, the Company
estimates annual industry revenue potential of $6.4 billion. If 33% of
households pay their bills online, the market potential is $2.1 billion per
year. The Company believes that if small businesses are included in the
calculation, the market size doubles to over $4 billion per year.1
According to the Bank Administration Institute, five industries utilities,
communications, credit cards, insurance, and lending institutions are
responsible for over one-half of all consumer bill payments.2 Because of the
large number of recurring bills, these industries are the most likely to be the
first to offer electronic bill presentment.
D. PRODUCTS AND SERVICES
In order to meet real and anticipated market demand, the Company has developed
and is marketing the following products and services:
- --------
1 "Internet Billing: Waiting for the Banks," Salomon Smith Barney,
October 15, 1998, p. 20.
2 "Internet Billing: Waiting for the Banks," p. 17.
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ESERV SM (INTERNET BILLING SERVICE BUREAU). EServ creates the option for
companies currently printing and mailing bills to instead publish the bills on
the Internet wherever their consumers may choose to receive, view and pay them.
Currently, there are several Internet locations, or "front ends," from which
consumers may choose to access and pay bills electronically. The principal front
ends are CheckFree TransPoint and Bank of America as well as the biller's
website. It is important for a biller to be able to deliver statements to all of
these front ends, because each consumer will demand to receive electronic bills
at their preferred front end. Similarly, consumer acceptance will be accelerated
if consumers can use any front end they wish to view and pay their bills.
EServ is the focal point for managing all of the front end relationships. eServ
will allow billers to concentrate resources on their core business and still
exploit the growth of Internet billing. EServ's goal is to offer a familiar
business model to billers who today use traditional print and mail methods, but
allow for one delivery channel to publish bills and one delivery channel to
receive payments and accounts receivable data. With EServ, billserv.com assumes
the responsibility of managing the multiple systems, multiple delivery channels,
and multiple relationships necessary to make Internet billing effective.
EServ is competitively priced because billserv.com pays one-time integration
fees to the front ends for each biller, and volume-based per statement charges,
aggregating the volume of all of its billers. This reduction in cost enables
billserv.com to charge a one-time implementation fee to each biller and a per
statement fee which is less than the rate a biller would pay if supporting an
internal Internet billing system.
EPUBLISHING SM (INTERNET PRESENTMENT OF STATEMENTS). The EPublishing product
enables business-to-business distribution of traditional paper-based statements,
such as those produced by investment or fund managers for their brokers.
The EPublishing solution will allow businesses such as investment fund managers
or current print vendors to transmit already existing print files to the Company
for manipulation and presentment on a website that the brokerage community or
other business can access for viewing. The Company will also implement
substantial data archival systems that will house statement history and allow
for disaster recovery through a sophisticated back-up system.
While the market size for this product is very difficult to estimate, the
Company believes it is substantial. The Company is aware of one large
traditional print and mail operation that produces more than six million
statement pages per month. These paper statements are boxed and mailed to more
than 2,500 brokers. Each broker reviews and files these statements creating
inefficient workflow processes and storage costs. Assuming that most brokers are
already Internet-enabled, making the transition to an electronic retrieval and
storage system will be simple and more cost efficient than the current methods.
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ECARE SM (CUSTOMER INTERACTION CENTER). ECare is similar in nature to
traditional call centers, but with multiple communication entry points such as
telephone, Internet, interactive voice response, email and fax. The Internet
communication component may support Web chat, IP Telephony (voice over the
Internet), Web Whiteboarding (visual interactive on-screen markings), email and
Web Video conferencing. The call centers will provide revenue opportunities
through traditional outsourced customer care services as well as through
fulfillment services via electronic bill marketing inserts.
ECONSULTING SM (PROFESSIONAL SERVICES). EConsulting will provide custom build
solutions for companies seeking an in-house EBPP or related system. These
services can range from assisting in the development an Internet billing
strategy to actually building an EBPP system for the biller. In this regard, the
Company can assist the biller in overcoming the learning curve associated with
EBPP. The market for this product primarily consists of large first tier or
second tier billers.
BILLS.COM (INTERNET PORTAL). bills.com will operate as an Internet portal
offering an electronic bill presentment service for consumers. In this regard,
bills.com will operate a consumer front end, similar to CheckFree. Unlike other
consumer front ends, however, bills.com will offer its services free of charge
to consumers. In addition, bills.com will provide other on-line features such as
stock quotes, mortgage quotes, loan applications and approvals, banking,
shopping, news, weather, sports and other features to consumers who enter the
website.
E. SALES AND MARKETING
I. STRATEGY
The Company foresees two broad-based approaches to its sales and marketing
strategy. The first approach is based on a geographic concentration, whereby the
Company will attempt to secure a critical mass of billing customers in a densely
populated metropolitan area. These billing customers would be local and regional
utilities or other companies from which consumers receive a substantial number
of their total monthly statements. The Company will concurrently approach local
banks and credit unions in order to develop Internet billing relationships.
These financial institutions could also market to their respective customer
bases, thereby driving consumer acceptance and demand for Internet billing
services. The geographic model would be replicated on a national and
international basis. The Company will develop a sales force to meet the demands
presented by the geographic sales model.
The second approach of the Company's sales and marketing strategy will be a
non-geographic expansion model. In this approach, the Company will pursue
vertical markets and traditional print and mail enterprises and encourage
companies in these areas to offer Internet billing services to their print and
mail customers, wherever they may be located.
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To supplement its sales efforts, the Company intends to develop a marketing
compact disc which would be presented to targeted executives within prospective
billing customers. The compact disc will contain a clear value proposition
supported by video and demonstration capabilities.
To further its sales and marketing strategies, the Company will attend and make
presentations at industry-specific trade shows and in trade publications. It is
the Company's plan to have a significant presence at each of these trade shows
to ensure direct contact with prospect companies and executives. Trade
publications will be used to promote the brand and services. The Company will
evaluate the effectiveness of this program based upon revenue generation, reader
response cards and in-bound calls for more information.
For the newly-formed bills.com subsidiary, marketing efforts may be directed
toward a nationwide campaign of television commercials, Internet banner
advertisements, news media briefings, and the offering of incentives for new
subscribers.
II. SUPPORT
The Company's sales and marketing efforts, their associated costs and precise
timing are under development, and thus extremely difficult to project. Until
sufficient funds are available, the Company will be unable to pursue fully its
sales and marketing strategies. In order to fund these efforts, the cost of
which will likely exceed the amount of $3,000,000 over the next twelve (12)
month period, the Company currently plans to issue additional equity securities,
undertake capital lease financing arrangements, and in the longer term expend
revenue from operations.
The Company is currently capable of providing services in each of its key
product areas, although ECare services are available on a limited basis, due
primarily to the size and configuration of the company's current facilities.
Through September 30, 1999, the Company has expended approximately $600,389 on
research and development of its products and services. To further support its
ECare product sales and service, the Company intends to develop, build and staff
a customer care center which integrates Internet and traditional telephone
capabilities. While development costs for this center are difficult to project,
and may change as more extensive plans are developed later this year, the
Company estimates expenditures ranging from $3,000,000 to $4,000,000 for the
development and construction of its customer call center.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION AND PLAN OF OPERATION
A. GENERAL
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billserv.com, Inc. is a service bureau consolidator in the EBPP industry. As a
development stage enterprise, the Company has yet to receive any operating
revenues. However, the Company intends to generate four principal revenue
streams: Internet billing services, Internet publishing of statements, customer
care services through Internet and traditional telephony technologies, and
professional services associated with the implementation and maintenance of
these Internet technologies. The Company has a limited operating history on
which to base an evaluation of its businesses and prospects. The Company's
prospects must be considered in light of the risks, expenses, and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as electronic
commerce. Such risks for the Company include, but are not limited to, an
evolving and unpredictable business model and the management of growth. To
address these risks, the Company must, among other things, maintain and increase
its customer base, implement and successfully execute its business and marketing
strategy, continue to develop and upgrade its technology and
transaction-processing systems, provide superior customer service, respond to
competitive developments, improve its Web site, and attract, retain and motivate
qualified personnel. There can be no assurance that the Company will be
successful in addressing such risks, and the failure to do so could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Since inception, the Company has incurred losses and as of September 30, 1999
had an accumulated deficit of $4,291,055. The Company believes that its success
will depend in large part on its ability to (a) secure additional financing to
meet capital and operating requirements, (b) capture a major portion of the
medium to large size market of billers as its customer base, (c) drive the
consumer adoption rate of EBPP, and (d) meet changing customer requirements and
technological changes in an emerging market. Accordingly the Company intends to
invest heavily in its product development, technology, and operating
infrastructure development as well as marketing and promotion. Because the
Company's services will require a significant amount of investment in
infrastructure and a substantial level of fixed operating expenses, achieving
profitability depends on the Company's ability to generate a high volume of
revenues. As a result of the Company's limited operating history and the
emerging nature of the markets in which it competes, the Company is unable to
accurately forecast its revenues. The Company's current and future expense
levels are based largely on its investment plans and estimates of future
revenues and are to a large extent fixed. Sales and operating results will
depend on the volume of transactions completed and related services rendered.
The timing of such services and transactions and the Company's ability to
fulfill a biller's demands are difficult to forecast. The Company 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 the
Company's planned expenditures could have an adverse effect on the Company's
business, prospects, financial condition and results of operations. Further, the
Company may from time to time make certain pricing, service,
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marketing or acquisition decisions that could have a material adverse effect on
its business, prospects, financial conditions and results of operations.
B. PLAN OF OPERATION
The Company's plan of operation for the next twelve months is to: (1) further
develop trading partner relationships with front ends such as CheckFree,
Transpoint, Bank of America, all of which have executed agreements with the
Company; (2) develop trading partner relationships with Internet portals such as
in order to gain access to as many Internet users as possible. (3) execute
billing agreements with as many billers as possible; (4) design, develop and
market its Internet portal where the consumer can view and pay bills; (5) build
systems which will operate the EBPP and other operations of the Company; (6)
attract and retain highly qualified employees in order to appropriately staff
business operations; and (7) provide the facilities and resources necessary to
achieve the business goals of the Company. The Company currently employs 50
personnel.
C. RESULTS OF OPERATIONS--FROM INCEPTION TO DECEMBER 31, 1998
The Company's activities for the five month period from inception to December
31, 1998 resulted in net operating losses of $289,770. The Company generated no
revenues during the period. Operating expenses were generally not incurred until
December 1998.
Selling expenses consisted primarily of payroll and related expenses for
personnel engaged in marketing and selling activities, as well as advertising
services under a consulting agreement with the Consulting Group described below
at Item 7. The Company expanded its sales and marketing staff subsequent to
December 31, 1998 and intends to continue such expansion. It also will increase
marketing and sales capabilities through various marketing and sales activities,
including, advertising in trade publications, promotional activities and
aggressive trade show attendance. Therefore the Company expects marketing and
sales expense to increase substantially.
General and administrative expenses consisted primarily of payroll and related
expenses for executive, accounting, legal and administrative personnel, as well
as professional and consulting fees and other general corporate expenses. In
1998, financial and investor relation services provided to the Company by the
Consulting Group, a related party, totaled $100,000. The Company expanded its
general and administrative staff subsequent to December 31, 1998 and intends to
continue such expansion. Therefore, the Company expects general and
administrative expenses to increase substantially as it incurs additional costs
related to the growth of its business.
D. RESULTS OF OPERATIONS - QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999
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The Company's activities for the quarter and nine months ending September 30,
1999 resulted in a net operating loss of $1,539,858 and $3,991,349 respectively.
The Company generated no revenues during the period.
Selling expenses consisted primarily of payroll and related expenses for
personnel engaged in marketing and selling activities, as well as advertising
services purchased from the Company's Consulting Group which totaled $100,000
and $400,000 for the quarter and nine months ended September 30,1999. The
Company expanded its sales and marketing staff during the quarter ended
September 30, 1999 and intends to continue such expansion. The Company has
opened sales offices in Arizona, California, Massachusetts, New Jersey, North
Carolina, Pennsylvania, and Texas. The Company plans to increase its marketing
and sales capacities through various marketing and sales activities, including,
advertising in trade publications, promotional activities, and aggressive trade
show attendance. Therefore the Company expects marketing and sales expense to
increase substantially.
Research and development expenses totaled $260,847 and $600,389 for the quarter
and nine months ended September 30, 1999. The Company devoted these resources to
development of its technology infrastructure and operating systems. The Company
is continuing to invest significantly in research and development, particularly
in the development of its technology infrastructure and operating systems in
anticipation and support of revenue growth, quality improvement and efficiency
enhancement opportunities.
General and administrative expenses consisted primarily of payroll and related
expenses for executive, accounting, legal and administrative personnel, as well
as professional and consulting fees and other general corporate expenses. For
the quarter and nine months ended September 30, 1999, financial and investor
relation's services provided under the Consulting Agreement totaled $100,000 and
$650,000. The Company expects general and administrative expenses to increase as
the Company expands its staff and incurs additional costs related to the growth
of its business.
E. LIQUIDITY AND CAPITAL RESOURCES
From inception to date, the Company's operations have been funded from advances
under an equity placement. This placement was concluded and fully funded on June
11, 1999, pursuant to Regulation S. The Company issued 946,428 shares of common
stock in exchange for $5.3 million in cash. Advances outstanding at the time of
the placement totaling $2 million were repaid from the proceeds, as well as
amounts due to a related party for investor and public relations services for $1
million. An additional $200,000 was paid during the quarter ended September 30,
1999 to the Consulting Group for services under the consulting agreement.
In addition to the equity placement, on August 6, 1999, the Company issued a
short-term note payable to an accredited investor for $1 million. The note was
issued as bridge
38
<PAGE>
financing until such time as the Company completed the private placement
offering ("Offering"). The Offering was completed in December 1999. A total of
2,136,637 common shares were issued resulting in net proceeds of approximately
$7,905,251. One half of the short-term note payable, or $500,000 was converted
into Common Stock under the Offering. The remaining $500,000 was repaid on
October 18, 1999.
At September 30, 1999, the Company had positive working capital of $350,383.
During the third quarter and the first nine months of 1999 the Company made
significant expenditures and commitments for capital improvements consistent
with anticipated growth in operations, infrastructure and personnel. The Company
anticipates it will make additional investments in and for capital improvements
utilizing proceeds of the Offering completed in October 1999 and which will
require additional financing, either through the use of equipment leasing
arrangements, or other equity financing.
The Company purchased the domain name bills.com for $75,000 in April 1999, at
which time it announced the establishment its own Internet portal at the website
WWW.BILLS.COM. The company will amortize the amount over a ten year period. The
operations of the Internet portal have been organized under "bills.com, Inc.", a
Delaware corporation that will operate as a wholly-owned subsidiary of the
Company. The portal is currently available for consumer use and interaction. The
Company will continue to develop the website and to enhance its design.
bills.com(TM) expects to earn revenues through Internet banner advertising on
its website, as well as through sponsorship agreements with other Internet
portals. The Company believes that companies will purchase space on its
bills.com(TM) website in order to take advantage of the potentially large number
of consumers who will use the site as an Internet bill presentment and payment
service. The Company currently has plans to invest only limited funds to support
and market the portal; however, the Company could at any time decide to devote
additional financial resources to the portal.
The Company has engaged Pennsylvania Merchant Group ("PMG"), to provide
strategic and financial advisory services, including analysis of markets,
products, positioning, financial models, organizations and staffing, potential
strategic alliances, capital requirements and funding options. In exchange for
these advisory services, the Company issued a warrant to PMG to purchase 111,085
shares of common stock of the Company at an exercise price of $6.75 per share
(which represents the average closing price of the Company's stock over the
twenty (20) day period preceding May 18, 1999). The warrant is immediately
exercisable and expires in five (5) years. This warrant was issued in accordance
with exemption under Section 4(2) of the Securities Act of 1933, as amended,
because the transaction is by an issuer not involving a public offering.
The Company secured long-term financing for portions of its computer, software
and telephone systems, and furniture during the second and third quarter of
1999. It entered into four three-year capital leases for approximately $208,292,
which have an interest rate of 10.8%. The term of the leases include a
requirement of security totaling 50% of the total lease for which the company
purchased a certificate of deposit for $105,000.
39
<PAGE>
Additionally, the Company entered into a two-year capital lease totaling
$487,131 carrying an interest rate of approximately 17%. The terms of the lease
include a requirement of an initial security deposit in the form of a
certificate of deposit equal to 70% of the total dollars financed, 25% of the
security will be released to the Company on each six month anniversary of the
lease inception date.
The Company's headquarters are located in San Antonio, Texas. The Company
entered into a two-year lease for its headquarters beginning in May 1999 for
8,000 square feet which was modified to include an additional 3,000 square feet
beginning in August 1999. The Company anticipates acquiring additional adjacent
leased space to meet the requirements of its expanding clerical, administrative
and sales activities. Additionally, the Company leases sales offices in
Hollidaysburg, Pennsylvania; Dallas, Texas; Phoenix, Arizona; and Concord,
Massachusetts and plans to open additional sales offices throughout the United
States. The Company also anticipates increasing its lease commitments with the
establishment of a customer care center within the next 12 months.
The Company intends to develop, build and staff a customer care center, which
integrates Internet and traditional telephone capabilities to further support
it, eCare product sales and service. While development costs for this center are
difficult to project, and may change as more extensive plans are developed later
this year, the Company estimates expenditures ranging from $3,000,000 to
$4,000,000 for the development and construction of its customer care center. The
Company plans to meet its capital requirements primarily through use of cash on
hand, additional issuance of equity securities, capital lease financing, and in
the longer term, revenue from services.
The Company's sales and marketing efforts, their associated costs and precise
timing are under development, and thus extremely difficult to project. Until
sufficient funds are available, the Company will be unable to pursue fully its
sales and marketing strategies. In order to fund these efforts, the cost of
which will likely exceed the amount of $3,000,000 over the next twelve (12)
month period, the Company currently plans to issue additional equity securities,
undertake capital lease financing arrangements, and in the longer term expend
revenue from operations.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates to avoid system failures
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to comply with
such "Year 2000" requirements.
As of December 15, 1999, the Company has completed the process of determining
whether or not its products, its internal systems, computers and software, and
the products and systems of its critical vendors and suppliers are Year 2000
compliant. The cost
40
<PAGE>
associated with this review has been minimal, primarily because the Company has
utilized internal personnel to complete the review, and because the Company's
systems are relatively new. To date, this evaluation process has resulted in the
following:
IT Systems. The Company has conducted a preliminary survey of its IT
hardware and software and believes that all such hardware and
software is Year 2000 compliant.
Non-IT Systems and Infrastructure. Machinery and equipment used in
operations has been inventoried and assessed for Year 2000
compliance. The Company believes all such items are Year 2000
compliant.
Vendors. The Company has completed the process of ascertaining
whether or not its vendors and suppliers are Year 2000
compliant. Again, the Company believes that all of its critical
vendors are Year 2000 compliant.
Given these results of its Year 2000 review, in a reasonable worst case
scenario, the Company might experience some disruptions in certain of its
peripheral operating systems or with certain non-critical vendors. The Company
believes that sufficient redundancy exists in its systems and vendor
relationships to minimize any substantial detrimental effects on the Company's
operations and financial position.
Although the Company believes that its Year 2000 review has identified all
material Year 2000 issues, there can be no absolute assurance that the Company
identified and resolved all such issues. If the Company discovers Year 2000
problems in the future, it may not be able to develop, implement, or test
remediation or contingency plans in a timely or cost-effective manner.
PROPERTIES AND EQUIPMENT
As of May 1, 1999 the Company entered into a two-year lease for its headquarters
in San Antonio, Texas for 10,000 square feet. The Company anticipates acquiring
additional adjacent leased space to meet the needs of its expanding clerical,
administrative and sales activity. Additionally, the Company leases sales
offices in Hollidaysburg, Pennsylvania, North Carolina, Dallas, Texas and
Phoenix, Arizona, and plans to open additional sales offices throughout the
United States. The Company also anticipates increasing its lease commitments
with the establishment of a customer care center within the next twelve months.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A. TRANSACTIONS WITH MANAGEMENT AND OTHERS; CERTAIN BUSINESS RELATIONSHIPS;
PROMOTERS
41
<PAGE>
Concurrent with and in connection with the Regulation S equity financing
described herein, the Company entered into a consulting agreement, effective
December 1, 1998, with the Consulting Group, located at 1090 W. Pender Street,
Suite 420, Vancouver BC V632N7, under which that Group provided or will provide
financing, investor relations, public relations and advertising services for the
Company for a period of one year. The total consideration paid and to be paid to
the Consulting Group for all services to the Company is $1.2 million; the
Company has not allocated this amount between and among the various services of
the Consulting Group. Additionally, between the period of December 1998 and May
1999, the Consulting Group advanced to the Company the sum of $2.0 million,
which was subsequently repaid on June 11, 1999, from the proceeds of closing the
Regulation S financing in the amount of $5.3 million.
On May 7, 1999, the Company entered into a certain Business Development
Agreement, and a related Independent Sales Agent Agreement, with Southwest
Business Corporation ("SBC"), of San Antonio, Texas. In exchange for sales and
marketing services and support described in these agreements, which generally
includes identification, introduction, sales to, and support of prospective
customers, and subject to performance criteria described therein (volume-based
customer billings thresholds), SBC may earn the right to purchase up to 500,000
shares of common stock of the Company. The warrant is for a term of three years
after the Company's common stock is offered for sale on a recognized stock
market, which the Company construes to include the NASDAQ National or SmallCap
Markets; the exercise price is 110% of the per share price of the common stock
at May 7, 1999, which was $6.50.
On May 18, 1999, the Company contracted with Pennsylvania Merchant Group
("PMG"), of West Conshohocken, Pennsylvania, to provide strategic and financial
advisory services, including analysis of markets, products, positioning,
financial models, organizations and staffing, potential strategic alliances,
capital requirements and funding options. In exchange for these advisory
services, the Company agreed to issue to PMG a warrant to purchase 111,085
shares of common stock of the Company at an exercise price of $6.75 per share
(which represents the average closing price of the Company's stock over the
twenty (20) day period preceding May 18, 1999). The warrant is exercisable for
five (5) years.
On or about May 18, 1999, a warrant was issued to PMG for 111,085 shares in
exchange for advisory services. This warrant has an exercise price of $6.75
which represents the average closing price of the Company's stock over the
twenty (20) business days preceding the date of engagement for advisory
services. On October 15, and October 22, 1999,the Company issued to PMG two
warrants to purchase a total 37,524 Shares of Common Stock of the Company at an
exercise price of $3.25 which represents the price at which the Holders of the
Secondary Shares purchased the Shares. On the following dates, four additional
warrants (the "Additional Warrants") for the number of shares indicated were
issued to PMG in consideration for additional services rendered relating to the
private placement. The exercise price for the Additional Warrants was determined
by the closing price of the Company's stock on the day each warrant was issued.
42
<PAGE>
NUMBER OF SHARES EXERCISE PRICE ISSUE DATE
---------------- -------------- ----------
18,900 $8.00 December 16, 1999
19,950 $7.44 December 17, 1999
8,890 $7.41 December 21, 1999
3,500 $7.31 December 23, 1999
Except as described above, there is no affiliation between or among the Company,
Consulting Group, SBC and PMG. The Company possesses separate relationships with
each of these groups or entities.
B. INDEBTEDNESS OF MANAGEMENT
No member of management of the Company is or has been indebted to the Company in
an amount in excess of $60,000. No director or executive officer is personally
liable for repayment of amounts advanced under any financing received by the
Company.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. MARKET INFORMATION
The Company's common stock is traded on the NASD OTC BB. The following table
sets forth the range of high and low bid quotations as reported during the most
recent fiscal year. Bid quotations represent prices between dealers, do not
include retail markup, mark down or other fees or commissions, and do not
necessarily represent actual transactions.
CALENDAR QUARTER BID PRICES
ENDED LOW HIGH
- --------------------------------------------------------------------------------
December 31, 1998(1) 2 3/8 3 3/8
March 31, 1999 2 3/4 8 5/8
June 30, 1999 4 1/4 10 1/8
September 30, 1999 3 13/16 7 3/4
December 31, 1999 3 8 13/32
(1) No previous periods are reported as the Company was initially listed in the
fourth quarter 1998.
The Company has 13,113,065 shares of common stock outstanding, including the
2,136,637 shares issued and registered hereby; of this amount, 6,030,000 of such
shares are nonrestricted; 6,136,637 of such shares are restricted pursuant to
Rule 144; and 946,428 shares are restricted pursuant to Regulation S. As of
December 23, 1999, the number of holders of record of the common stock, $.001
par value, of the Company was approximately 4,348.
B. DIVIDEND POLICY
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<PAGE>
The Company has paid no cash or stock dividends and has no present plan to pay
any such dividends, intending instead to reinvest its earnings, if any. However,
payment of future dividends will be determined from time to time by its board of
directors, based upon its future earnings, financial condition, capital
requirements and other factors. The Company is not presently subject to any
restriction on its present or future ability to pay such dividends.
44
<PAGE>
FINANCIAL STATEMENTS
billserv.com, Inc.
(a development stage company)
Financial Statements
Period Ended December 31, 1998
45
<PAGE>
Report of Independent Auditors
Board of Directors
billserv.com, Inc.
We have audited the accompanying balance sheet of billserv.com, Inc. (a
development stage company) as of December 31, 1998, and the related statements
of operations, shareholders' equity (deficit), and cash flows for the period
from inception (July 30, 1998) through December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of billserv.com, Inc. at December
31, 1998, and the results of its operations and its cash flows for the period
from inception (July 30, 1998) through December 31, 1998 in conformity with
generally accepted accounting principles.
Ernst & Young LLP
San Antonio, Texas
June 1, 1999, except for Note 7,
as to which the date is November 19, 1999
46
<PAGE>
billserv.com, Inc.
(a development stage company)
Balance Sheet
December 31, 1998
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 329,618
Related party accounts receivable ........................... 24,000
Prepaid expenses ............................................ 3,213
Other current assets ........................................ 31,149
---------
Total current assets ........................................... 387,980
Property and equipment, net of
accumulated depreciation of $559 ............................ 19,550
---------
Total assets ................................................... $ 407,530
=========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................ $ 3,779
Accounts payable - related party ............................ 150,000
Accrued expenses ............................................ 38,127
Advance from shareholders ................................... 500,000
---------
Total current liabilities ...................................... 691,906
Equity subject to potential redemption ......................... 5,300
Shareholders' equity (deficit):
Common stock - $.001 par value, 200,000,000 shares
authorized, 10,030,000 shares issued and
outstanding at December 31, 1998 ......................... 10,030
Additional paid-in capital .................................. --
Deficit accumulated during the development stage ............ (299,706)
---------
Total shareholders' equity (deficit) ........................... (289,676)
---------
Total liabilities and shareholders' equity (deficit) ........... $ 407,530
=========
SEE ACCOMPANYING NOTES.
47
<PAGE>
billserv.com, Inc.
(a development stage company)
Statement of Operations
From Inception (July 30, 1998) to December 31, 1998
Revenues .................................................... $ --
Operating expenses:
Selling expenses ......................................... 88,298
General and administrative ............................... 200,913
Depreciation ............................................. 559
------------
Total operating expenses .................................... 289,770
------------
Loss before income taxes .................................... (289,770)
Income taxes ................................................ --
------------
Net loss .................................................... $ (289,770)
============
Net loss per common share - basic ........................... $ (0.03)
============
Weighted average common shares outstanding - basic .......... 10,030,000
============
SEE ACCOMPANYING NOTES.
48
<PAGE>
billserv.com, Inc.
(a development stage company)
Statement of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
ADDITIONAL DURING THE SHAREHOLDERS'
COMMON STOCK PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL STAGE (DEFICIT)
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at inception ......................... 1,000 $ -- $ -- $ -- $ --
Acquisition of shares and reverse merger
on December 9, 1998 ........................ 10,029,000 10,030 -- (4,636) 5,394
Reclass of equity subject to potential
redemption ................................. -- -- -- (5,300) (5,300)
Net loss for the period ...................... -- -- -- (289,770) (289,770)
----------------------------------------------------------------------------------
Balance at December 31, 1998 ................. 10,030,000 $ 10,030 $ -- $ (299,706) $ (289,676)
==================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
49
<PAGE>
billserv.com, Inc.
(a development stage company)
Statement of Cash Flows
From Inception (July 30, 1998) to December 31, 1998
OPERATING ACTIVITIES
Net loss ......................................................... $(289,770)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ............................................... 559
Changes in operating assets and liabilities:
Increase in related party receivables .................... (24,000)
Increase in prepaid expenses and other current assets .... (34,362)
Increase in accounts payable and accrued liabilities ..... 191,906
---------
Net cash used in operating activities ............................ (155,667)
INVESTING ACTIVITIES
Purchase of equipment ............................................ (20,109)
Proceeds of acquisition/merger ................................... 5,394
---------
Net cash used in investing activity .............................. (14,715)
FINANCING ACTIVITY
Advance from shareholders ........................................ 500,000
---------
Net cash provided by financing activity .......................... 500,000
---------
Increase in cash ................................................. 329,618
Cash and cash equivalents at beginning of period ................. --
---------
Cash and cash equivalents at end of period ....................... $ 329,618
=========
SEE ACCOMPANYING NOTES.
50
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Financial Statements
December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
billserv.com, Inc. (the Company) was incorporated on July 30, 1998 under the
laws of the state of Texas for the purpose of providing billing services over
the Internet. The Company, having no substantial assets, was acquired by and
merged with and into Goldking Resources, Inc. (Goldking). A shareholder of
Goldking transferred 4,000,000 shares of stock to the principals and certain key
employees of the Company in exchange for all 1,000 shares of the Company's
stock.
The shares of Goldking, a Nevada corporation formed to develop mineral rights,
are traded on the National Association of Securities Dealers Over-the-Counter
Bulletin Board (NASD OTC BB). On December 3, 1998, Goldking Resources, Inc.
changed its name to billserv.com, Inc. and began trading under the symbol BLLS.
The acquisition has been accounted for as a "reverse acquisition" under the
purchase method. The paid-in capital of the Company has been credited for
$5,394, the fair value of the tangible net assets of Goldking. The results of
operations of Goldking have been included in the Company's financial statements
from December 9, 1998.
Comprehensive loss is the same as net loss for the period ended December 31,
1998.
BASIS OF PRESENTATION
The Company's principal activities have been research and development, raising
capital, and organizational activities. Accordingly, it is considered a
development stage company. The Company expects to incur losses during its first
year of operations and may incur losses in subsequent years as development
efforts continue after the commencement of generation of revenues. The Company
plans to meet its capital requirements primarily through funding under a
financing agreement and issuance of equity securities, capital lease financing,
and in the longer term, revenue from services.
51
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Financial Statements (continued)
December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
REVENUE RECOGNITION
Revenue consists of implementation fees, transaction fees, and professional and
consulting fees. Recognition of implementation fee revenue is recognized when
customer setup is complete. Transaction fees are recognized as revenue upon
completion of transactions. Professional and consulting fees are recognized when
services are rendered.
FEDERAL INCOME TAXES
The Company follows SFAS No. 109, "Accounting for Income Taxes." This statement
establishes financial accounting and reporting standards for deferred income tax
assets and liabilities that arise as a result of differences between the
reported amounts of assets and liabilities for financial reporting and income
tax purposes.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at original cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the related
assets. The Company's computer systems are currently depreciated over a period
of three years.
52
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Financial Statements (continued)
December 31, 1998
1. SIGNFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding during the period. Diluted
net loss per common share is not presented as the assumed exercise of stock
options is antidilutive due to the Company's net loss.
2. ADVANCE FROM SHAREHOLDERS
The Company has received advances from a related party on a contemplated private
placement of the Company's common stock. As of December 31, 1998, $500,000 had
been advanced to the Company. An additional $1,500,000 was advanced in the
period from January 1999 through May 1999. The equity securities will be issued
under a Regulation S exemption. It is anticipated that net proceeds to the
Company under this offering will be approximately $5.3 million. Of the proceeds,
$1.2 million will be reserved for payments under the Company's Consulting
Agreement. See Note 3.
3. CONSULTING AGREEMENT
The Company has entered into a Consulting Agreement with a consulting group,
consisting of minority shareholders, which will provide financial consulting,
public relations services, advertising services, and investor relations
services. The term of the agreement is for one year, from November 1, 1998 to
October 31, 1999, and provides for services totaling $1.2 million. At December
31, 1998, the Company had received $150,000 in services from the consulting
group. The related liability has been recorded as Accounts Payable - Related
Party and will be paid from the proceeds of the Regulation S offering. See Note
2.
4. INCOME TAXES
At December 31, 1998, the Company had a net operating loss carryforward for
federal income tax purposes of approximately $290,000 which expires in the tax
year 2019. The Company recorded a deferred tax asset and a corresponding
valuation allowance of approximately $98,000 at December 31, 1998. There were no
material temporary differences between the financial statement and tax basis of
assets and liabilities.
53
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Financial Statements (continued)
December 31, 1998
4. INCOME TAXES (CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense at December 31, 1998 is:
Tax at U.S. federal statutory rates ................. $(98,000)
Valuation allowance ................................. 98,000
--------
Income tax expense .................................. $ --
========
5. SUBSEQUENT EVENT
In January 1999, the Company's Board of Directors ratified, subject to
shareholder approval, the adoption of three stock option plans and reserved
4,500,000 shares of its common stock for issuance to certain employees,
consultants and directors. Under this plan, incentive and nonqualified options
may be granted. Options granted under this plan are 33 1/3% vested after one
year and vest thereafter at a rate of approximately 2.78% per month. In the
event of a stock dividend, stock split or reverse stock split, reclassification,
or recapitalization, the aggregate number and/or class of shares subject to the
plan and exercise price prior to such occurrence are appropriately adjusted. The
Company intends to submit these plans for shareholder approval in late 1999.
6. YEAR 2000 ISSUE (UNAUDITED)
Although the Company is not aware of any material operational issue or costs
associated with preparing its internal systems for the year 2000, there can be
no assurance that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its internal systems, which include third-party software and
hardware technology.
54
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Financial Statements (continued)
December 31, 1998
7. EQUITY SUBJECT TO POTENTIAL REDEMPTION
On or about December 3, 1998, the Company, then under the control of former
management, and then known as Goldking Resources, Inc., concluded an offering of
approximately 5.3 million shares of the Company's common stock. This transaction
was completed through the cancellation of approximately 6.2 million shares, held
by shareholders who tendered their shares to the Company, followed by the
Company's issuance of 5.3 million shares to 15 new shareholders, who paid par
value to the Company for such shares, in the total amount of approximately
$5,300.00. The new shareholders also paid an additional $300,000 to the
shareholders who had agreed to cancel their shares. Subsequently, some of these
new shareholders sold the shares into the secondary market. The Company timely
filed a Form D reporting this transaction to the SEC, and claimed exemption
under Rule 504. The SEC has challenged the validity of this claimed exemption.
The Company disputes the following assertions, but it is possible that the
issuance of shares described above may have violated provisions of the federal
and state securities laws which subject the Company to fines, penalties or other
regulatory enforcement action. There can be no assurance that the SEC or
applicable state authorities will not pursue any enforcement action. The Company
disputes any such liability.
Additionally, while the Company also disputes the following assertions, it is
possible that shareholders who purchased the shares described above may have the
right under state and federal securities laws to require the Company to
repurchase their shares, for the amount originally paid, plus interest. The
Company disputes any such liability.
55
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Financial Statements (continued)
December 31, 1998
7. EQUITY SUBJECT TO POTENTIAL REDEMPTION (CONTINUED)
Based upon the best information available to the Company at this time, the
Company has calculated a range of possible, but disputed, exposure that exists
for the Company in light of the disputed civil liabilities described above.
Accordingly, in the event these disputed civil liabilities were successfully
asserted, the Company could be liable to the 15 new shareholders, and to any
shareholder that immediately purchased from these 15 shareholders, in an amount
ranging from approximately $5,300 up to approximately $2.9 million, plus
interest. This range of possible exposure is calculated by reference to the
average closing price for a share of the Company's common stock,
weighted for reported daily volume, during December 1998 and January 1999; the
number of shares possibly sold during the same period of time; and the closing
price of one share on November 11, 1999. The foregoing range could be adjusted
higher or lower depending upon adjustments to any of the referenced items, and
as any new information becomes available to the Company.
56
<PAGE>
Financial Statements
Period Ended September 30, 1999
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- --------------
<S> <C> <C>
Assets:
Cash and cash equivalents ..................................... $ 1,498,703 $ 329,618
Related party accounts receivable ............................. 55,911 24,000
Prepaid expenses .............................................. 147,114 3,213
Other current assets .......................................... 205,336 31,149
----------- -----------
Total current assets .......................................... 1,907,064 387,980
Property and equipment, net of accumulated
depreciation and amortization of $161,289 and $559 ......... 1,099,219 19,550
Other assets .................................................. 399,960 --
----------- -----------
Total assets .................................................. $ 3,406,243 $ 407,530
=========== ===========
Liabilities & shareholders' equity (deficit):
Current liabilities:
Accounts payable ............................................ $ 122,366 $ 3,779
Note payable ................................................ 1,000,000 --
Accrued expenses ............................................ 124,866 38,127
Current portion of obligations under capital leases ......... 296,430 --
Other current liabilities ................................... 13,019 --
Advance from shareholders ................................... -- 500,000
Accounts payable, related party ............................. -- 150,000
----------- -----------
Total current liabilities ..................................... 1,556,681 691,906
Obligations under capital leases, less current portion ............... 333,859
Equity subject to potential redemption ............................... 5,300 5,300
Shareholders' equity (deficit):
Common stock, $.001 par value, 200,000,000 shares
authorized; 10,976,428 issued and outstanding
at September 30, 1999, 10,030,000 issued and
outstanding at December 31, 1998 ......................... 10,976 10,030
Paid-in capital ............................................. 5,790,482 --
Deficit accumulated during the development stage ............ (4,291,055) (297,706)
----------- -----------
Total shareholders' equity (deficit) .......................... 1,510,403 (289,676)
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
----------- -----------
Total liabilities and shareholders' equity (deficit) .......... $ 3,406,243 $ 407,530
=========== ===========
</TABLE>
See notes to financial statements
58
<PAGE>
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 30,
1998
THREE MONTHS NINE MONTHS (INCEPTION)
ENDED ENDED TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 1999
--------------- -------------- --------------
<S> <C> <C> <C>
Revenues ............................ $ -- $ -- $ --
Operating expenses
Research and development .......... 260,847 600,389 600,389
Selling expenses .................. 536,629 1,278,566 1,366,864
General and administrative ........ 516,463 1,810,388 2,011,301
Depreciation & amortization ....... 87,541 168,805 169,364
------------ ------------ ------------
Total operating expenses ............ 1,401,480 3,858,148 4,147,918
------------ ------------ ------------
Operating loss ...................... (1,401,480) (3,858,148) (4,147,918)
Other income (expense):
Interest income ................... 24,774 36,905 36,905
Interest expense .................. (165,279) (173,433) (173,433)
Other income ...................... 2,127 3,327 3,327
------------ ------------ ------------
Total other income (expense) ........ (138,378) (133,201) (133,201)
------------ ------------ ------------
Loss before income taxes ............ (1,539,858) (3,991,349) (4,281,119)
Income taxes ........................ -- -- --
------------ ------------ ------------
Net loss ............................ $ (1,539,858) $ (3,991,349) $ (4,281,119)
============ ============ ============
Net loss per common share - basic ... $ (0.14) $ (0.38) $ (0.42)
============ ============ ============
Weighted average common shares
outstanding - basic ............... 10,976,428 10,414,811 10,276,027
============ ============ ============
</TABLE>
See notes to financial statements
59
<PAGE>
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE TOTAL
COMMON STOCK PAID-IN DEVELOPMENT SHAREHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance July 30, 1998
(date of inception) ................................. 1,000 $ -- $ -- $ -- $ --
Reclass of equity subject to potential redemption ..... (5,300) (5,300)
Acquisition of shares and reverse merger,
December 9, 1998 ................................... 10,029,000 10,030 -- (4,636) 5,394
Net loss from inception (July 30, 1998 to
December 31, 1998) ................................. -- -- -- (289,770) (289,770)
---------------------------------------------------------------------------
Balance at December 31, 1998 .......................... 10,030,000 10,030 -- (299,706) (289,676)
Shares issued under Reg S,
June 11, 1999 ....................................... 946,428 946 5,299,054 -- 5,300,000
Issuance of Common Stock Warrants,
May 18, 1999 ........................................ -- -- 356,583 -- 356,583
Issuance of Common Stock Warrants,
August 6, 1999 ...................................... -- -- 134,845 -- 134,845
Net loss for the nine months ending
September 30, 1999 .................................. -- -- -- (3,991,349) (3,991,349)
---------------------------------------------------------------------------
Balance at September 30, 1999 ......................... 10,976,428 $ 10,976 $ 5,790,482 $(4,291,055) $ 1,510,403
===========================================================================
</TABLE>
See notes to financial statements
60
<PAGE>
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 30, 1998
NINE MONTHS (INCEPTION)
ENDED TO
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................. $(3,991,349) $(4,281,119)
Adjustments to reconcile net loss to net
cash used in operating activities-
Issuance of common stock warrants .................................... 491,428 491,428
Depreciation and amortization ........................................ 168,805 169,364
Changes in current assets and current liabilities-
(Increase) decrease in related party receivables ..................... (31,911) (55,911)
(Increase) decrease in prepaid expenses and other current assets ..... (318,088) (352,450)
Increase (decrease) in accounts payable and accrued liabilities ...... 205,326 397,232
Increase (decrease) in accounts payable related party ................ (150,000) (150,000)
Increase (decrease) in other current liabilities ..................... 13,019 13,019
----------- -----------
Net cash used in operating activities ................................ (3,612,770) (3,768,437)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................... (665,398) (685,507)
Proceeds from sale of property and equipment ......................... 116,320 116,320
Purchase of long term investments .................................... (286,098) (286,098)
Purchase of intangible assets ........................................ (75,000) (75,000)
Deposits - long term ................................................. (42,834) (42,834)
Proceeds of acquisition/merger ....................................... -- 5,394
----------- -----------
Net cash used in investing activities ................................ (953,010) (967,725)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable ........................................... 1,000,000 1,000,000
Advance from shareholders ............................................ 1,500,000 2,000,000
Repayment to shareholders ............................................ (2,000,000) (2,000,000)
Issuance of common stock ............................................. 5,300,000 5,300,000
Payments on obligations under capital lease .......................... (65,135) (65,135)
----------- -----------
Net cash provided by financing activities ............................ 5,734,865 6,234,865
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... 1,169,085 1,498,703
CASH AND CASH EQUIVALENTS, beginning of period ................................. 329,618 --
----------- -----------
CASH AND CASH EQUIVALENTS, end of period ....................................... $ 1,498,703 $ 1,498,703
=========== ===========
NON CASH INVESTING AND FINANCING ACTIVITIES:
Purchases of equipment under capital leases .......................... $ 695,423 $ 695,423
</TABLE>
See notes to financial statements
61
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company's principal activities have been research and development, raising
capital, and organizational activities. Accordingly, it is considered a
development stage company. The Company expects to incur losses during its first
year of operation and may incur losses in subsequent years as development
efforts continue after the commencement of generation of revenue. The Company
plans to meet its capital requirements primarily through funding under
borrowings and issuance of equity securities, capital lease financing, and in
the longer term, revenue from services.
The Company's statements have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC") and, in the
opinion of management, include all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the results for the interim
periods shown. 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 SEC rules
and regulations. The results for the interim periods are not necessarily
indicative of results for the full year. The financial statements contained
herein should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10, as amended.
The Company's operations began in November 1998, and as a result, there are no
results of operations presented for the three months period ended September 30,
1998. No revenue was recorded during 1998.
2. STOCK ISSUANCE UNDER REGULATION S
On June 11, 1999, the Company issued 946,428 shares of common stock, in exchange
for $5.3 million in cash. The stock was issued pursuant to exemption under
Regulation S.
3. RELATED PARTY TRANSACTIONS
The Company entered into an agreement ("Consulting Agreement") to receive
financial consulting, public relations services, advertising services, and
investor relations' services from a group of minority shareholders ("Consulting
Group"). The term of the agreement is for one year, from November 1, 1998 to
October 31, 1999, and provides for services totaling $1.2 million. The Company
paid $1 million to the Consulting Group, previously reported as Accounts Payable
- - Related Party, from the proceeds of the Regulation S offering which was
completed on June 11, 1999. The remaining $200,000
62
<PAGE>
under the agreement was paid to the Consulting Group during the third quarter of
1999.
63
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
4. OBLIGATIONS UNDER CAPITAL LEASES
Equipment held under capital leases is stated at the present value of minimum
lease payments at the inception of the related leases. Equipment held under
capital leases and leasehold improvements are amortized on a straight-line basis
over the estimated useful life of the assets. Amortization of equipment held
under capital leases is included with depreciation expense. Repairs and
maintenance costs are charged to expense as incurred. At September 30, 1999,
there was $695,423 of office and computer equipment held under capital leases.
The following is a schedule, by year, of future minimum lease payments under
capital leases, together with the present value of the minimum lease payments as
of September 30, 1999:
Year ending December 31,
1999 $ 92,745
2000 370,979
2001 226,289
2002 43,183
Total minimum lease payments $ 733,196
Less: amount representing interest (102,907)
-----------
$ 630,289
Less: current portion (296,430)
-----------
Obligations under capital leases $ 333,859
===========
64
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
5. OPERATING LEASES
The Company leases office space and other equipment under noncancelable
operating leases expiring in 2004. Future minimum lease payments required under
these leases entered into by the Company, by year and in the aggregate, consist
of the following at September 30, 1999:
Year ending December 31,
1999 $ 52,588
2000 200,799
2001 50,548
2002 6,074
2003 6,074
Thereafter 3,400
-----------
Total minimum lease payments $ 319,483
===========
6. OTHER ASSETS
The Company purchased the domain name bills.com for $75,000 in April 1999. The
Company has utilized the domain name for its own Internet portal at the website
www.bills.com. The domain name is reflected in Other Assets. The Company is
amortizing the amount over a ten year period. Additionally, certificates of
deposit purchased for security of long term capital leases are classified under
Other Assets.
7. NOTE PAYABLE
On August 6, 1999, the Company issued a one-year unsecured note payable for $1
million to an accredited investor, which bears interest at 9% per annum, payable
quarterly. The proceeds of this note payable were allocated for use in corporate
operations and to supplement the Company's cash reserves until future equity
financing was obtained. In connection with the issuance of the note, the Company
paid a $20,000 loan origination fee to a venture capitalist firm and issued a
warrant to the accredited investor. See Note 9.
8. EQUITY SUBJECT TO POTENTIAL REDEMPTION
On or about December 3, 1998, the Company, then under the control of former
management, and then known as Goldking Resources, Inc., concluded an offering of
65
<PAGE>
approximately 5.3 million shares of the Company's common stock. This transaction
was completed through the cancellation of approximately 6.2 million shares, held
by shareholders who tendered their shares to the Company, followed by the
Company's issuance of 5.3 million shares to 15 new shareholders, who paid par
value to the Company for such shares, in the total amount of approximately
$5,300. The new shareholders also paid an additional $300,000 to the
shareholders who had agreed to cancel their shares. Subsequently, some of these
new shareholders sold the shares into the secondary market. The Company timely
filed a Form D reporting this transaction to the SEC, and claimed exemption
under Rule 504. The SEC has challenged the validity of this claimed exemption.
The Company disputes the following assertions, but it is possible that the
issuance of shares described above may have violated provisions of the federal
and state securities laws which subject the Company to fines, penalties or other
regulatory enforcement action. There can be no assurance that the SEC or
applicable state authorities will not pursue any enforcement action. The Company
disputes any such liability.
Additionally, while the Company also disputes the following assertions, it is
possible that shareholders who purchased the shares described above may have the
right under state and federal securities laws to require the Company to
repurchase their shares, for the amount originally paid, plus interest. The
Company disputes any such liability.
Based upon the best information available to the Company at this time, the
Company has calculated a range of possible, but disputed, exposure that exists
for the Company in light of the disputed civil liabilities described above.
Accordingly, in the event these disputed civil liabilities were successfully
asserted, the Company could be liable to the 15 new shareholders, and to any
shareholder that immediately purchased from these 15 shareholders, in an amount
ranging from approximately $5,300 up to approximately $2.9 million, plus
interest. This range of possible exposure is calculated by reference to the
average closing price for a share of the Company's common stock, weighted for
reported daily volume, during December 1998 and January 1999; the number of
shares possibly sold during the same period of time; and the closing price of
one share on November 11, 1999. The foregoing range could be adjusted higher or
lower depending upon adjustments to any of the referenced items, and as any new
information becomes available to the Company.
66
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
SEPTEMBER 30, 1999
9. STOCK WARRANT AGREEMENTS
On May 7, 1999, the Company contracted to issue a warrant for the purchase of up
to 500,000 shares of common stock to Southwest Business Corporation ("SWBC"), of
San Antonio, Texas. Subject to specific performance criteria in sales and
marketing of the Company's products, SWBC may earn the right to purchase shares
of common stock, at 110% of the closing bid price as of May 7, 1999 ($7.15),
over a three-year term. If SWBC meets the contract requirements, the warrant
will be issued in accordance with an exemption under Section 4(2) of the
Securities Act of 1933, as amended, because the transaction is by an issuer not
involving a public offering. No warrants had been issued as of September 30,
1999.
On May 18, 1999, the Company contracted with Pennsylvania Merchant Group ("PMG")
to provide strategic and financial advisory services. In exchange for these
advisory services, the Company issued to PMG a warrant to purchase 111,085
shares of common stock of the Company at an exercise price of $6.75 per share
(which represents the average closing price of the Company's stock over the
twenty (20) day period preceding May 18, 1999). The warrant is exercisable for
five (5) years. This warrant was issued in accordance with an exemption under
Section 4(2) of the Securities Act of 1933, as amended, because the transaction
is by an issuer not involving a public offering. Using the fair value based
method of accounting, the company recorded $356,583 of expense and a
corresponding credit to paid-in-capital related to the issuance of this warrant.
This expense is included in the general and administrative line item in the
Statements of Operations for the nine months ended September 30, 1999. No shares
had been exercised as of September 30, 1999.
As part of the August 6, 1999 debt issuance, the Company issued a warrant to the
accredited investor for the purchase of 41,237 shares of the Company's Common
Stock at an exercise price of $6.0625, which represents the average reported
closing sale price of the Company's Common Stock for the ten (10) business days
immediately preceding the loan agreement. The warrant is immediately exercisable
and carries a term of five years and piggyback registration rights. Using the
fair value based method of accounting, the company recorded $134,845 of expense
and a corresponding credit to paid-in-capital related to the issuance of this
warrant. This expense is included in the interest expense line item in the
Consolidated Statement of Operations for the quarter and nine months ended
September 30,1999. See Note 7.
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<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
10. SUBSEQUENT EVENTS
On October 15, 1999 and October 22, 1999, ("the Closing") the Company issued
1,230,792 and 173,845 shares of Common Stock (the "Shares"), respectively to
twenty-one accredited investors under a private placement offer (the
"Offering"). The shares were issued at $3.25 per share which represented a
discount upon the average reported closing sale price of the Company's Common
Stock for the ten (10) business days immediately preceding the Closing date. Net
proceeds to the Company totaled approximately $4,188,053, net of expenses of
$377,009, which included $264,299, or 6.5% of the Offering, paid Pennsylvania
Merchant Group ("PMG") as Placement Agent. Of the Shares issued on October 22,
1999, 153,845 shares were issued in satisfaction of the $500,000 of the
Company's outstanding short-term note payable. The remaining $500,000 of the
outstanding short-term note payable was paid on October 18, 1999.
In accordance with the terms of the Offering, the Company also issued warrants
to the twenty-one investors to purchase 1,404,637 shares of Common Stock at
$3.75 per share, or one warrant for each Share issued. The warrants are
exercisable for three years from the date of issuance, or October 14, 2002. The
Company has right to call the exercise of the warrants at any time after six
months after the date of the issuance and after the closing price of the Common
Stock exceeds $12.00 for a period of twenty (20) consecutive trading days. Upon
such call notice from the Company, the holders of the warrants must exercise the
warrants within thirty days, after which time the Company will redeem each
warrant for $.05.
Pursuant to the terms of the Offering, the Company shall file a registration
statement with the SEC within thirty days of the Closing for the purpose of
registering the Shares and underlying warrants. The Company shall also use its
best efforts to maintain with the SEC a Registration Statement that is
effective, as of one hundred twenty (120) days after Closing, and otherwise
cause the Shares and Warrant Shares to be Registered under the Securities Act
until the date on which the Shares and Warrant Shares are eligible for resale or
other disposition under Rule 144 without regard to the volume limitations
thereof.
If a Registration Statement is not filed on or before thirty (30) days after
Closing, or is not effective on or before one hundred twenty (120) days after
Closing (the "Target Date"), as required above, then for every applicable thirty
(30) day period after the applicable target date, the Company shall pay to
Purchaser, as liquidated damages, an amount equal to two percent (2%) of the
total Offering Price of such Shares (without reference to the Warrant Shares or
the Placement Agent Warrant Shares) for each thirty (30) day period following
the applicable Target Date until such time as the registration statement is
declared effective or, in the case of a late filing, is filed. Such payment
shall be made to the Purchaser by cashier's check or wire transfer in
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<PAGE>
immediately available funds to an account designated, in writing, by Purchaser.
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
10. SUBSEQUENT EVENTS (CONTINUED)
As additional compensation for acting as Placement Agent for the Offering, the
Company issued a warrant to PMG for the purchase of 37,524, or 3% of the Shares
sold in the Offering. The warrant is immediately exercisable, carries a five
year term, an exercise price of $3.25, piggyback registration rights, and a
cashless exercise provision.
69
<PAGE>
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Nevada law sets forth the powers of the Company to indemnify officers,
directors, employees and agents. The Articles of Incorporation for the Company
provide as follows:
"No director or officer shall have any personal liability
to the corporation or its stockholders for damages for
breach of fiduciary duty as a director or officer, except
that this Article shall not eliminate or limit the
liability of a director or officer for (i) acts or
omissions that involve intentional misconduct, fraud or a
knowing violation of the law, or (ii) the payment of
dividends in violation of Nevada Revised Statutes."
Except to the extent herein above set forth, there is no charter provision,
bylaw, contract, arrangement or statute pursuant to which any director or
officer of the Company is indemnified in any manner against any liability which
he may incur in his capacity as such. The Company also maintains a standard
director and officer liability policy to fund the Company's obligations as
stated herein above.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Company has agreed to pay all expenses associated with the registration of
the Secondary Shares, including the following:
Placement Agent Fees $ 525,919
Other Expenses 50,434
Legal and Accounting Fees 92,500
----------
Total Expenses $ 668,853
==========
RECENT SALES OF UNREGISTERED SECURITIES
There are issued and outstanding 13,113,065 shares of common stock which were
sold as follows:
A. THE FORMATION OF GOLDKING RESOURCES
On or about July 10 and 14, 1998, a total of 10,000,000 shares of common stock
were sold for a total of $10,000 to one individual, Mr. Adam Smith, of
Vancouver, BC, Canada, who then served as a director and the President of the
Company; and seven (7) corporate shareholders. Mr. Smith acquired 4,000,000
shares at such time; and the corporate shareholders acquired 6,000,000 shares.
On or about July 15 and 30, and August 19, 1998, thirty-three (33) individuals
acquired 742,500 shares of common stock, for the total purchase price of $7,425.
On or about September 5, 1998, three (3) individual shareholders paid $13,000
for 130,000 shares. All of the
70
<PAGE>
share issuances described above were concluded at the direction of former
management of the Company.
All of the shares of common stock described above were issued in compliance with
exemption under Section 4(2) of the Securities Act of 1933, as amended, because
the transactions were concluded by an issuer not involving a public offering, or
pursuant to exemption under Rule 504, because the total amount of the offering
of those shares did not exceed $1 million. Form D relating to these offerings
were filed with the Securities and Exchange Commission.
B. CURRENT MANAGEMENT'S ACQUISITION OF SHARES IN GOLDKING RESOURCES
On or about October 26, 1998, in a transaction facilitated by the Consulting
Group, the current management directors of the Company agreed to acquire the
4,000,000 shares held by Mr. Smith, then the President of the Company, then
known as Goldking Resources, Inc.; these shares were subsequently transferred to
the current management directors of the Company, Messrs. Long, Hoch and Jones,
and other key executives of the Company, in December 1998. Neither Messrs. Long,
Hoch and Jones nor any other executive of the Company paid cash consideration
for the shares received, but instead transferred their shares in billserv-Texas
to Goldking, which subsequently caused the merger of billserv-Texas with and
into Goldking. All of these common shares were transferred in compliance with
exemption under Section 4(1) of the Securities Act of 1933, because the
transaction was by a person other than an issuer, underwriter or dealer. The
shares are restricted under Rule 144.
Current management completed this transaction, and the transactions described
immediately below in paragraph 3, in order to obtain a preexisting corporate
entity, whose shares were traded on the OTC BB. Current management believed that
developing the Company's business in this vehicle would facilitate funding
efforts for the Company in the future. Additionally, management believed that
the Consulting Group, which had introduced current management to Goldking
Resources, could assist with funding of the Company at a future date. The
Company's relationship with the Consulting Group ultimately resulted in
completion of Regulation S financing described below.
C. RELATED CANCELLATION OF "OLD" GOLDKING SHARES, AND ISSUANCE OF NEW SHARES
On December 3, 1998, in a transaction related to current management's
acquisition of Mr. Smith's 4,000,000 shares (described above), the Company,
under former management's control, issued 5,359,500 shares of common stock at
par in reliance upon exemption under Rule 504, and received for cancellation
6,202,000 shares, held by eleven (11) Goldking shareholders (the "Cancelling
Holders"), with unanimous shareholder consent. The 5,359,500 shares described
above were issued to fifteen (15) individual and institutional investors. The
total purchase price for all shares issued was $305,359.50, of which $300,000
was paid directly to Mr. Smith and the Cancelling Holders by the 15 new
shareholders; the balance was paid to the Company. Additionally, the Company's
sole asset immediately prior to this transaction, a mineral claim, was
transferred out of the Company for the benefit of Mr. Smith and the Cancelling
Holders. Form D relating to the Rule 504 offering was filed with the Securities
and Exchange Commission.
71
<PAGE>
D. ISSUANCES UNDER NEW MANAGEMENT
After current management was in place, on May 7, 1999, the Company contracted to
issue a warrant for the purchase of up to 500,000 shares of common stock to SBC,
of San Antonio, Texas. Subject to specific performance criteria in sales and
marketing of the Company's products, SBC may earn the right to purchase shares
of common stock, at 110% of the closing bid price as of May 7, 1999 ($6.50),
over a three year term. If SBC meets the contract requirements, the warrant will
be issued in accordance with exemption under Section 4(2) of the Securities Act
of 1933, as amended, because the transaction is by an issuer not involving a
public offering.
On May 18,1999, the Company also contracted with Pennsylvania Merchant Group
("PMG"), of West Conshohocken, Pennsylvania, to provide strategic and financial
advisory services, including analysis of markets, products, positioning,
financial models, organizations and staffing, potential strategic alliances,
capital requirements and funding options. In exchange for these advisory
services, the Company issued to PMG a warrant to purchase 111,085 shares of
common stock of the Company at an exercise price of $6.75 per share (which
represents the average closing price of the Company's stock over the twenty (20)
day period preceding May 18, 1999). The warrant is exercisable for five (5)
years. This warrant will be issued in accordance with exemption under Section
4(2) of the Securities Act of 1933, as amended, because the transaction is by an
issuer not involving a public offering. In order to secure bridge financing for
the private placement offering, the Company issued a Warrant for 41,237 Shares
of its Common Stock to Kingship LTD. This Warrant has an exercise price of
$6.0625 per share and expires on August 6, 2004.
On June 11, 1999, the Company issued 946,428 shares of common stock to two
corporate investors, in exchange for $5.3 million in cash. The stock was issued
pursuant to exemption under Regulation S. Neither investor is a "U.S. person"
under Regulation S. Proceeds of this offering were used to repay advances to the
Company by the Consulting Group of $2.0 million; to fund contractual commitments
totaling $1.2 million for fundraising and public and investor relations services
performed or to be performed by the Consulting Group; and for other general
corporate operating purposes.
On or about October 15, and October 22, 1999, the Company issued 1,404,637
Shares of Common Stock and Warrants convertible to 1,404,637 shares, to certain
of the Selling Shareholders, in exchange for $4,565,063 million in cash, in
connection with this offering, the Company issued a Warrant for 37,524 shares to
the placement agreement Pennsylvania Merchant Group. In addition, on or about
December 22, 1999, the Company issued 732,000 shares to certain of the Selling
Shareholders for $4,026,000. Four additional warrants for a total of 51,240
shares were issued to PMG in connection with this December offering. All of the
stock was issued pursuant to Rule 506, Regulation D. Form D was timely filed
with the Securities and Exchange Commission.
72
<PAGE>
EXHIBITS
Index of Exhibits:
*1. Articles of Organization and Bylaws
*2. Common Stock Purchase Agreement(1)
*3. Registration Rights Agreement
*4. Investor Warrant Agreement
*5. Bridge Loan Warrant
*6. PMG Advisory Warrant Agreement
*7. Form of PMG Placement Agent Warrant (2)
8. Opinion regarding legality
9. Auditor's Consent to use of Financial Statements
(1) This is the form of Common Stock Purchase Agreement executed by the
Company and named Selling Shareholders with respect to 1,604,486
shares of Common Stock; the form of Agreement with respect to
732,000 shares is identical, except that the provision granting the
right to purchase shares pursuant to warrants is deleted.
(2) This is the form of the five warrants issued to PMG in
consideration of services rendered as Placement Agent. The five
"Placement Agent Warrants" may be exercised for a total of 88,764
shares of the Company's common stock. See "Issuance Under New
Management".
* PREVIOUSLY FILED
UNDERTAKINGS
The undersigned registrant hereby further undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
2. That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide
offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
73
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment No. 1
registration statement to be signed on its behalf by the undersigned, in the
City of San Antonio, State of Texas, on the ______ day of January, 2000.
billserv.com, Inc.
A Nevada Corporation
By: _________________________________
Louis A. Hoch,
President and Director
In accordance with the requirements of the Securities Act of 1933,
this Amendment No. 1 registration statement was signed by the following persons
in the capacities and on the dates stated.
____________________________________
Michael R. Long
Chief Executive Officer and Director
Date:_______________________________
____________________________________
Louis A. Hoch
President and Director
Date:_______________________________
____________________________________
David S. Jones
Executive Vice President and Director
Date:_______________________________
____________________________________
Lori Turner
Chief Financial Officer and
Principal Accounting Officer
Date:_______________________________
74
EXHIBIT 8
[ARTER & HADDEN LLP LETTERHEAD]
billserv.com, Inc.
14607 San Pedro Avenue, Suite 100
San Antonio, TX 78232
Re: REGISTRATION STATEMENT ON FORM SB-2
Gentlemen:
We have been advised that on or about January 13, 2000, billserv.com,
Inc., a Nevada corporation (the "Company"), expects to file under the Securities
Act of 1933, as amended (the "Act") with the Securities and Exchange Commission
(the "Commission"), Amendment No. 1 to that Registration Statement on Form SB-2,
originally filed on December 28, 1999 (the "Registration Statement"). Such
Registration Statement relates to the offering (the "Offering") from time to
time by certain selling security holders named in the registration statement of
up to: (1) 1,404,637 shares of the Company's stock, $.001 par value (such class
of stock being hereafter called the "Common Stock" and such aggregate of
1,404,637 shares of Common Stock hereinafter called the "Unit Shares") (2)
1,404,637 shares of common stock issuabale upon exercise of certain Warrants for
the purchase of one additional share of the Company's Common Stock per warrant
(the aggregate 1,404,637 shares initially purchasable upon the exercise of the
warrants being hereinafter called the "Warrant Shares"); (3) 732,000 shares of
the Company's Common Stock to be issued without warrants the ("Common Shares");
(4) 199,849 shares of Common Stock issuable to the Pennsylvania Merchant Group
upon exercise of warrants (hereinafter the "Placement Agent Warrant Shares");
and (5) 41,237 Common Shares issuable to Kingship, Ltd. upon exercise of
warrants ("Kingship Warrant Shares"). The Unit Shares, Common Shares, Warrant
Shares, Placement Agent Warrant Shares and Kingship Warrant Shares are
collectively referred to herein as the "Offered Securities." This firm has acted
as counsel to you in connection with the preparation and filing of the
Registration Statement and you have requested our opinion with respect to
certain legal aspects of the Offering of the Offered Securities.
In rendering our opinion, we have participated in the preparation of the
Registration Statement and have examined and relied upon the original or copies,
certified to our satisfaction, of such documents and instruments of the Company
as we have deemed necessary and have made such other investigations as we have
deemed appropriate in order to express the opinions
<PAGE>
billserv.com, Inc.
January 13, 2000
Page 2
set forth herein. In our examinations, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals,
and the conformity to original documents of all documents submitted to us as
certified or reproduction copies. In addition, we have assumed and have not
verified the accuracy of factual matters of each document we have reviewed.
As to certain questions of fact material to this opinion, we have relied,
to the extent we deem reasonably appropriate, upon the representations or
certificates of officers or directors of the company.
Based upon the following examination and subject to the comments and
assumptions as noted below, we are of the opinion as follows:
1) The Unit Shares and the Common Shares have been duly authorized, and
validly issued, and are fully paid and nonassessable;
2) The Warrant Shares have been duly authorized and reserved for issuance
upon the exercise of the warrants and, when issued upon such exercise
in accordance with the terms of the Warrant Agreement at the price
therein provided, will be validly issued and fully paid and
nonassessable;
3) The Placement Agent Warrant Shares have been duly authorized and
reserved for issuance upon the exercise of the Placement Agent Warrant
and when issued upon such exercise in accordance with the terms of the
Placement Agent Warrant at the price therein provided, will be validly
issued and fully paid and nonassessable; and
4) The Kingship Warrant Shares have been duly authorized and reserved for
issuance upon the exercise of the Kingship Warrant and when issued upon
such exercise in accordance with the terms of the Kingship Warrant at
the price therein provided, will be validly issued and fully paid and
nonassessable.
Insofar as the foregoing opinions relate to the legality, validity,
binding effect or enforceability of any agreement or obligations of the Company,
(i) we have assumed that each party to such agreement or obligation has
satisfied those legal requirements that are applicable to it to the extent
necessary to make such agreement or obligation enforceable against it; (ii) such
opinions are subject to applicable bankruptcy, insolvency, reorganization,
liquidation, receivership, fraudulent conveyance or similar laws, now or
hereafter in effect, relating to creditors' rights generally, and (iii) such
opinions are subject to the general principals of equity, including, without
limitation, concepts of materiality, reasonableness, good faith and fair dealing
(regardless of whether considered in a proceeding at law or in equity).
<PAGE>
billserv.com, Inc.
January 13, 2000
Page 3
This opinion is limited in all respects to the laws of the State of Nevada
and the State of Delaware. We do not purport to be admitted to practice in the
State of Nevada or the State of Delaware and for the purposes of rendering the
opinions set in this letter we have assumed that the applicable laws of the
State of Nevada and the State of Delaware are the same as the laws of the State
of Texas.
We bring to your attention the fact that this legal opinion is an
expression of professional judgment and not a guaranty of results. This opinion
is given as of the date hereof, and we assume no obligation to update or
supplement such opinion to reflect any facts or circumstances that may hereafter
come to our attention or any changes in laws or judicial decisions that may
hereafter occur.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving such consent, we do not admit that we have
come within the category of persons whose consent is required by the Section 7
of the Act or the rules and regulations of the Commission thereunder.
Respectfully submitted,
ARTER & HADDEN, LLP
EXHIBIT 9
Consent of Independent Auditors
We consent to use of our report dated June 1, 1999 (except Note 7, as to which
the date is November 19, 1999) in the Registration Statement (Form SB-2) and
related Prospectus of billserv.com, Inc. dated November 22, 1999 for the
registration of 2,999,120 shares of its common stock.
ERNST & YOUNG LLP
San Antonio, Texas
December 27, 1999
