SECURITIES AND EXCHANGE COMMISSION POST-EFFECTIVE AMENDMENT NO. 1 TO FORM 10 GENERAL FORM REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES ACT OF 1934 -------------------------------------------------------------------- billserv.com, Inc. (Exact name of issuer as specified in its charter) --------------------------------------------------------------------- Nevada (State or other jurisdiction of incorporation or organization) -------------------------------------------------------------------- Lori Turner Marshall Millard Vice President and Chief Financial Officer Vice President and General Counsel 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) --------------------------------------------------------------------- Nevada Agency & Trust Company 50 West Liberty Street, Suite 880 Reno, Nevada 89501 702.322.0626 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------------------------------------------------------------- I.R.S. Employer Identification Number 98-0190072 --------------------------------------------------------------------- Securities to be registered pursuant to Section 12(b) of the Act: None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock $.001 par value (Title of Class) INFORMATION REQUIRED IN REGISTRATION STATEMENT ITEM 1. BUSINESS.........................................................1 ITEM 2. SPECIAL RISK FACTORS.............................................9 ITEM 3. FINANCIAL INFORMATION...........................................18 ITEM 4. PROPERTIES AND EQUIPMENT........................................24 ITEM 5. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..24 ITEM 6. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES.........26 ITEM 7. EXECUTIVE COMPENSATION..........................................29 ITEM 8. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................32 ITEM 9. LEGAL PROCEEDINGS...............................................33 ITEM 10. MARKETPRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................................33 ITEM 11. RECENT SALES OF UNREGISTERED SECURITIES.........................34 ITEM 12. DESCRIPTION OF THE COMPANY'S SECURITIES.........................37 ITEM 13. INDEMNIFICATION OF DIRECTORS AND OFFICERS.......................38 ITEM 14. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA......................39 ITEM 15. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................39 ITEM 16. FINANCIAL STATEMENTS AND EXHIBITS...............................39 ii CAUTIONARY STATEMENT All statements, trends, analyses and other information contained in this Form 10 relative to trends in net sales, gross margin, anticipated expense levels and liquidity and capital resources, as well as other statements, including, but not limited to, words such as "anticipate," "believe," "plan," "intend," "expect," and other similar expressions constitute forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. SPECIAL RISK FACTORS Potential risks and uncertainties of an investment in the Company include those set forth below in "Item 2. Special Risk Factors." Particular attention should be paid to the cautionary statements involving the Company's limited operating history, the unpredictability of its future revenues, the unpredictable and evolving nature of its business model, the intensely competitive online commerce industry and the risks associated with capacity constraints, systems development, management of growth and business expansion, as well as other factors described below. ITEM 1. BUSINESS 1. GENERAL 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 40 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 3 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 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 expects to generate its initial operating revenue for the EServ product, as some of its initial customers have 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. 4 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. 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 5 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 fully 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 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 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. 2. 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 6 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 likely to be the first to offer electronic bill presentment. 3. PRODUCTS AND SERVICES In order to meet real and anticipated market demand, the Company has developed and is marketing the following products and services: 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 - ---------------- (1) "Internet Billing: Waiting for the Banks," Salomon Smith Barney, October 15, 1998, p. 20. (2) "Internet Billing: Waiting for the Banks," p. 17. 7 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. 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. 8 4. 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. 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 9 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. The Company currently employs 40 personnel; and projects that it will have approximately 60 employees by the end of 1999. 5. PLAN OF OPERATION FOR REMAINDER OF FISCAL YEAR 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 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 40 personnel and projects that it will have approximately 60 employees by the end of 1999. 6. 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 10 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. The Company currently has 12,381,065 shares of common stock issued and outstanding. Four million of these shares are restricted stock owned by the directors and certain key employees of the Company; and 1,404,637 shares are restricted stock owned by certain accredited investors. The remaining shares are owned by approximately 4,320 shareholders. The Company believes no shareholder holds more than five per cent (5%) ownership of the Company. (See Item 4 - Security Ownership of Certain Beneficial Owners and Management.). In March 1999, bills.com, Inc. was incorporated in Delaware, as a wholly-owned subsidiary of the Company. This report contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Special Risk Factors" described in Item 2 below. ITEM 2. SPECIAL RISK FACTORS Investors should carefully consider the following information which outlines special market and other risk factors affecting the industry and the Company. LACK OF OPERATING HISTORY; LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION. 11 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 revenue. Through September 30, 1999, the Company's accumulated deficit was $4,285,775. 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 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. DELISTING FROM OTC BB; EFFECT ON LIQUIDITY. The Company is a "reporting company" 12 under the Exchange Act, having filed a Form 10 Registration Statement (the "Registration Statement") on June 11, 1999. Following initial comment by the SEC, the Registration Statement was amended on July 27, 1999, and became effective on August 11, 1999. In light of the risk factors stated above, the Company anticipates that the SEC will require one or more post-effective date amendments of the Registration Statement. The Company intends to seek relisting immediately upon the filing of this post-effective amendment to Form 10 with the SEC. The National Association of Securities Dealers ("NASD"), which operates the Over the Counter Bulletin Board ("OTC BB"), has recently adopted eligibility rules, which require the Company to clear comment with the SEC in order to remain listed on the OTC BB. While the Company has promptly responded to the SEC's comments, the Registration Statement has not yet cleared comment. Thus, the Company has not met the eligibility criteria established by the NASD. Accordingly, as of October 7, 1999 the NASD notified the Company that its listing on the OTC BB was terminated, and the Company's common stock is now quoted in the National Quotation Board's Electronic Pink Sheets, until such time, if any, as the Company requalifies for listing on the OTC BB. Delisting of the Company's common stock from the OTC BB could substantially and negatively affect the liquidity and marketability of the Company's common stock. Furthermore, the Company can offer no assurances concerning the timing, nature, or scope of further comment by the SEC. UNCERTAIN RELIABILITY, GROWTH AND CONSUMER ACCEPTANCE OF THE INTERNET, INTERNET TECHNOLOGY, AND ELECTRONIC COMMERCE. The electronic commerce market is a relatively new and growing service industry. If the electronic commerce market fails to grow or grows slower than anticipated, or if the Company, despite an investment of significant resources, is unable to adapt to meet changing customer requirements or technological changes in this emerging market, or if the Company's services and related products do not maintain a proportionate degree of acceptance in this growing market, the Company's business, operating results, and financial condition could be materially adversely affected. Additionally, the security and privacy concerns of existing and potential customers may inhibit the growth of the electronic commerce market in general, and the Company's customer base and revenues in particular. Similar to the emergence of the credit card and automatic teller machine ("ATM") industries, the Company and other organizations serving the electronic commerce market must educate users that electronic transactions use encryption technology and other electronic security measures that make electronic transactions more secure than paper-based transactions. While the Company believes that it is utilizing proven applications designed for premium data security and integrity to process electronic transactions, there can be no assurance that the Company's use of such applications will be sufficient to address the changing market conditions or the security and privacy concerns of existing and potential customers. Adverse publicity raising concerns about the safety or privacy of electronic transactions, or widely reported breaches of the Company's or another providers' security, have the potential to undermine consumer confidence in the technology and thereby have a materially adverse effect on the Company's business. In addition, there can be no guarantee that the Internet 13 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. As compared with making payment by paper check or by draft, the Company believes that electronic payments: (i) cost much less to complete; (ii) give rise to fewer errors, which are costly to resolve; and (iii) generate far fewer customer inquiries and therefore consume fewer customer care resources. Accordingly, the Company's inability to continue to decrease the percentage of remittances effected by paper documents 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 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 14 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 OFDI sorts and transmits the file to an ACH Operator. The Arizona Clearing House Association, Federal Reserve, New York Automated Clearing House, and Visa USA act as ACH Operators, central clearing facilities through which financial institutions transmit or receive ACH entries. The ACH Operator then distributes the ACH file to the Receiving Depository Financial Institution, the bank of the customer, which makes the funds available to the customer. If the Federal Reserve rules were to change to further restrict or modify access to the ACH, the Company's business could be materially adversely affected. INTENSE COMPETITION IN ELECTRONIC COMMERCE AND RELATED FINANCIAL SERVICES. Portions of the electronic commerce market are becoming increasingly competitive. The Company expects to face significant competition in all 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 15 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. In late October 1999, the Company concluded equity financing through a private placement of common stock and warrants to purchase common stock, with proceeds to the Company in the amount of $4,188,053. 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 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 16 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 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 17 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 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. Until October 8, 1999, the Company was listed on the NASD OTC BB. The Company's Shares are now traded through the National Quotation Board's Electronic Pink Sheets. There can be no assurance that an active or liquid trading market in the Company's common stock will develop or be sustained. 18 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. Until October 8, 1999, the Company was listed on the NASD OTC BB, and 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 through National Quotation Board's Electronic Pink Sheets. 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 30.8% of the outstanding shares of the Company's common stock. As a result, these stockholders are able to exercise significant influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON MARKET PRICE. Currently, the Company has 12,381,065 shares of the Company's common stock outstanding. Five million four hundred four thousand six hundred thirty-seven (5,404,637) 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 October of 1999, the Company is obligated to seek registration of 1,404,637 common shares and 1,594,482 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. 19 ANTI-TAKEOVER PROVISIONS; CERTAIN PROVISIONS OF NEVADA LAW; CERTIFICATE OF INCORPORATION, BYLAWS, 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. The Company's Board of Directors is also classified into three classes of directors serving staggered three-year terms. Such classification of the Board of Directors expands the time required to change the composition of a majority of directors and may tend to discourage a proxy contest or other takeover bid for the Company. The 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 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 additional 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 20 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 CheckFree, Transpoint, and Intuit 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. 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 21 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. ITEM 3. FINANCIAL INFORMATION 1. SELECTED FINANCIAL DATA 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. NINE MONTHS ENDED JULY 30 1998 SEPTEMBER 30 1999 (INCEPTION) TO DECEMBER 31 1998 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report on Form 10 contains forward-looking statements based on current expectation, estimates and projections about the Company's industry, management's beliefs and certain assumptions made by management. All statements, trends, analyses and other information contained in this report relative to trends in net sales, gross margin, anticipated expense levels and liquidity and capital resources, as well as other statements, including, but not limited to, words such as "anticipate," "believe," "plan," "intend," "expect," and other similar expressions constitute forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Accordingly, actual results may 22 differ materially from those anticipated or expressed in such statements. Potential risks and uncertainties include, among others, those set forth below. (See "Item 2. Special Risk Factors" above.) Particular attention should be paid to the cautionary statements involving the Company's limited operating history, the unpredictability of its future revenues, the unpredictable and evolving nature of its business model, the intensely competitive online commerce industry and the risks associated with capacity constraints, systems development, management of growth and business expansion, as well as other risk factors. GENERAL billserv.com, Inc. is a service bureau consolidator in the EBPP industry. As a startup 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 23 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, marketing or acquisition decisions that could have a material adverse effect on its business, prospects, financial conditions and results of operations. 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 November 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 (see also Items 1, 8 & 11 for a discussion of the Company's relationship with Consulting Group). 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. RESULTS OF OPERATIONS--QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999 The Company's activities for the quarter and nine months ended 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 24 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, respectively. 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, respectively. 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. 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 related party for services under a consulting agreement. See Note 3 to interim financial statements. 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 financing until such time as the Company completed a private placement offering to accredited investors. The offering was completed in October 1999. A total of 1,404,637 common shares were issued resulting in net proceeds of approximately $4,188,053. 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 25 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 will require additional financing, either through the use of equipment leasing arrangements, borrowing's 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 of its own Internet portal at the website http://www.billserv.com. The Company is amortizing 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 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 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. 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. 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. 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 in the form of a certificate of deposit equal to 70% of the total dollars financed, 25% of which 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 26 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. YEAR 2000 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 July 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 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 27 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. ITEM 4. 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. ITEM 5. 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 28 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: 29 SHARES OWNED BENEFICIALLY AND OF RECORD PERCENT OF CLASS TITLE OF AMOUNT & NATURE OF PERCENT OF OWNERSHIP CLASS NAME AND ADDRESS BENEFICIAL OWNERSHIP AS OF NOVEMBER 15, 1999 (1) Common Michael R. Long (2) Stock 15546 Clover Ridge San Antonio, TX 78248 1,183,333 9.6% Common Louis A. Hoch (3) Stock 15138 Grayoak Forest San Antonio, TX 78248 1,191,334 9.62% Common David S. Jones (4) Stock 11530 Vance Jackson San Antonio, TX 78230 1,183,333 9.6% Common Lori Turner Stock 11205 Woodridge Forest San Antonio TX 78249 100,000 0.8% Common Marshall Millard Stock 18123 Summer Knoll San Antonio, TX 78258 150,000 1.2% Common All directors, officers Stock and employees as a group(5) (7 persons) 4,000,000 30.8% (1) ALL OWNERSHIP IS STATED AS OF NOVEMBER 15, 1999. IN 1999, THE COMPANY HAS AWARDED, SUBJECT TO SHAREHOLDER APPROVAL, OPTIONS TO PURCHASE 754,000 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. 3. CHANGE IN CONTROL There are no arrangements known to the Company the operation of which may result in a change of control of the Company. 30 ITEM 6. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES The following sets forth the directors and executive officers and key employees of the Company as of November 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: NAME OF DIRECTOR/ AGE POSITION HELD POSITION OFFICER HELD SINCE - --------------- Michael R. Long ............................. 55 Director, Chairman and C.E.O. November, 1998 Louis A. Hoch ............................... 34 Director, President and C.O.O. November, 1998 David S. Jones .............................. 26 Director and Executive Vice November, 1998 President November, 1998 Lori A. Turner .............................. 42 Treasurer, Vice President and C.F.O. December, 1998 Marshall Millard ............................ 37 Secretary, Vice President and General Counsel November, 1998 E. Scott Crist .............................. 36 Director January, 1999 Roger R. Hemminghaus ........................ 62 Director April, 1999 2. FAMILY RELATIONSHIPS No family relationship exists between or among any of the directors, executive officers, 31 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 November 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 November 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 November 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 November 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). DAVID S. JONES, DIRECTOR AND EXECUTIVE VICE-PRESIDENT Mr. Jones joined the Company in November 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 32 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 1988, 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 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 7 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 33 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. 4. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS. None of the directors or executive officers of the Company have been involved in any legal proceedings during the past five (5) years that are material to an evaluation of their ability or integrity as a director or executive officer of the Company. ITEM 7. EXECUTIVE COMPENSATION 1. 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 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 34 (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. 2. 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; Mr. Hemminghaus holds 80,000 options with an exercise price of $5.18 per share. The options vest over a three year period. ITEM 8. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 1. TRANSACTIONS WITH MANAGEMENT AND OTHERS; CERTAIN BUSINESS RELATIONSHIPS; PROMOTERS Concurrent with and in connection with the Regulation S equity financing described hereinabove, the Company had entered into a consulting agreement, effective November 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 35 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 October 15, 1999, the Company issued to PMG a warrant to purchase 37,524 Shares of common stock of the Company at an exercise price of $3.25 which represents the price at which the certain accredited investors purchased shares in a private placement concluded in October 1999. Another 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. 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. 2. 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 any financing received by the Company. 36 ITEM 9. LEGAL PROCEEDINGS There is no litigation currently pending and the Company is not aware of any disputes that may lead to litigation. ITEM 10. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 1. MARKET INFORMATION The Company's common stock is traded on the National Quotation Board's Electronic Pink Sheets. 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 3/8 8 7/8 September 30, 1999 . 4 11/16 4 13/16 ------- ------- (1) No previous periods are reported as the Company was initially listed in the fourth quarter 1998. The Company has 12,381,065 shares of common stock outstanding, including the 1,404,637 shares issued pursuant to a private placement concluded in October 1999; of this amount, 6,030,000 of such shares are nonrestricted; 5,404,637 of such shares are restricted pursuant to Rule 144; and 946,428 shares are restricted pursuant to Regulation S. As of September 30, 1999, the number of holders of record of the common stock, $.001 par value, of the Company was approximately 4,327. ITEM 11. RECENT SALES OF UNREGISTERED SECURITIES There are issued and outstanding 12,381,065 shares of common stock which were sold as follows: 1. 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 37 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 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. Forms D relating to the Rule 504 offerings were filed with the Securities and Exchange Commission. 2. 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. 3. 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. 38 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 Canceling 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 Canceling Holders. Form D relating to the Rule 504 offering was filed with the Securities and Exchange Commission 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. 4. 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 39 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 agreed to issue to PMG a warrant to purchase 99,206 shares of common stock of the Company at an exercise price of $7.56 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. 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 October 15 and 22, 1999, the Company issued 1,230,792 and 173,845 restricted shares of common stock (the "Shares"), respectively to twenty-one accredited investors under a private placement offer under Rule 506 of Regulation D (the "Offering"). A Form D describing this transaction was timely filed with the SEC. 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. 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 PMG as placement agent. Proceeds of the Offering are to be used to pay short term debt of the Company and for other general corporate operating purposes. 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 "Warrant Shares"). The warrants are exercisable for three years from the date of issuance, or October 14, 2002. The Company has the right to call the exercise of the warrants at any time after six months after the date of the issuance and after the closing price of the Common Stock exceeds $12.00 for a period of twenty (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 intends to file a registration statement with the SEC for the purpose of registering the Shares and Warrants Shares. The Company shall also use its best efforts to maintain with the SEC a registration statement 40 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 of the Offering, or is not effective on or before one hundred twenty (120) days after closing (the "Target Date"), then for every applicable thirty (30) day period after the applicable Target Date, the Company shall pay to the accredited investors, as liquidated damages, an amount equal to two percent (2%) of the total Offering price of such Shares (without reference to the 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. As additional compensation for acting as Placement Agent for the Offering, the Company issued a warrant to PMG for the purchase of 37,524 shares of common stock, 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. ITEM 12. DESCRIPTION OF THE COMPANY'S SECURITIES 1. GENERAL The Company is authorized to issue 200,000,000 shares of common stock of $.001 par value per share. This is the only class of stock currently authorized for issuance by the Company. The common stock has no conversion, preemptive or subscription rights as to any securities of the Company and are not liable to assessments or further calls. Each share of common stock of the Company, when fully paid for, will be validly issued and outstanding, is entitled to one vote on all matters to be voted on by shareholders, is entitled to equal dividends when and as declared by the board of directors from funds legally available therefor, and is entitled to a pro rata share of the Company's net assets in the event of dissolution, liquidation or winding up of the Company. The holders of shares of common stock are entitled to dividends when and as declared by the Board of Directors from funds legally available therefore and, upon liquidation, are entitled to share pro rata in any distribution to common shareholders. Holders of the common stock have one non-cumulative vote for each share held. There are no preemptive, conversion or redemption privileges, nor sinking fund provisions, with respect to the common stock. All of the outstanding shares of common stock are validly issued, fully paid and non-assessable. Since the common stock of the Company does not have cumulative voting rights, the holders of more than 50 percent of the outstanding shares can elect all of the directors, if they choose to do so, in which event the holders of the remaining shares cannot elect any directors. Accordingly, if the present shareholders in the foreseeable future own more 41 than 50 percent of the outstanding shares, they will be able to elect all of the directors. 2. DIVIDEND POLICY The payment by the Company of dividends, if any, in the future rests principally on the discretion of its board of directors, and will depend, among other things, upon the Company's earnings, its capital requirements, and its financial condition, as well as other relevant factors. The Company has not paid or declared any dividends upon its common stock since its inception, and by reason of its contemplated financial requirements, does not contemplate or anticipate paying any dividends upon its common stock in the foreseeable future. See "Special Risk Factors." 3. REPORTS TO SHAREHOLDERS The Company intends to furnish its shareholders with annual reports of its operations, containing financial statements. The Company will also file annual and quarterly reports as required by the Securities Exchange Act of 1934. 4. TRANSFER AGENT The Company has contracted with NEVADA AGENCY AND TRUST COMPANY, 50 West Liberty, Suite 880, Reno, Nevada 89501, as its transfer agent. ITEM 13. 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. ITEM 14. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA 42 The financial statements of the Company, itemized in the sub-topic, "Financial Statements" under Item 16 hereof, are set forth below. ITEM 15. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There exists no disagreement between the Company and its accountants on any matter of accounting principles or practice or financial statement disclosure. ITEM 16. FINANCIAL STATEMENTS AND EXHIBITS FINANCIAL STATEMENTS a. Period from Inception (July 30, 1998) through December 31, 1998 Report of Independent Auditors Balance Sheet Statement of Operations Statement of Shareholders' Equity (Deficit) Statement of Cash Flows Notes to Financial Statements b. Nine Month Period ended September 30, 1999 Balance Sheets - unaudited Statements of Operations - unaudited Statement of Shareholders' Equity (Deficit) - unaudited Statements of Cash Flows - unaudited Notes to Financial Statements- unaudited This report contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Special Risk Factors." EXHIBITS 1. Financial Statements (see above) 2. Articles of Incorporation of Goldking Resources, Inc., a Nevada corporation, filed with the Secretary of State of Nevada on June 4, 1998 (previously filed). 3. Certificate of Amendment to Articles of Amendment, filed with the Secretary of State of Nevada on December 3, 1998 (reflecting name change to "billserv.com, Inc.") (previously filed). 43 4. Bylaws of the Company, formerly known as Goldking Resources, Inc., adopted June 4, 1998 (previously filed). 5. Specimen of common stock certificate, of billserv.com, Inc., par value $0.001 (previously filed). 6. Employment Agreement, dated November 28, 1998, by and between billserv.com, Inc. and Michael Long (previously filed). 7. Employment Agreement, dated November 28, 1998, by and between billserv.com, Inc. and Louis Hoch (previously filed). 8. Employment Agreement, dated November 28, 1998, by and between billserv.com, Inc. and David Jones (previously filed). 9. Employment Agreement, dated November 28, 1998, by and between billserv.com, Inc. and Lori Turner (previously filed). 10.Employment Agreement, dated November 28, 1998, by and between billserv.com, Inc. and Marshall Millard (previously filed). 11.Employment Agreement, dated November 28, 1998, by and between billserv.com, Inc. and Randy Kauftheil (previously filed). 12.Consulting Agreement, dated November 1, 1998, by and between billserv.com, Inc. and Richard N. Jeffs, James R. King, and Robert B. Smith (previously filed). 13.Business Development Agreement, dated May 7, 1999, by and between billserv.com, Inc. and Southwest Business Corporation (previously filed). 44 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, on this ____ day of ____________, 1999. billserv.com, Inc. A Nevada corporation ------------------------------ By: Louis A. Hoch Name: Louis A. Hoch, President ------------------------------ By: Marshall N. Millard Name: Marshall N. Millard, Secretary 45 billserv.com, Inc. (a development stage company) Financial Statements Period Ended December 31, 1998 CONTENTS Report of Independent Auditors ........................................1 Financial Statements Balance Sheet .........................................................2 Statement of Operations ...............................................3 Statement of Shareholders' Equity (Deficit) ...........................4 Statement of Cash Flows ...............................................5 Notes to Financial Statements .........................................6 46 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 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. 2 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. 3 billserv.com, Inc. (a development stage company) Statement of Shareholders' Equity (Deficit) DEFICIT ACCUMULATED TOTAL ADDITIONAL DURING THE SHAREHOLDERS' COMMON STOCK PAID-IN DEVELOPMENT EQUITY SHARES AMOUNT CAPITAL STAGE (DEFICIT) ------------------------------------------------------------- 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) ============================================================ SEE ACCOMPANYING NOTES. 4 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. 1 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. 2 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. 3 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. 4 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. 5 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. 6 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. 7 billserv.com, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS (UNAUDITED) SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------ ----------- 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) =========== =========== Total liabilities and shareholders' equity (deficit) ....................................... $ 3,406,243 $ 407,530 =========== =========== See notes to financial statements 8 billserv.com, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) JULY 30, 1998 THREE MONTHS NINE MONTHS (INCEPTION) ENDED ENDED TO SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1999 1999 1999 ------------ ------------ ------------ 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 ============ ============ ============ See notes to financial statements 9 billserv.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (DEFICIT) (UNAUDITED) DEFICIT ACCUMULATED ADDITIONAL DURING THE TOTAL COMMON STOCK PAID-IN DEVELOPMENT SHAREHOLDERS' SHARES AMOUNT CAPITAL STAGE EQUITY ------------ ------------ ------------ ------------ ------------ Balance July 30, 19984 (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 ============ ============ ============ ============ ============ See notes to financial statements 10 billserv.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) JULY 30, 1998 NINE MONTHS (INCEPTION) ENDED TO SEPTEMBER SEPTEMBER 30, 1999 30, 1999 ----------- ----------- 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 See notes to financial statements 11 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 under the agreement was paid to the Consulting Group during the third quarter of 1999. 12 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 ========= 13 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 14 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. 15 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. 16 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 17 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 or 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. DELISTING FROM OTC BB; EFFECT ON LIQUIDITY. The Company is a "reporting company" under the Exchange Act, having filed a Form 10 Registration Statement (the "Registration Statement") on June 11, 1999. Following initial comment by the SEC, the Registration Statement was amended on July 27, 1999, and became effective on August 11, 1999. In light of the risk factors stated above, the Company anticipates that the SEC will require one or more post-effective date amendments of the Registration Statement. The National Association of Securities Dealers ("NASD"), which operates the Over the Counter Bulletin Board ("OTC BB"), has recently adopted eligibility rules, which require the Company to clear comment with the SEC in order to remain listed on the OTC BB. While the Company has promptly responded to the SEC's comments, the Registration Statement has not yet cleared comment. Thus, the Company has not met the eligibility criteria established by the NASD. Accordingly, as of October 7, 1999 the NASD notified the Company that its listing on the OTC BB was terminated, and the Company's common stock is now quoted in the National Quotation Board's Electronic Pink Sheets, until such time, if any, as the Company requalifies for listing on the OTC BB. Delisting of the Company's common stock from the OTC BB could substantially and negatively affect the liquidity and marketability of the Company's common stock. Furthermore, the Company can offer no assurances concerning the timing, nature, or scope of further comment by the SEC. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements based on current expectations, estimates, and projections about the Company's industry, management's beliefs and certain assumptions made by management. All statements, trends, analyses, and other information contained in this report relative to trends in net sales, gross margin, anticipated expense levels, and liquidity and capital resources, as well as other statements, including, but not limited to, words such as "anticipate," "believe," "plan," "intend," "expect," and other similar expressions constitute forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Accordingly, actual results may differ materially from those anticipated or expressed in such statements. Potential risks and uncertainties include, among others, those set forth below. Particular attention should be paid to the cautionary statements involving the Company's limited operating history, the unpredictability of its future revenues, the unpredictable and evolving nature of its business model, the intensely competitive online commerce industry and the risks associated with capacity constraints, systems development, management of growth and business expansion, as well as other risk factors. GENERAL billserv.com, Inc. is a service bureau consolidator in the electronic bill presentment and payment ("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) 19 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, marketing or acquisition decisions that could have a material adverse effect on its business, prospects, financial conditions and results of operations. RESULTS OF OPERATIONS--QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999 The Company's activities for the quarter and nine months ended 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, respectively. 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 20 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, respectively. 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. 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 related party for services under a consulting agreement. See Note 3 to interim financial statements. 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 financing until such time as the Company completed a private placement offering ("Offering"). The Offering was completed in October 1999. A total of 1,404,637 common shares were issued resulting in net proceeds of approximately $4,188,053. 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 will require additional financing, either through the use of equipment leasing arrangements, borrowing's 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 of its own Internet portal at the website www.bills.com. The Company is amortizing the amount over a ten year period. The operations of the Internet portal have been organized under "bills.com, Inc.", a Delaware corporation that operates 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 21 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. 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 Consolidated Statements of Operations for the nine months ended September 30, 1999. 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. The security deposit of $105,000 is included in Other Assets on the Company's Consolidated Balance Sheet as of September 30, 1999. 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 in the form of a certificate of deposit equal to 70% of the total dollars financed, 25% of which will be released to the Company on each six month anniversary of the lease inception date. A security deposit of $170,496 is included in Other Current Assets and a deposit of $170,496 is included in Other Assets on the Company's Consolidated Balance Sheet as of September 30, 1999. 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 22 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. YEAR 2000 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 November 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 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 23 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. 24