As filed with the Securities and Exchange Commission on August 9, 2002.
Registration No. ____-____
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SECURITIES AND EXCHANGE COMMISSION
-------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BILLSERV, INC.
(Exact name of registrant as specified in its charter)
NEVADA 98-0190072
(State of Incorporation) (I.R.S. Employer
Identification No.)
211 North Loop 1604 East, Suite 200
San Antonio, Texas 78232
210.402.5000
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
-------------
MARSHALL N. MILLARD
Secretary, Senior Vice President and General Counsel
Billserv, Inc.
211 North Loop 1604 East, Suite 200
San Antonio, Texas 78232
210.402.5000
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
TIMOTHY N. TUGGEY, ESQ.
Loeffler Jonas & Tuggey LLP
755 East Mulberry, Suite 200
San Antonio, Texas 78212
210.354.4300
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Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If the only securities being registered on this Form are to be offered pursuant
to dividend or interest reinvestment plans, please check the following box. |_|
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number
of the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
------------------------ ---------------------- ------------------- --------------------- -------------------
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered offering price aggregate offering Registration fee
registered per share price
------------------------ ---------------------- ------------------- --------------------- -------------------
Common Stock 3,846,154 (1) $0.90 $3,461,539 $______
------------------------ ---------------------- ------------------- --------------------- -------------------
Common Stock 150,000 (3) $0.936 $140,400 (4) $______
------------------------ ---------------------- ------------------- --------------------- -------------------
Common Stock 50,000 (3) $0.975 $48,750(4) $______
------------------------ ---------------------- ------------------- --------------------- -------------------
Common Stock 100,000 (3) $1.17 $117,000(4) $______
------------------------ ---------------------- ------------------- --------------------- -------------------
Total 4,146,154 $3,767,689 $346.63(2)
------------------------ ---------------------- ------------------- --------------------- -------------------
(1) Represents 200% of our good faith estimate of the number of shares that are
issuable to the selling security holder following the conversion of interest
and/or principal of a convertible note held by the selling security holder or
our payment of the interest and/or principal of the convertible note held by the
selling security holder with shares of our common stock.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. The calculation of the
registration fee is based on the average of the high and low prices for our
common stock on August 7, 2002 as quoted through the NASDAQ National Market.
(3) Represents the number of shares that may be sold by the selling security
holder following the exercise of a warrant.
(4) Pursuant to Rule 457(g), calculated based upon the exercise price of the
warrant.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE
1
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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211 North Loop 1604 East, Suite 200
San Antonio, Texas 78232
210.402.5000
Billserv, Inc.
4,146,154 SHARES
COMMON STOCK
Our common stock is traded on the NASDAQ National Market under the symbol
"BLLS." On August 7, 2002, the closing bid quotation for the common stock was
$0.90.
This prospectus covers the resale of a total of up to 4,146,154 shares of our
common stock that may be issued pursuant to a convertible note and warrant that
were issued to the selling security holder in exchange for a $1.5 million
investment. See "Recent Transactions" below for additional details of this
transaction.
BUYING SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" DESCRIBED LATER IN THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF SHARES OF OUR COMMON
STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SEC IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO
SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALES IS NOT PERMITTED.
THE DATE OF THIS PROSPECTUS IS AUGUST 9, 2002.
2
TABLE OF CONTENTS
Page
PART 1
AVAILABLE INFORMATION.......................................................1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS...................1
RISK FACTORS................................................................1
THE COMPANY................................................................10
USE OF PROCEEDS............................................................11
RECENT TRANSACTIONS........................................................11
THE SELLING SECURITY HOLDER................................................12
PLAN OF DISTRIBUTION.......................................................13
LEGAL MATTERS..............................................................13
EXPERTS....................................................................14
WHERE YOU CAN FIND MORE INFORMATION........................................14
PART 2
INFORMATION NOT REQUIRED IN PROSPECTUS.....................................15
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.......................15
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.........................15
ITEM 16. EXHIBITS..........................................................16
ITEM 17. UNDERTAKINGS......................................................16
SIGNATURES.................................................................17
POWER OF ATTORNEY..........................................................18
EXHIBIT INDEX..............................................................18
OPINION OF COUNSEL ........................................................19
CONSENT OF INDEPENDENT AUDITORS............................................22
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PART I
AVAILABLE INFORMATION
Prior to filing the registration statement on Form S-3 of which this Prospectus
is a part, the Company has been subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). As such,
Billserv, Inc. is a "reporting company."
The Company has filed with the Commission a registration statement on Form S-3
of which this Prospectus is a part. This registration statement or any part
thereof, together with all other reports and other information filed by
Billserv, Inc. may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street N.W., Judiciary Plaza,
Washington, D.C. 20549. Copies of such material may be obtained from the Public
Reference Section of the Commission's Washington, D.C. office at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at http://www.sec.gov.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. A number of important factors could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Risk Factors" and "The Company" as well as those discussed
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under "Risk Factors".
The Company intends to furnish its shareholders with annual reports containing
audited financial statements certified by its independent public accountants and
quarterly reports containing unaudited financial statements for each of the
first three quarters of each fiscal year.
RISK FACTORS
AN INVESTMENT IN THE SECURITIES IS SPECULATIVE IN NATURE AND INVOLVES A HIGH
DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND OTHER
INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN THE SECURITIES. YOU
SHOULD ONLY PURCHASE THE SECURITIES IF YOU CAN AFFORD TO LOSE YOUR ENTIRE
INVESTMENT. THE RISKS DESCRIBED BELOW MAY NOT BE THE ONLY RISKS FACING THE
COMPANY.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING.
The Company currently plans to meet their capital requirements primarily through
issuance of equity securities, equipment leasing and new borrowing arrangements,
and in the longer term, revenue from operations. If current cash, marketable
securities and cash that may be generated from operations are insufficient to
satisfy their liquidity requirements, the Company may seek to sell additional
equity or secure
-1-
borrowings. The sale of additional equity or convertible debt securities would
result in additional dilution to the Company's stockholders, and debt financing,
if available, may involve restrictive covenants which could restrict their
operations or finances. There can be no assurance that financing will be
available in amounts or on terms acceptable to the Company, if at all. If the
Company cannot raise funds, on acceptable terms, they may not be able to
continue to exist, expand our operation, grow market share, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements, any of which would negatively impact their business, operating
results and financial condition.
LACK OF OPERATING HISTORY; LIMITED RELEVANCE OF HISTORICAL FINANCIAL
INFORMATION.
The Company was organized in 1998 and began operations as a public company in
1999. The Company has not been profitable. Through March 31, 2002, the Company's
accumulated deficit was $38.1 million. Therefore, all information included
herein may not necessarily reflect the results of operations, financial position
and cash flows of the Company in the future.
UNCERTAIN RELIABILITY, GROWTH AND CONSUMER ACCEPTANCE OF THE INTERNET,
INTERNETTECHNOLOGY, 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 will continue to grow in acceptance or maintain its
reliability, or that new technologies might supplant the Internet in part or in
whole.
-2-
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. The market for the Company's services, however, is characterized
by rapidly changing technology, evolving industry standards, emerging
competition and frequent new and enhanced software, service and related product
introductions. In addition, the software market is subject to rapid and
substantial technological change. The Company, to remain successful, must be
responsive to new developments in hardware and semiconductor technology,
operating systems, programming technology and computer capabilities. In many
instances, the new and enhanced services, products, and technologies are in the
emerging stages of development and marketing, and are subject to the risks
inherent in the development and marketing of new software, services, and
products. The Company may not successfully identify new service opportunities,
and develop and bring new and enhanced services and related products to market
in a timely manner; there can be no assurance that any such services, products
or technologies will develop or will be commercially successful, that the
Company will benefit from such developments or that services, products, or
technologies developed by others will not render the Company's services, and
related products noncompetitive or obsolete. If the Company is unable, for
technological or other reasons, to develop and introduce new services and
products in a timely manner in response to changing market conditions or
customer requirements, or if new or enhanced software, services and related
products do not achieve a significant degree of market acceptance, the Company's
business, operating results and financial condition would be materially
adversely affected.
CHANGES IN REGULATION OF ELECTRONIC COMMERCE AND RELATED FINANCIAL SERVICES.
Management believes that the Company is not required to be licensed by the
Office of the Comptroller of the Currency, the Federal Reserve Board, or other
federal or state agencies that regulate or monitor banks or other types of
providers of electronic commerce services. There can be no assurance that a
federal or state agency will not attempt to regulate providers of electronic
commerce services, such as the Company, which could impede the Company's ability
to do business in
-3-
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 (Automated Clearinghouse) Network is a nationwide batch-oriented
electronic funds transfer system that provides for the interbank clearing of
electronic payments for participating financial institutions. The Federal
Reserve rules provide that the ACH system is available only through a bank. To
access the Network, the Company or its authorized representative may originate
an ACH entry. As the originator, the Company forwards transaction data to the
Originating Depository Financial Institution ("ODFI"), which is a participating
financial institution that must abide by the provisions of the ACH Operating
Rules and Guidelines. The OFDI sorts and transmits the file to an ACH Operator.
The Automated Clearing House Association, Federal Reserve, New York Automated
Clearing House, and Visa USA act as ACH Operators, 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 areas of
the EBPP market. 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 billers of all sizes. The Company
further believes that software providers, consumer front ends, banks and
Internet portals will provide increasingly competitive billing solutions for
billers of all sizes. In addition, a number of banks have developed, and others
in the future may develop, home banking services in-house. The Company believes
that banks will also compete for the EBPP business of billers.
The Company expects competition to increase from both established and emerging
companies and that such increased competition could result in reduced
transaction pricing that could materially adversely affect the Company's
business, operating results and financial condition.
-4-
Moreover, the Company's current and potential competitors, many of whom have
greater financial, technical, marketing, and other resources than the Company,
may respond more quickly than the Company to new or emerging technologies or
could expand to compete directly against the Company in any or all of its target
markets. Accordingly, it is possible that current or potential competitors could
rapidly acquire market share. There can be no assurance that the Company will be
able to compete against current or future competitors successfully or that
competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL.
The Company's success depends to a significant degree upon the continued
contributions of its key management, marketing, service and related product
development and operational personnel, including its Chairman and Chief
Executive Officer, Michael R. Long; its President and Chief Operating Officer,
Louis A. Hoch; and its Chief Marketing Officer, Tony Diamond. The Company's
operations could be affected adversely if, for any reason, any of these officers
ceased to be active in the Company's management. The Company maintains
proprietary nondisclosure and non-compete agreements with all of its key
employees. The success of the Company depends to a large extent upon its ability
to retain and continue to attract highly skilled personnel. Competition for
employees in the electronic commerce industry is intense, and there can be no
assurance that the Company will be able to attract and retain enough qualified
employees. If the Company experiences significant growth, it may become
increasingly difficult to hire, train and assimilate the new employees needed.
The Company's inability to retain and attract key employees could have a
material adverse effect on the Company's business, operating results, and
financial condition. To date, the Company has not experienced any of these
difficulties.
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
SAS 70 technical audits
-5-
and limitation-of-liability provisions in its customer agreements. There can be
no assurance that the measures taken by the Company will prove effective in
limiting the Company's exposure to warranty claims. Despite the existence of
various security precautions, the Company's computer infrastructure may also be
vulnerable to viruses or similar disruptive problems caused by its customers or
third parties gaining access to the Company's processing system.
EROSION OF REVENUE FROM SERVICES.
The profitability of the Company's business depends, to a substantial degree,
upon billers electing to continue to periodically renew contracts. In the event
that a substantial number of these customers were to decline to renew these
contracts for any reason, the Company's revenues and profits would be adversely
affected. Sales of the Company's services are dependent upon customer demand for
the services, which is affected by pricing decisions, the competition of similar
products and services, and reputation of the products and services for
performance. Most of the Company's services are likely to be sold within the
utilities and financial services industries, and poor performance by the Company
in performing its services has the potential to undermine the Company's
reputation and affect future sales of other services. A substantial decrease in
revenue from services would have a material adverse effect upon the Company's
business, operating results, and financial condition.
RISK OF LOSS FROM RETURNED TRANSACTIONS, MERCHANT FRAUD OR ERRONEOUS
TRANSMISSIONS.
The Company relies upon the Federal Reserve's ACH for electronic fund transfers
and conventional paper check and draft clearing systems for settlement of
payments by check or drafts. In its use of these established payment clearance
systems, the Company generally bears the same credit risks normally assumed by
other users of these systems arising from returned transactions caused by
insufficient funds, stop payment orders, closed accounts, frozen accounts,
unauthorized use, disputes, theft or fraud. In addition, the Company also
assumes the risk of merchant fraud and transmission errors when it is unable to
have erroneously transmitted funds returned by an unintended recipient. Merchant
fraud includes such actions as inputting false sales transactions or false
credits.
RISK OF SYSTEM FAILURE.
The Company's operations are dependent on its ability to protect its computer
equipment against damage from fire, earthquake, power loss, telecommunications
failure or similar event. Any damage or failure that causes interruptions in the
Company's operations could have a material adverse effect on the Company's
business, operating results, and financial condition. The Company's property and
business interruption insurance may not be adequate to compensate the Company
for all losses that may occur.
LIMITED PROTECTION OF PROPRIETARY SERVICES.
The Company regards some of its services as proprietary and relies primarily on
a combination of trademark and trade secret laws, employee
-6-
and third party non-disclosure agreements, and other intellectual property
protection methods to protect its services. Existing intellectual property laws
afford only limited protection, and it may be possible for unauthorized third
parties to copy the Company's services and related products or to reverse
engineer or obtain and use information that the Company regards as proprietary.
There can be no assurance that the Company's competitors will not independently
develop services and related products that are substantially equivalent or
superior to those of the Company.
VOLATILITY OF STOCK PRICE.
The market price of the Company's common stock is subject to significant
fluctuations in response to variations in quarterly operating results, the
failure of the Company to achieve operating results consistent with securities
analysts' projections of the Company's performance, and other factors. The stock
market has experienced extreme price and volume fluctuations and volatility that
has particularly affected the market prices of many technology, emerging growth,
and developmental stage companies. Such fluctuations and volatility have often
been unrelated or disproportionate to the operating performance of such
companies. Factors such as announcements of the introduction of new or enhanced
services or related products by the Company or its competitors, announcements of
joint development efforts or corporate partnerships in the electronic commerce
market, market conditions in the technology, banking, telecommunications and
other emerging growth sectors, and rumors relating to the Company or its
competitors may have a significant impact on the market price of the Company's
common stock.
CONTROL BY PRINCIPAL STOCKHOLDERS.
As of June 30, 2002, the directors and officers of the Company and their
affiliates collectively own approximately 9% of the outstanding shares of the
Company's common stock. As a result, these stockholders are able to exercise
significant influence over matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON MARKET PRICE.
As of June 30, 2002, the Company has 20,581,126 shares of common stock
outstanding. If the Company needs future equity financing to meet its
operational and strategic requirements, such future equity financing may have a
significant dilutive effect on the Company's stock price.
ANTI-TAKEOVER PROVISIONS; CERTAIN PROVISIONS OF NEVADA LAW; CERTIFICATE OF
INCORPORATION, BYLAWS, AND STOCKHOLDER RIGHTS PLAN.
On October 4, 2000, the Company approved a stockholder rights plan to protect
stockholders in the event of an unsolicited attempt to acquire the Company in a
manner that would not be in the best interests of its stockholders. This
stockholders rights plan could have the effect of making it more difficult for a
third party to acquire, or of
-7-
discouraging a third party from attempting to acquire, control of the Company.
The Company's Board of Directors is also classified into three classes of
directors serving staggered three-year terms. Such classification of the Board
of Directors expands the time required to change the composition of a majority
of directors and may tend to discourage a proxy contest or other takeover bid
for the Company. The issuance of common stock under a stockholder rights plan
could decrease the amount of earnings and assets available for distribution to
the holders of the Company's common stock or could adversely affect the rights
and powers, including voting rights, of the holders of the Company's common
stock. In certain circumstances, such issuance could have the effect of
decreasing the market price of the Company's common stock.
DIFFICULTY IN MANAGEMENT OF GROWTH.
The Company may experience a period of rapid growth that could place a
significant strain on its resources. The Company's ability to manage growth
successfully will require the Company to continue to improve its operational,
management and financial systems and controls as well as to expand its work
force. A significant increase in the Company's customer base would necessitate
the hiring of a significant number of additional customer care and technical
support personnel as well as computer software developers and technicians,
qualified candidates for which, at the 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 acquisitions of complementary service or
product lines, technologies, or businesses. Future acquisitions by the Company
could result in potentially dilutive issuance of equity securities, the
incurrence of debt and contingent liabilities, and amortization expenses related
to goodwill and other intangible assets, any of which could materially adversely
affect the Company's business, operating results, and financial condition. In
addition, acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies, services, and products of the
acquired companies, the diversion of management's attention from other business
concerns, risks of entering markets in which the Company has no or limited
direct prior experience, and the potential loss of key employees of the acquired
company. From time to time, the Company evaluates potential acquisitions of
businesses, services, products, or technologies. The Company has no present
commitments or agreements with respect to any material acquisition of
-8-
other businesses, services, products, or technologies. In the event that such an
acquisition was to occur, however, there can be no assurance that the Company's
business, operating results, and financial condition would not be materially
adversely affected.
UNLIKELY PAYMENT OF DIVIDENDS.
The Company has paid no cash dividends and has no present plan to pay cash
dividends, intending instead to reinvest its earnings, if any. However, payment
of future cash dividends will be determined from time to time by its board of
directors, based upon its future earnings, financial condition, capital
requirements and other factors. The Company is not presently subject to any
restriction on its present or future ability to pay such dividends.
DEPENDENCE UPON CONTRACTS WITH BILLERS.
The Company's business is dependent upon performing under the terms of
agreements with billers. Although the Company is unaware of any circumstance
that would prevent the operational ability to perform these agreements, there
can be no assurance that the Company might not be able to fully perform under
these agreements or that other factors may prevent billers from processing
billing information through the Company.
DEPENDENCE UPON CONTRACTS WITH TRADING PARTNERS.
The Company's business is dependent upon executing and maintaining agreements
with distribution and payment partners such as CheckFree Services Corporation
and Paymentech, Inc. to provide dependable financial services for customers of
billers. Such financial services include ACH processing through the 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 distribution or payment partners will
be able to perform under these agreements in the future.
ANTICIPATED BILLING SYSTEM EXPENDITURES.
To facilitate and support the growth anticipated in its business, the Company
plans to make certain expenditures in its operations over the next one to three
years. These expenditures are expected to be made in the areas of software
development, licensing, hardware and related staffing. The Company believes that
it will be able to fund these expenditures with internally generated funds and
financing, but there can be no assurance that such funds will be generated or
spent in these areas.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE.
This private placement memorandum 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 information currently
available to the Company's management. When used in this document, the words
"anticipate," "believe," "estimate," "expect," and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company
-9-
with respect to future events and are subject to certain risks, uncertainties
and assumptions, including the risk factors described in this private placement
memorandum. 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.
THE COMPANY
We provide electronic bill presentment and payment ("EBPP") and related services
to companies generating recurring paper-based bills. EBPP is the process of
presenting a bill in a secure environment on the Internet and facilitating
payment of the bill utilizing an electronic transfer of funds. We provide a
turnkey outsourcing solution that enables our customers to offer EBPP services
to their customers. Our solution also enables our customers to utilize the EBPP
channel to enhance business, Internet and customer relationship management
strategies by establishing an interactive, online relationship with their
customers, creating additional revenue streams, increasing branding
opportunities, enhancing customer service and reducing the costs associated with
customer care and the billing function. Through the implementation of our
complete solution, we become our customers' single point of contact for
developing, implementing and managing their entire EBPP channel.
Our services combine our industry knowledge and expertise as well as state of
the art technology components (both hardware and software) to offer a complete
outsourced solution to our customers. We use certain proprietary components that
we have integrated with third-party, "best-of-breed" hardware and software
platforms to offer our customers a scalable, branded and secure EBPP solution.
All of the technology components of our solution have been integrated and are
operational. We have designed our system so that it is reliable, flexible, and
can easily be expanded to meet growth demands without significant cost or
changes. Our modular solution allows us to work with our customers to build a
customized EBPP solution tailored to their specific needs. The services we offer
include:
o Internet billing clearinghouse services for EBPP;
o Electronic publishing services for online statement delivery;
o Internet-enabled, interactive customer care center operation;
o Professional consulting services for billing organizations offering
in-house bill presentment, and;
o Gateway services for billers who already have an in-house EBPP system
with limited distribution points, a solution to deliver bills to
virtually any distribution point across the Internet.
To enable us to offer the most comprehensive solution to our customers, we have
entered into partnership agreements with many significant EBPP and
Internet-based services companies, including Bank of America Corporation, Bank
One, BlueGill Technologies, Inc., CheckFree Corporation (including the
operations of CheckFree i-Solutions), International Business Machines
Corporation, MasterCard International, Metavante and Wells Fargo. We believe
that these partnerships, by allowing us to outsource certain components of our
solution, will
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enable us to provide more flexibility, higher quality and potentially lower cost
services to our customers than if we were to provide these components ourselves.
We currently market our services through a direct sales force and through
organizations that resell our services to their clients and prospects. To date,
we have billing relationships representing 112 billers who send over 3.1 billion
paper-based bills annually (or approximately 15.5% of the total annual bills
produced in the United States). These customers include AFSA Data Corporation,
AT&T Corporation, Chevron, Waste Management, Sallie Mae Corporation and Time
Warner Cable. Of these customers, 96 are in a full production environment and 16
are in various stages of implementation.
A major component of our growth strategy involves not only obtaining new
customers, but also actively assisting these companies in developing a strategy
designed to encourage the highest possible acceptance by the consumer. This
includes assigning an account manager to each customer to assist in developing a
marketing strategy aimed at maximizing consumer adoption of the EBPP services.
Our objective is to positively influence consumer adoption rates for each
customer. To date, we have seen positive results in adoption rates as a result
of this initiative.
Our stock is traded on the NASDAQ National Market under the symbol BLLS. Our
corporate offices are located at 211 North Loop 1604 East, Suite 200, San
Antonio, Texas, 78232. Our phone number is (210) 402-5000.
USE OF PROCEEDS
The shares covered by this prospectus are being offered by the selling security
holder and not by us. Therefore, we will not receive proceeds from the sale of
shares.
RECENT TRANSACTIONS
On July 25, 2002, we completed a transaction with Laurus Master Fund, Ltd.,
pursuant to which Laurus made a $1.5 million investment in us in exchange for a
7% convertible note and a three-year warrant to purchase 300,000 shares of our
common stock at exercise prices of $0.936 for the first 150,000 shares, $0.975
for the next 50,000 shares, and $1.17 for the remaining 100,000 shares. We
intend to use the proceeds of the investment for general corporate purposes.
Laurus may convert the convertible note at any time into shares of our common
stock at a fixed conversion price of $0.78, subject to certain restrictions in
the purchase agreement. We may pay the principal and interest on the convertible
note, which has a one-year term, in cash, shares of our common stock or a
combination of cash and stock, except prior to the date of this prospectus we
must make such payments solely in cash unless Laurus consents to payment in
stock. If we choose to use our common stock to pay the note, the conversion
price will be the
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lesser of (i) $0.78 and (ii) 88% of the average of the 7 lowest closing prices
during the 22 trading days prior to the date we give notice of payment. We make
no payments under the note until November 1, 2002, at which time we will pay
interest and one-ninth of the principal on the first business day of each
calendar month and on the maturity date of July 1, 2003.If the monthly payments
are made in cash, the amount paid will be 105% of the monthly amount due. We
granted Laurus a security interest in our assets.
We expect to record a debt discount as a result of the issuance of the warrant
to Laurus of approximately $259,000, which amount will be charged to interest
expense over the term of the convertible note using the effective yield method.
Furthermore, upon the date of this prospectus, we expect to record an additional
debt discount as a result of the beneficial conversion feature of approximately
$283,000, which amount will be charged to interest expense at the date of
issuance.
Laurus contractually agreed to restrict its ability to convert the convertible
note and/or exercise its warrants and receive shares of our common stock such
that the number of shares of common stock held by it and its affiliates after
such conversion and/or exercise does not exceed 4.9% of the then issued and
outstanding shares of our common stock. However, in the event we redeem the
convertible note, default on the note, and other limited circumstances, the 4.9%
limitation shall not apply.
We also agreed to file with the Securities and Exchange Commission, and have
declared effective by November 25, 2002, a registration statement registering
the resale of the shares of our common stock issuable to Laurus upon conversion
or payment of the note and exercise of the warrant.
THE SELLING SECURITY HOLDER
One of our security holders may sell, from time to time, an estimated 4,146,154
shares of our common stock pursuant to this prospectus, including 300,000 shares
of our common stock issuable upon the exercise of a warrant and an estimated
3,846,154 shares of our common stock (which represents 200% of the shares
obtained upon conversion at the fixed conversion price of $0.78), and may be
issued to the selling security holder upon either the conversion of a
convertible note or issuance by us as payment of interest and/or principal of a
convertible note. The table below identifies the selling security holder and
indicates the number of shares that the selling security holder may sell
pursuant to this prospectus.
----------------------------------------------- --------------------------- ----------------------------
NAME OF SELLING SECURITY HOLDER NUMBER OF SHARES PERCENT OF CLASS OWNED
BENEFICIALLY OWNED PRIOR AFTER SALE
TO SALE
----------------------------------------------- --------------------------- ----------------------------
Laurus Master Fund, Ltd. (1) 4,146,154(2) 0
----------------------------------------------- --------------------------- ----------------------------
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
Laurus Capital Management, L.L.C., a Delaware limited liability company, may be
deemed a control person of the shares owned by Laurus
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Master Fund, Ltd. David Grin and Eugene Grin are the principals of Laurus
Capital Management, L.L.C.
(2) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling security holder has sole or shared voting power or investment power
and also any shares, which the selling stockholder has the right to acquire
within 60 days. The actual number of shares of common stock issuable upon the
conversion or payment of the convertible note is subject to the future market
price of our common stock, and could be materially less or more than the number
estimated in the table. However the selling stockholder has contractually agreed
to restrict its ability to convert the convertible note or exercise its warrants
and receive shares of our common stock such that the number of shares of common
stock held by it and its affiliates after such conversion or exercise does not
exceed 4.9% of the then issued and outstanding shares of common stock.
PLAN OF DISTRIBUTION
Subject to the restrictions on transfer in the registration rights agreement
with us, the selling security holder may sell shares:
o through the Nasdaq Stock Market, otherwise in the over-the-counter
market, in privately negotiated transactions or otherwise;
o directly to purchasers or through agents, brokers, dealers or
underwriters; and
o at market prices prevailing at the time of sale, at prices related to
the prevailing market prices, or at negotiated prices.
If the selling security holder sells shares through agents, brokers, dealers or
underwriters, such agents, brokers, dealers or underwriters may receive
compensation in the form of discounts, commissions or concessions. This
compensation may be greater than customary compensation.
To the extent required, we will use our best efforts to file one or more
supplements to this prospectus to describe any material information with respect
to the plan of distribution not previously disclosed in this prospectus or any
material change in such information.
LEGAL MATTERS
Certain legal matters relating to the shares of common stock that may be offered
pursuant to this prospectus have been passed upon for us by Loeffler Jonas &
Tuggey LLP, counsel to our company.
-13-
EXPERTS
The consolidated financial statements of the Billserv, Inc. appearing in the
Annual Report (Form 10-K) for the year ended December 31, 2001 have been audited
by Ernst & Young, LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such financial
statements referred to above are incorporated herein by reference in reliance
upon such report given on authority of such firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and special reports, proxy statements, and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York, and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available on the SEC's
Website at "http://www.sec.gov."
The SEC allows us to "incorporate by reference" information from other documents
that we file with them, which means that we can disclose important information
by referring to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 prior to the sale of all the shares covered by this
prospectus:
o Annual Report on Form 10-K for the year ended December 31, 2001, filed
on April 1, 2002;
o Quarterly Report on Form 10-Q for the three months ended March 31,
2002, filed on May 13, 2002;
o Definitive Proxy Statement or Schedule 14A filed April 12, 2002; and
o Our Current Report on Form 8-K dated July 25, 2002, filed on August 1,
2002.
You may request a copy of these or any other filings, at no cost, by writing or
telephoning us using the following contact information:
Billserv, Inc.
Attn: Investor Relations
211 North Loop 1604 East, Suite 200
San Antonio, Texas 78232
210.402.5000
You should rely only on the information incorporated by reference or provided in
this prospectus or any supplement. We have not authorized anyone else to provide
you with different information. You should not assume that the information in
this prospectus or any supplement is accurate as of any date other than the date
on the front of those documents.
-14-
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses in connection with the offering of the shares will be borne by the
registrant and are estimated as follows:
SEC Registration Fee-------------------------- $ 364.63
Legal fees and expenses----------------------- 2,500.00
Accounting fees and expenses------------------ 2,500.00
-----------
Total------------------------------------ $ 5,364.63
(1) Pursuant to Rule 457(c) promulgated by the Commission under the
Securities Act, the registration fee was calculated based upon the
average of the high and low price per share of the Company's common
stock, as reported by the NASDAQ National Market, on August 7, 2002.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers or persons controlling
the Company, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
The Company has agreed to indemnify Laurus, its officers, directors and
constituent partners, if any, and each person controlling (within the meaning of
the Securities Act) Laurus, against all claims, losses, damages or liabilities
(or actions in respect thereof) suffered or incurred by any of them, to the
extent such claims, losses, damages or liabilities arise out of or are based
upon any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus or any related registration statement incident to
this Registration, or any omission (or alleged omission) to state therein a
material fact required to be stated herein or necessary to make the statements
herein not misleading, or any violation by the Company of any rule or regulation
promulgated under the Securities Act applicable to the Company and relating to
actions or inaction required of the Company in connection with any such
Registration. The Company has agreed to reimburse each selling stockholder, its
officers, directors and constituent partners, if any, and each person who
controls Laurus, for any reasonable, documented legal and other expenses
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action.
Laurus has agreed to indemnify the Company, each of its directors and officers,
each placement agent and underwriter, if any, of the Company's securities
covered by this Registration Statement, each person who controls the Company or
such underwriter within the meaning of the Securities Act, against all claims,
losses, damages and liabilities (or actions in respect thereof) suffered or
incurred by any of them and arising out of or based upon any untrue statement
(or alleged untrue statement) of a material fact contained in this
-15-
Registration Statement or related prospectus, or any omission (or alleged
omission) to state herein a material fact required to be stated herein or
necessary to make the statements herein not misleading, but solely to the extent
that either of the foregoing occurs in reliance upon and conformity with
information provided by Laurus expressly for use in connection with any such
Registration, or any violation by Laurus of any rule or regulation promulgated
under the Securities Act applicable to Laurus and relating to actions or
inaction required of Laurus in connection with any such Registration and will
reimburse the Company, such directors, officers, partners, persons, placement
agent, underwriters and controlling persons for any reasonable, documented legal
and other expenses incurred in connection with investigating or defending any
such claim, loss, damage, liability or action.
ITEM 16. EXHIBITS
See Exhibit Index immediately following the signature page hereof.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post- effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement; provided,
however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 of 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities
-16-
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions referred to in Item 15 hereof, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Antonio, State of Texas, on this 9th day of
August, 2002.
Billserv, Inc.
By: /s/ Terri A. Hunter
----------------------------------------
Terri A. Hunter
Director, Executive Vice President and
Chief Financial Officer
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POWER OF ATTORNEY
We, the undersigned officers and directors of Billserv, Inc., hereby severally
constitute and appoint Michael R. Long and Louis A. Hoch, and each of them
singly, our true and lawful attorneys, with full power to them in any and all
capacities, to sign any amendments to this Registration Statement on Form S-3
(including any Pre- and Post-Effective Amendments), and any related Rule 462(b)
registration statement or amendment thereto, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact may do or cause to be done by virtue hereof. Pursuant to the
requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities indicated
as of August 9th, 2002.
SIGNATURE TITLE
/s/ Michael R. Long Chairman of the Board and Chief
------------------------------------------ Executive Officer
Michael R. Long
/s/ Louis A. Hoch Director, President and Chief
------------------------------------------ Operating Officer
Louis A. Hoch
/s/ Terri A. Hunter Director, Executive Vice
------------------------------------------ President and Chief Financial
Terri A. Hunter Officer
/s/ Anthony L. Diamond Senior Vice President and Chief
------------------------------------------ Marketing Officer
Anthony L. Diamond
/s/ Marshall N. Millard Secretary, Senior Vice President
------------------------------------------ and General Counsel
Marshall N. Millard
/s/ E. Scott Crist Director
------------------------------------------
E. Scott Crist
/s/ Peter G. Kirby Director
------------------------------------------
Peter G. Kirby
/s/ Richard B. Bergman Director
------------------------------------------
Richard B. Bergman
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
5.1 Opinion of Loeffler, Jonas & Tuggey LLP. Filed herewith.
23.1 Consent of Ernst & Young, LLP, independent auditors to the registrant.
Filed herewith.
23.2 Consent of Loeffler, Jonas & Tuggey LLP (contained in Exhibit 5.1).
-18-
24.1 Power of Attorney (included on the signature page of this Registration
Statement).
EXHIBIT 5.1
LOEFFLER JONAS & TUGGEY LLP
755 EAST MULBERRY, SUITE 200
SAN ANTONIO, TEXAS 78212
August 9, 2001
Billserv, Inc.
211 North Loop 1604, Ste. 100
San Antonio, TX 78232
Re: Registration Statement on Form S-3
----------------------------------
Gentlemen:
We have been advised that on or about August 9, 2002, Billserv, Inc., a
Nevada corporation (the "Company"), expects to file under the Securities Act of
1933, as amended (the "Act") with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-3 (the "Registration
Statement"). Such Registration Statement relates to the offering (the
"Offering") of up to 3,846,154 shares of the Company's stock, $.001 par value
(such class of stock being hereafter called the "Common Stock") and a Warrant to
purchase 300,000 additional shares of the Company's Common Stock (the "Warrant
Shares"). The Common Stock and the Warrant Shares are collectively referred to
herein as the "Offered Securities." This firm has acted as counsel to you in
connection with the preparation and filing of the Registration Statement and you
have requested our opinion with respect to certain legal aspects of the Offering
of the Offered Securities.
In rendering our opinion, we have participated in the preparation of the
Registration Statement and have examined and relied upon the original or copies,
certified to our satisfaction, of such documents and instruments of the Company
as we have deemed necessary and have made such other investigations as we have
deemed appropriate in order to express the opinions set forth herein. In our
examinations, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals, and the conformity
to original documents of all documents submitted to us as certified or
reproduction copies. In addition, we have assumed and have not verified the
accuracy of factual matters of each document we have reviewed.
As to certain questions of fact material to this opinion, we have relied,
to the extent we deem reasonably appropriate, upon the representations or
certificates of officers or directors of the company.
Based upon the following examination and subject to the comments and
assumptions as noted below, we are of the opinion as follows:
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1) The sale of the Common Stock and the Warrant Shares has been duly
authorized;
2) The Common Stock has been duly authorized and are validly issued,
fully paid and nonassessable; and
3) The Warrant Shares have been duly authorized and when issued upon such
exercise in accordance with the terms of the Warrant Agreement at the
price therein provided, will be validly issued and fully paid and
nonassessable.
Insofar as the foregoing opinions relate to the legality, validity, binding
effect or enforceability of any agreement or obligations of the Company, (i) we
have assumed that each party to such agreement or obligation has satisfied those
legal requirements that are applicable to it to the extent necessary to make
such agreement or obligation enforceable against it; (ii) such opinions are
subject to applicable bankruptcy, insolvency, reorganization, liquidation,
receivership, fraudulent conveyance or similar laws, now or hereafter in effect,
relating to creditors' rights generally, and (iii) such opinions are subject to
the general principals of equity, including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing (regardless of whether
considered in a proceeding at law or in equity).
This opinion is limited in all respects to the laws of the State of Nevada
and the State of Delaware. We do not purport to be admitted to practice in the
State of Nevada or the State of Delaware and for the purposes of rendering the
opinions set in this letter we have assumed that the applicable laws of the
State of Nevada and the State of Delaware are the same as the laws of the State
of Texas.
We bring to your attention the fact that this legal opinion is an
expression of professional judgment and not a guaranty of results. This opinion
is given as of the date hereof, and we assume no obligation to update or
supplement such opinion to reflect any facts or circumstances that may hereafter
come to our attention or any changes in laws or judicial decisions that may
hereafter occur.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving such consent, we do not admit that we have
come within the category of persons whose consent is required by the Section 7
of the Act or the rules and regulations of the Commission thereunder.
Respectfully submitted,
LOEFFLER, JONAS & TUGGEY, LLP
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