SCHEDULE 14A INFORMATION

                    Proxy Statement Pursuant to Section 14(a)
                     of the Securities Exchange Act of 1934

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Filed by a partyParty other than the Registrant / /|_|

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/X/|_|  Preliminary Proxy Statement
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     14a-6(e)(2))
/ /|X|  Definitive Proxy Statement
/ /|_|  Definitive Additional Materials
/ /|_|  Soliciting Material Pursuant to Sectionss. 240.14a-11(c) or ss. 240.14a-12

                           Billserv, Inc
- --------------------------------------------------------------------------------Payment Data Systems, Inc.
                (Name of Registrant as Specified In Itsin its Charter)
      - -----------------------------------------------------------------------------------------------------------------------------------------------------
     (Name of Person(s) Filing Proxy Statement if other than the Registrant)

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     (1)1.   Title of each class of securities to which transaction applies:
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                                       1.


                           BILLSERV,PAYMENT DATA SYSTEMS, INC.
                    NOTICE OF SPECIALANNUAL MEETING OF STOCKHOLDERS
                                  JULY 14, 2003

A specialJUNE 22, 2004

The annual meeting of stockholders of Billserv,Payment Data Systems, Inc. (the "Company")
will be held at the principal offices of the Company located at 211 North Loop 1604 East,12500 San Pedro,
Suite 200,120, San Antonio, Texas, 78232,78216, on Monday, July 14, 2003,Tuesday, June 22, 2004, at 9:3010:00 a.m.,
C.D.T.,Central Time, (the "Special"Annual Meeting") for the following purposes:

     1.   To elect one Directordirector to serve until the next Annual Meeting2007 annual meeting of
          stockholders and until his successor is duly elected and qualified.stockholders.

     2.   To approve an amendment to the sale of substantially all assets of the Company.1999 Comprehensive Employee Stock Plan.

     3.   To grant authorityapprove an amendment to the Directors to change the name of the Company.1999 Non-Employee Director Plan.

     4.   To ratify the appointment of the independent auditors of the Company.

     5.   To transact any other business that properly comes before the meeting.

Stockholders of record at the close of business on June 9, 2003April 23, 2004 are entitled
to notice of, and to vote at, the SpecialAnnual Meeting or any adjournment thereof (the
"Record Date").

If you cannot attend the SpecialAnnual Meeting in person, please datesign and executedate the
accompanying Proxy and return it promptly to the Company. IfThis way, your shares
will be voted as you direct even if you can't attend the Special Meeting, you may revoke your Proxy and vote in person if you desire to
do so, but attendance at the Special Meeting does not of itself serve to revoke
your Proxy.meeting.

MICHAEL R. LONG
Chief Executive Officer



WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE PROVIDE YOUR PROXY
BY COMPLETING, SIGNING, DATING, AND PROMPTLY MAILING THE ACCOMPANYING PROXY IN
THE ENCLOSED ENVELOPE SO THAT YOUR SHARES WILL BE REPRESENTED.



                                       2.


                               
GENERAL INFORMATION Q. WHO IS SOLICITING MY PROXY? for Future Operations After the Proposal Sale." A. The Board of Directors of Billserv, Inc. Q. HOW DO I KNOW IF THE COMPANY IS RECEIVING FAIR VALUE FOR THE ASSETS? Q. WHERE AND WHEN IS THE SPECIAL MEETING? A. Based on a variety of factors including (i) the A. 9:30 a.m. C.D.T., Monday, July 14, 2003, at the Company's overall goalsGENERAL INFORMATION Q. WHO IS SOLICITING MY PROXY? A. The Board of Directors of Payment Data Systems, Inc. Q. WHERE AND WHEN IS THE ANNUAL MEETING? A. 10:00 a.m., Central Time, Tuesday, June 22, 2004, at the principal offices of the Company located at 12500 San Pedro, Suite 120, San Antonio, Texas, 78216. Q. WHAT AM I VOTING ON? A. Management of the Company is seeking the authorization of the stockholders to elect one Director to the Board of Directors of the Company, approve an amendment to the 1999 Comprehensive Employee Stock Plan to increase the number of shares of Common Stock available under that plan to 10,000,000, approve an amendment to the 1999 Non-Employee Director Plan to increase the number of shares of Common Stock available under that plan to 1,500,000 and future business plans, (ii) principal offices of the Company located at 211 North the current financial condition and future prospects Loop 1604 East, Suite 200, San Antonio, Texas, 78232. for the Company, and (iii) the survey of limited proposed alternatives to the transaction, the Board Q. WHAT AM I VOTING ON? believes that the consideration to be received from Saro, Inc. for the assets is fair. A. Management of the Company is seeking the authorization of the stockholders to elect one Director to the Board Q. WILL ANY OF THE MONEY RECEIVED FROM THE TRANSACTION BE of Directors of the Company, sell substantially all of DISTRIBUTED TO THE COMPANY'S STOCKHOLDERS? the assets of the Company to Saro, Inc., a wholly owned subsidiary of CyberStarts, Inc. (the "Asset Purchase A. No. The Company intends to use most of the Transaction"), change the name of the Company, and consideration received in the Asset Purchase ratify the appointment of the Company's independent Transaction to discharge the Company's debts with its auditors. creditors, as described below. The remaining consideration from the Asset Purchase Transaction will Q. WHY SHOULD THE COMPANY SELL THE ASSETS? be used to fund the continuing and redefined operations of the Company after the Asset Purchase Transaction. A. The Board of Directors of the Company has thoroughly See below the discussion on "Use of Proceeds; Plans for considered the advantages and disadvantages of the Future Operations After the Proposal Sale." Asset Purchase Transaction at this time. As described in greater detail in this Proxy Statement, the Board Q. WILL STOCKHOLDERS HAVE APPRAISAL RIGHTS? believes that it is in the best interests of the stockholders and this Company to convert the assets of A. No. Stockholders of the Company will not have appraisal the Company into cash and redeploy that cash in rights as a result of the Asset Purchase Transaction. connection with the Company's redefined business plan. See below the discussion on "Use of Proceeds; Plans Q. WHAT SHOULD STOCKHOLDERS DO NOW? 3.
A. Stockholders should mail their signed and dated proxy card in the enclosed envelope, as soon as possible, so that their shares will be represented at the SpecialAnnual Meeting. Q. CAN STOCKHOLDERS CHANGE THEIR VOTE AFTER THEY HAVE MAILED A SIGNED PROXY CARD? A. Yes. Stockholders can change their vote in one of three ways at any time before their proxies are used. First, stockholders can revoke their proxies by written notice. Second, stockholders can complete new, later-dated proxy cards. Third, stockholders can attend the stockholders' meeting and vote in person. Q. WHOM SHOULD STOCKHOLDERS CALL WITH QUESTIONS? Stockholders who have questions about the materials in this Proxy Statement should call Michael R. Long, the Company's Chief Executive Officer, at (210) 402-5005. 4.249-4040. 3. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Proxy Statement contains forward-looking statements including statements containing the words "believes," "anticipates," "expects," "intends" and words of similar import. These statements involve known and unknown risks and uncertainties that may cause the Company's actual results or outcomes to be materially different from those anticipated and discussed herein. Important factors that the Company believes might cause such differences include: (1) concentration of the Company's assets into one industry segment; (2) the nature of the Company's business (as defined herein); (3) the impact of changing economic conditions; (4) the actions of competitors, including pricing and new product introductions; and (5) those specific risks that are discussed in the cautionary statements accompanying the forward-looking statements in this Proxy Statement and in the Risk Factors detailed in the Company's previous filings with the Securities and Exchange Commission (the "Commission").Commission. In assessing forward-looking statements contained herein, stockholders are urged to read carefully all cautionary statements contained in this Proxy Statement and in those other filings with the Securities and Exchange Commission. 4. BILLSERV,PAYMENT DATA SYSTEMS, INC. PROXY STATEMENT INTRODUCTION This Proxy Statement is furnished in connection with the solicitation of Proxies by and on behalf of the Board of Directors of the Company for use at the Special Meeting of Stockholders to be held on July 14, 2003 (the "Special Meeting"THIS PROXY STATEMENT IS FURNISHED IN CONNECTION WITH THE SOLICITATION OF PROXIES BY AND ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY FOR USE AT THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JUNE 22, 2004 (THE "ANNUAL MEETING") or any adjournment thereof.OR ANY ADJOURNMENT THEREOF. This Proxy Statement, the Notice of the SpecialAnnual Meeting and the accompanying Proxy are being mailed to stockholders on or about June 19, 2003.May 3, 2004. The Company's principal executive offices are located at 211 North Loop 1604 East,12500 San Pedro, Suite 200,120, San Antonio, Texas, 78232.78216. As to all matters that may come before the SpecialAnnual Meeting, each stockholder will be entitled to one vote for each share of the Company's Common Stock of the Company held by him or her at the close of business on the Record Date. The holders of aA majority of the shares ofissued and outstanding Common Stock of the Company presentedpresent in person or by proxy and entitledat the Annual Meeting, regardless of whether the proxy has authority to vote will constituteon all matters, constitutes a quorum for the transaction of business at the SpecialAnnual Meeting. Abstentions and broker non-votes will be counted for purposes of determining the presence of a quorum. As of the Record Date, there were 20,722,65621,495,181 shares of Common Stock of the Company issued and outstanding. The purposenominee for Director will be approved by a plurality of the Specialvotes cast at the Annual Meeting. All other matters subject to a vote of stockholders at the Annual Meeting is to (a) elect one individual to serve as a Class II Directorshall be approved upon receiving the vote of 10 percent of the Board of Directors whose term will expirequorum at the 2006 Annual Meeting entitled to vote on that matter. If you sign, date, and return your proxy but do not mark your voting preference, the individuals named as proxies herein will vote your Common Stock FOR (1) the election of the Stockholdersnominee for Director, (2) the approval of the Company, (b) approveamendment to the Asset Purchase Transaction, (c) approve changing1999 Employee Comprehensive Stock Plan, (3) the nameapproval of the Company from Billserv, Inc.amendment to Payment Data Systems, Inc., and (c) ratify the appointment1999 Non-Employee Director Plan, (4) the ratification of ErnstAkin, Doherty, Klein & Young LLPFeuge, P.C. as the independent auditors of the Company for the year ending December 31, 2002.2004, as applicable. The purpose of the Annual Meeting is to (a) elect one individual to serve as a Class I Director of the Board of Directors whose term will expire at the 2007 Annual Meeting of the Stockholders of the Company, (b) approve an amendment to the 1999 Comprehensive Employee Stock Plan, as amended, to increase the number of shares of Common Stock available under that plan to 10,000,000, (c) approve an amendment to the 1999 Non-Employee Director Plan, as amended, to increase the number of shares of Common Stock available under that plan to 1,500,000, and (d) ratify the appointment of Akin, Doherty, Klein & Feuge, P.C. as the independent auditors of the Company for the year ending December 31, 2004. The Company is not aware at this time of any other matters that will come before the SpecialAnnual Meeting. The nominee for Director of the Company and appointment of the independent auditor will be approved upon receiving 10% of the votes having voting power and cast at the Special Meeting. The Asset Purchase Transaction and the Company name change will be approved upon receiving the vote of a majority of the issued and outstanding Common Stock of the Company authorized to vote on such matters. All shares of Common Stock represented by properly executed proxies whichProxies that are returned and not revoked will be voted in accordance with the instructions, if any, given therein. Broker non-votes and proxies containing no instructions will be counted for purposes of deciding quorum for the Special Meeting and will be countedtherein or as a vote FOR all proposals describedotherwise specifically indicated herein. A form of Proxy for use at the Special Meeting is also enclosed. A stockholder may revoke any such Proxy at any time before it is exercised by either giving written notice of such revocation to the Secretary of the Company or submitting a later-dated Proxy to the Company prior to the SpecialAnnual Meeting. A stockholder attending the SpecialAnnual Meeting may revoke his or her Proxy and vote in person if he or she desires to do so, but attendance at the SpecialAnnual Meeting will not of itself revoke the Proxy. 6. VOTING SECURITIES SECURITIES OUTSTANDING On the Record Date there were 20,722,65621,495,181 shares of the Common Stock of the Company issued, outstanding and entitled to vote.vote at the Annual Meeting. The Company has no other voting securities outstanding. Each stockholder of record is entitled to one vote per share of Common Stock held on all matters submitted to a vote of stockholders. Cumulative voting is prohibited. SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERSCERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, to our knowledge, certain information regardingconcerning the beneficial ownership of theour Common Stock as of June 9, 2003 ofApril 5, 2004 by each personstockholder known to the Company to beneficially own more than five percent of the Common Stock.
-------------------------- COMMON STOCK ------------------------------------------------------------------------------------------- NUMBER OF SHARES BENEFICIALLY PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) CLASS (1) ------------------------------------------------------------------------------------------- CheckFree Investment Corporation 3,168,242 15.3%
The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of June 9, 2003 of (i) each Director or Director nominee of the Company; (ii) each executive officer of the Company; and (iii) all Directors, Director nominees and executive officers of the Company as a group:
---------------------------------------- ----------------------------------------------- NUMBER OF SHARES PERCENT OF NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) CLASS (1) -------------------------------------------------------------------------------------- Michael R. Long 900,002 4.3% Louis A. Hoch 936,368 4.5% Terri A. Hunter 89,833 0.4% Anthony L. Diamond 68,168 0.3% Marshall N. Millard 216,131 1.0% Peter Kirby 13,267 0.1% Group, 6 persons 2,223,819 10.7%
The information in this table is based on information supplied by Directors, Director nominees, and executive officers of the Company on Form 3, 4 or 5 and on any Schedule 13G filed with the Securities and Exchange Commission. A person is deemedus to be (i) the beneficial owner of shares if such person, either alone or with others, hasmore than 5% of the power to vote or to dispose of such shares. Shares beneficially owned by a person includeoutstanding shares of Common Stock, (ii) each current director, (iii) each of the executive officers named in 5. the Summary Compensation Table who were serving as executive officers at the end of the 2003 fiscal year and (iv) all of our directors and current executive officers as a group: AMOUNT AND NATURE OF NAME BENEFICIAL OWNERSHIP PERCENT OF CLASS (1) - -------------------- ---------------------- -------------------- 5% STOCKHOLDERS CheckFree Investment Corporation 3,168,242(2) 14.8% 2920 Green Valley Road Building 3, Suite 321-19 Henderson, NV 89014 NAMED EXECUTIVE OFFICERS AND DIRECTORS Michael R. Long 1,490,001(3) 6.9% Louis A. Hoch 1,468,034(4) 6.8% Peter G. Kirby 118,600(5) 0.6% All executive officers and directors as a group (3 people) 3,076,635(6) 14.3% (1) Based on a total of 21,445,181 shares of Common Stock issued and outstanding on April 5, 2004. (2) Based on a Schedule 13(g)/A filed on February 2, 2003, the most recent date for which the personinformation is available. (3) Includes 898,334 shares that Mr. Long has the right to acquire beneficial ownership within 60 days, including underupon the exercise of stock optionsoptions. (4) Includes 765,000 shares that were exercisable on June 6, 2003 orMr. Hoch has the right to acquire upon the exercise of stock options. (5) Includes 118,000 shares that become exercisable within 60 days after June 6, 2003. Also,Mr. Kirby has the percentages calculated above are basedright to acquire upon issuedthe exercise of stock options. (6) The address of all individual directors and outstanding shares as of June 6, 2003. Unless otherwise indicated in the footnotes below, the persons and entities named in this table have sole voting and dispositive power with respect to all shares beneficially owned, subject to community property laws where applicable. 7. executive officers is c/o Payment Data Systems, Inc., 12500 San Pedro, Suite 120, San Antonio, Texas 78216. PROPOSAL 1 ELECTION OF DIRECTORS The Board of Directors of the Company has currently set the number of Directors constituting the whole board at seven.DIRECTOR As established by the Company's Bylaws, thesethe Directors are divided into three classes serving staggered three-year terms. The Directors were re-classified in 2001 as a result of the increased number of Directors serving on the Board. As of June 9, 2003,April 23, 2004, Michael R. Long, Louis A. Hoch Terri A. Hunter, and Peter G. Kirby are the only members of the Board of Directors of the Company. Richard B. Bergman, Mitchell D. Hovendick, and E. Scott CristTerri A. Hunter resigned their positionsher position on the Board of Directors in earlyAugust 2003, each citingin connection with her resignation as Executive Vice President and Chief Financial Officer of the Company's decision not to renew director and officer liability insurance as their reason for resignation. Mr. Hovendick was appointed to the Board of Directors in 2002 upon the resignation of RogerCompany. Michael R. Hemminghaus from the Board of Directors. Louis A. HochLong is the only nominee for election to the Board of Directors of the Company. Mr. Hoch'sLong 's term on the Board of Directors, if elected thereto, will expire on the 20062007 Annual Meeting of the Stockholders of the Company. If Mr. Hoch is elected, three vacancies will remain on the Board of Directors. The individuals named as proxies will vote the enclosed Proxy forFOR the election of the nominee unless you direct them to withhold your vote. If the nominee becomes unable to serve as a Director before the SpecialAnnual Meeting (or decides not to serve), the individuals named as proxies may vote for a substitute or may reduce the number of members of the Board. Cumulative voting is not prohibited pursuant to Section 78.360 of the Nevada Revised Statutes. Below are the names and ages of the Directors and the nominee for Director, the years they became Directors, their principal occupations or employment for at least the past five years and certain of their other directorships, if any. 6. CLASS III DIRECTOR NOMINEE FOR ELECTION TO A THREE-YEAR TERM ENDING WITH THE 2007 ANNUAL MEETING OF THE STOCKHOLDERS OF THE COMPANY MICHAEL R. LONG. Age 59. Mr. Long has been our Chief Executive Officer, Chairman of the Board and Director since July 1998. In addition, Mr. Long has been our Chief Financial Officer since September 2003. Mr. Long has more than thirty years of senior executive management and systems development experience in six publicly traded companies, as well as operating a systems consulting business. Before assuming the top position at Payment Data Systems, Mr. Long was Vice President of Information Technology at Billing Concepts, Inc., the largest third party billing clearinghouse for the telecommunications industry. Mr. Long's career experience also includes financial services industry business development for Anderson Consulting and several executive positions in publicly traded telecommunications and financial services companies. CLASS III DIRECTORS WITH A THREE-YEAR TERM ENDING WITH THE 2005 ANNUAL MEETING OF THE STOCKHOLDERS OF THE COMPANY PETER G. KIRBY, PH.D. SPHR CM. Age 64. Mr. Kirby has been our Director since June 2001. Mr. Kirby distinguished himself in professional and community activities in a career that spans thirty-five years. He is an accomplished public speaker and has provided consulting services to Fortune 100 firms. Mr. Kirby has published numerous works in the fields of management, decision-making and human resources. He has been a director on many university advisory councils and boards and has served on many charitable committees and foundations. Mr. Kirby is currently a tenured professor of Management at Our Lady of the Lake University in San Antonio, Texas, where he has taught for the past fourteen years. CLASS II DIRECTOR WITH A THREE-YEAR TERM ENDING WITH THE 2006 ANNUAL MEETING OF THE STOCKHOLDERS OF THE COMPANY LOUIS A. HOCH. Age 37. A38. Mr. Hoch has been our President, Chief Operating Officer, and Director since July 1998. Mr. Hoch has more than 14fourteen years of management experience in large systems development.development; earning him national recognition as an expert in call centers, voice-systems and computer telephony integration. Mr. Hoch joined the Company as President and Chief Operating Officer in November 1998. Before joining the Company, Mr. Hoch's background has been primarily in the telecommunications industry. 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 U. S.held various key management positions with U.S. Long Distance, inc. and its spin-off company, 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.Anderson Consulting. Mr. Hoch holds a B.B.A.BBA in Computer Information Systems and an M.B.A.MBA in International Business Management, both from Our Lady of the Lake University. He is certifiedUniversity Business School. In 2000 and 2001, he served as a Computer Professional (CCP) by the Institute for Certification of Computing Professionals (ICCP). Mr. Hoch currently serves as a director on the advisory board 8. for Our Lady of the Lake University Business School, and is also an executive lecturer in the school's weekend MBA program. Mr. Hoch is a member of the board of directors of Billserv Australia and Office e-procure, Inc., which provides branded office supply eCommercee-commerce sites for businesses. CLASS I DIRECTOR WITH A THREE-YEAR TERM ENDING WITH THE 2004 ANNUAL MEETING OF THE STOCKHOLDERS OF THE COMPANY MICHAEL R. LONG. Age 58. A Director since 1998. Mr. Long became a Director and Chairman and Chief Executive Officer of the Company in November 1998. Mr. Long has over 29 years of senior executive management and systems development experience in six publicly traded companies, and has successfully operated his own systems consulting business. 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. CLASS III DIRECTORS WITH A THREE-YEAR TERM ENDING WITH THE 2005 ANNUAL MEETING OF THE STOCKHOLDERS OF THE COMPANY TERRI A. HUNTER. Age 40. A Director since 2001. Ms. Hunter joined the Company in April 2000 as its Chief Financial Officer. She possesses over eighteen years of analytical and management experience in finance, accounting, and investor relations for public companies. Most recently, from October 1999 to May 2000, Ms. Hunter was Vice President, Finance and Investor Relations, for Clear Channel Communications, Inc., a global leader in the out-of-home advertising industry with radio, television, and outdoor displays in 37 countries around the world. Ms. Hunter was also employed with U.S. Long Distance, Inc. and its spin-off company, Billing Concepts, Inc., from February 1993 to October 1999, where she lead their financial planning and analysis functions, as well as investor relations. In addition, Ms. Hunter has held various finance and accounting roles with Electronic Data Systems and Cullen/Frost Bankers since her graduation in May 1985 from the University of Texas at Austin. She also serves on the Board of Directors for the San Antonio chapter of the National Investor Relations Institute. PETER G. KIRBY. Age 62. A Director since 2001. Mr. Kirby is a tenured professor of management at Our Lady of the Lake University in San Antonio, Texas, where he has served for the past twelve years. DIRECTORS THAT RESIGNED DURING 2002 AND 2003 RICHARD B. BERGMAN Age 62. A Director since 2001. Mr. Bergman has served as a Director and Partner of Bergman, Igel, Kaplan & Associates, a business consulting firm located in New York, Washington, D.C. and Florida, since 2000. From 1999 to 2000, he served as a consultant for Glass America, an auto glass and commercial glazing company in Chicago, Illinois. From 1989 to 1999, he was a business consultant to numerous companies in various industries. 9. ROGER R. HEMMINGHAUS. Age 65. A Director since 1999. Mr. Hemminghaus was named Chairman Emeritus of Ultramar Diamond Shamrock January 1, 2000. In December 1996 he became Chairman and Chief Executive Officer of Ultramar Diamond Shamrock Corp. following the merger of Diamond Shamrock, Inc. and Ultramar Corporation. Prior to the merger, Mr. Hemminghaus was Chairman, Chief Executive Officer and President of Diamond Shamrock, Inc. After serving four years as a naval officer involved in nuclear power development, Hemminghaus started his career in the refining and marketing industry in 1962 as an engineer for Exxon, USA. Before joining a predecessor company to Diamond Shamrock in 1984, Mr. Hemminghaus held various management positions in the areas of refining, distribution, petroleum products and natural gas. Hemminghaus is on the board of directors of CTS Corporation, Luby's, Inc., Southwest Research Institute, Tandy Brands Accessories, Inc. and Xcel Energy, Inc. He is a past Chairman of the Federal Reserve Bank of Dallas and former Chairman of the National Petrochemicals and Refiners Association. Hemminghaus is the Chairman of the Board of Regents of Texas Lutheran University. E. SCOTT CRIST. Age 37. A Director since 1999. Mr. Crist is Managing Director of Crist Ventures and a general partner of Venture Bridge LP, an early-stage venture capital fund. He is Chairman of the Board of Office e-Procure, Inc., an office supply procurement company utilizing Web-based procurement technologies. He is also the former CEO and founder of Telscape International, Inc., (NASDAQ) an integrated communications company focused on emerging markets. Mr. Crist was formerly President and CEO for Matrix, a telecommunications company that ranked #7 on the INC. MAGAZINE list of the 500 fastest growing private companies in the U.S in 1995. Mr. Crist was named an ENTREPRENEUR OF THE YEAR by CNN/ NASDAQ/Ernst & Young in 1999. He is on the Board of several early-stage technology companies. Mr. Crist has an M.B.A. from the Kellogg School at Northwestern University and a B.S. in Electrical Engineering from NC State University. He is on the faculty at Rice University's Graduate Business School. MITCHELL D. HOVENDICK. A Director since 2002. Mr. Hovendick is vice president of EnCap Investments, a large institutional oil and gas fund. Prior to joining EnCap Investments, Mr. Hovendick spent sixteen years with Phillips Petroleum Company as a petroleum engineer. Mr. Hovendick earned an MBA with a concentration in finance from Rice University's Jones Graduate School of Business and a bachelor's degree in chemical engineering from Texas A&M University, graduating with honors from both schools. Mr. Hovendick is a member of the Independent Petroleum Association of America, the Houston Producers Forum, and a registered professional engineer. RECOMMENDATION OF BOARD OF DIRECTORS The Board of Directors of the Company recommends a vote FOR the nominee for election to the Board of Directors. COMPENSATION OF DIRECTORS Mr. Long and Mr. Hoch and Ms. Hunter receive no compensation for serving on the Board of Directors of the Company due to their status as officers of the Company. 10.In 2003, we did not pay any cash compensation to our independent Directors for their services on our Board of Directors. However, on December 30, 2003, we granted options to purchase 175,000 shares of our Common Stock at an exercise price of $0.14 per share to our independent director, Peter G. Kirby, as compensation for his service as a Director. PROCEEDINGS WITH DIRECTORS, OFFICERS, AND AFFILIATES Beginning in December 2000, the Company pledged certain funds held as money market funds and certificates of deposit to collateralize certain margin loans of four executive officers of the Company (only two of which are currently employed by the Company). These funds were classified as Cash pledged as collateral for related party obligations on the Company's balance sheet at December 31, 2002. The margin loans were from institutional lenders and were secured by shares of the Company's common stock held by these officers. The Company's purpose in 7. Incollateralizing the margin loans was to prevent the sale of the Company's common stock held by these officers while the Company was pursuing efforts to raise additional capital through private equity placements. The sale of the Company's common stock could have hindered the Company's ability to raise capital in such a manner and compromised the Company's continuing efforts to secure additional financing. The total balance of the margin loans guaranteed by the Company was approximately $1.3 million at December 31, 2002. The Company believed it had the unrestricted legal right to use the pledged funds for its operations, if necessary, based on (i) its interpretation of the loan guarantee agreements, (ii) the market price of the Company's stock at the time of the pledge, and (iii) assurances the Company received from one of the institutional lenders that funds would be made available if needed. During the fourth quarter of 2002, the Company provided as compensationsought partial release of the funds for operating purposes, which was denied by the institutional lender, based upon their interpretation of the loan guarantee agreements. In light of this action, the Company recognized a loss on the guarantees of $1,278,138 in the fourth quarter of 2002 and recorded a corresponding payable under related party guarantees on the Company's balance sheet at December 31, 2002. During the quarter ended March 31, 2003, the lenders applied the pledged funds to Mr. Crist, Mr. Hemminghaus, Mr. Kirby, and Mr. Bergman, as non-employee Directorssatisfy the outstanding balances of the loans. The total balance of the margin loans guaranteed by the Company was zero at December 31, 2003. The Company may institute litigation or arbitration concerning these matters, which may result in the assertion of claims by these officers under their employee agreements. The ultimate outcome of this matter cannot presently be determined. On July 25, 2003, certain stockholders of the Company a total(such stockholders being Mike Procacci, Jr., Mark and Stefanie McMahon, Anthony and Lois Tedeschi, Donna and James Knoll, John E. Hamilton, III, William T. Hagan, Samuel A. Fruscione, Dana Fruscione-Penzone, Gia Fruscione, Alicia Fruscione, Joseph Fruscione, Robert Evans, John Arangio, Gary and JoAnne Gardner, Lee and Margaret Getson, G. Harry Bonham, Jr., Gary Brewer, Bob Lastowski, Robert Filipe, Mitchell D. Hovendick, Dr. John Diephold, Joseph Maressa, Jr., and Charles Brennan (collectively, the "Plaintiffs")) commenced legal action against the Company, Ernst & Young, LLP and certain of $8,010the Company's current and former directors (such directors being Louis A. Hoch, Michael R. Long, David S. Jones, Roger Hemminghaus, E. Scott Crist, Peter Kirby, Richard Bergman, and Terri A. Hunter (the "Defendant Directors")) in the District Court of the 45th Judicial District, Bexar County, Texas (the "Suit"). The Plaintiffs allege, as the Suit pertains to the Company, that the Company, acting through the Defendant Directors, misstated in the Company's 2000 and 2001 Form 10-Ks the Company's ability to use for participation in Board meetingsoperational purposes the funds pledged as security for margin loans of certain officers of the Company, as discussed above. The Plaintiffs seek economic and reimbursement for certain out-of-pocket expenses associated therewith.exemplary damages, rescission, interest, attorneys' fees and costs of court. The Company believes the Suit to be without merit, and intends to vigorously defend itself and the Defendant Directors. COMMITTEES OF THE BOARD OF DIRECTORS AND MEETINGS THE AUDIT COMMITTEE The Audit Committee, established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, is currently comprised of our only independent directorsdirector, Mr. Kirby, and it operates under a written charter adopted by the Board of Directors. Mr. Kirby meets the independence standards for independent directors under the rules of the Nasdaq Stock Market published in the Nasdaq Marketplace Rules. The composition of the Audit Committee, the attributes of its members and the responsibilities of the Committee, as reflected in its charter, are intended to be in accordance with applicable requirements for corporate audit committees. The Committee reviews and assesses the adequacy of its charter on an annual basis. As set forth in more detail in its charter, the Audit Committee's purpose is to assist the Board of Directors in its general oversight of the Company's financial reporting, internal control and audit functions. Management is responsible for the preparation, presentation and integrity of the Company's financial statements, accounting and financial reporting principles and internal controls and procedures designed to ensure compliance with accounting standards, applicable laws and regulations. ErnstAkin, Doherty, Klein & Young LLP,Feuge, P.C., the Company's independent auditing firm, is responsible for performing an independent audit of the consolidated financial statements in accordance with generally accepted auditing standards. 8. The Audit Committee members are not professional accountants or auditors, and their functions are not intended to duplicate or to certify the activities of management and the independent auditor, nor can the Audit Committee certify that the independent auditor is "independent" under applicable rules. The Audit Committee serves a board-level oversight role, in which it provides advice, counsel and direction to management and the auditors on the basis of the information it receives, discussions with management and the auditors and the experience of the Audit Committee's members in business, financial and accounting matters. Among other matters, the Audit Committee monitors the activities and performance of the Company's internal and external auditors, including the audit scope, external audit fees, auditor independence matters and the extent to which the independent auditor may be retained to perform non-audit services. The Audit Committee and the Board of Directors have ultimate authority and responsibility to select, evaluate and, when appropriate, replace the Company's independent auditor. The Audit Committee also reviews the results of the internal and external audit work with regard to the adequacy and appropriateness of the Company's financial, accounting and internal controls. Management and independent auditor presentations to and discussions with the Audit Committee also cover various topics and events that may have significant financial impact or are the subject of discussions between management and the independent auditor. In addition, the Audit Committee generally oversees the Company's internal compliance programs. The Audit Committee met four times in relation to the year ended December 31, 2002. 11. In overseeing the preparation of the Company's financial statements, the Audit Committee has had access to the Company's management to review and discuss all financial statements prior to their issuance and to discuss significant accounting issues. Management advised the Audit Committee that all financial statements were prepared in accordance with U.S. generally accepted accounting principles. The Audit Committee has not met with the Company's independent auditorauditors with regard to the audited financial statements of the Company for the year ended December 31, 2002.2003. For the year ended December 31, 2002,2003, the Audit Committee did receive the independent auditor's letter and written disclosures required by the Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees). For the year ended December 31, 2002,2003, the membersonly member of the Audit Committee werewas Mr. Crist, Mr. Kirby, Mr. Bergman, and Mr. Hovendick. As of June 9, 2003, only Mr. Kirby remains on theKirby. The Audit Committee (see "Directors that Resigned During 2002 and 2003" above).met one time in relation to the year ended December 31, 2003. The Company does not have an audit committee financial expert serving on its Audit Committee because the Company has been unable to replace the independent director serving as the audit committee financial expert after his resignation during 2003. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S PREVIOUS FILINGS UNDER THE SECURITIES ACT OR THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), THAT MIGHT INCORPORATE FUTURE FILINGS, INCLUDING THIS PROXY STATEMENT, IN WHOLE OR IN PART, THIS COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION AND THE PERFORMANCE GRAPH ON PAGE 27 SHALL NOT BE INCORPORATED BY REFERENCE INTO ANY SUCH FILINGS. GENERAL. The Company's Board of Directors has established a Compensation Committee with authority to set all forms of compensation of the Company's executive officers, exceptincluding the grant of stock options and restricted shares. The full Board retains authority to administer stock options and restricted shares underMr. Kirby is the termssole member of the Amended and Restated Stock Incentive Plan (including any successor plan) and makes the determination of persons to whom options and restricted shares may be granted.Compensation Committee. COMPENSATION PHILOSOPHY. The Board'sBoard of Director 's compensation philosophy is to reward executive officers for the achievement of short and long-term corporate and individual performance, as measured by the attainment of specific goals for the creation of long-term shareholder value. Also, to ensure that the Company is strategically and competitively positioned for the future, the Compensation Committee has the discretion to attribute significant weight to other factors in determining executive compensation, such as maintaining competitiveness, expanding markets, pursuing growth opportunities and achieving other long-range business and operating objectives. The level of compensation should also allow the Company to attract, motivate, and retain talented executive officers whothat contribute to the long-term success of the Company. The compensation of the chief executive officerChief Executive Officer and other executive officers of the Company is comprised of cash compensation and long-term incentive compensation in the form of base salary and stock options. TOTAL COMPENSATION FOR EXECUTIVES. For 2002,2003, the Company's total compensation for executive officers consisted 9. of the following components: base salary and stock options. In setting 2002 12. 2003 compensation, the Compensation Committee considered the specific factors discussed below: BASE SALARY. In setting the executive officers base salaries, for 2002, the Compensation Committee considers the performance of the executive officers' respective business units, as well as individual performance. Base salaries are targeted to approximate the average base salaries paid to executives of similar companies for each position. To ensure that each executive is paid appropriately, the Compensation Committee considers the executive's level of responsibility, prior experience, overall knowledge, contribution to business results, executive pay for similar positions in other companies, and executive pay within the Company. OPTION PLANS. In addition to the foregoing, executive officers of the Company may be compensated through awards of options to purchase Common Stock of the Company. CHIEF EXECUTIVE OFFICER COMPENSATION Mr. Long's annual base salary for 20022003 was $190,000. He received a total stock option award of 340,000400,000 options granted on December 13, 2002 and December 31, 2002.30, 2003. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION For the year ended December 31, 2002,2003, Mr. Kirby was the membersonly member of the Compensation Committee were Mr. Crist, Mr. Kirby, Mr. Bergman, and Mr. Hovendick.Committee. To carry out its responsibilities, the Compensation Committee met one time during 2002. As2003. THE NOMINATING COMMITTEE The Company considers recommendations for Director candidates from its Directors, officers, employees, shareholders, customers, and vendors. The Board of June 9, 2003, only Mr. Kirby remains onDirectors selects the Compensation Committee. Mr. Hoch serves as an advisory director to Office e-Procure, Inc., an office supply procurement company utilizing Web-based procurement technologies. Mr. Crist is ChairmanDirector candidates slated for election. The Company does not have a Nominating Committee in light of resource allocations made by the Board of Office e-Procure, Inc.Directors in its business judgment. THE ENTIRE BOARD During 2002,2003, the entire Board of Directors of the Company met twelvetwo times for regular and specialAnnual meetings. During this period, each Director attended all meetings of the Board of Directors and any committee on which he or she served. TheIn all other instances in 2003, the Board alsoof Directors acted by unanimous written consent on several occasions.consent. PROPOSAL 2 APPROVAL OF ASSET SALEAMENDMENT TO THE 1999 COMPREHENSIVE EMPLOYEE STOCK PLAN GENERAL On May 19, 2003The Board of Directors proposes to increase the number of shares of Common Stock available under the 1999 Employee Comprehensive Stock Plan (the "Comprehensive Plan")by 5,000,000 for a total of 10,000,000 shares. The material features of the Comprehensive Plan are discussed below, but the description is subject to and is qualified in its entirety by the full text of the Comprehensive Plan, which is attached as ANNEX A to this Proxy Statement. The purpose of the Comprehensive Plan is to advance the interests of the Company by providing additional incentives to attract and Saro, Inc. (the "Purchaser"), a wholly owned subsidiary of CyberStarts, Inc., executed an asset purchase agreement (the "Agreement") wherebyretain qualified and competent officers and employees, upon whose efforts and judgment the Purchaser would purchase substantially allsuccess of the assetsCompany (including its subsidiaries) is largely dependent. In furtherance of this purpose, the Comprehensive Plan authorizes the granting of incentive and non-qualified stock options ("Comprehensive Options") to purchase common stock to qualifying officers, employees and consultants of the Company (the "Purchased Assets""Participants") and assume certain liabilities. In addition, the Comprehensive Plan authorizes the issuance of the Company (the "Assumed Liabilities") (collectively, the "Asset Purchase Transaction"). The Company is expected to receive approximately $4,800,000 from the Purchaser as consideration for the sale of the assets (depending on the sale 13. of the JV (as defined below), $600,000 of the $4,800,000 may be paid in the form of a note or an earnout, as discussed in detail below). Notwithstanding the Closing of the Asset Purchase Transaction, the Company will remain liable for certain indemnity obligations and retained liabilities, as discussed below. THE COMPANY Billserv, Inc. provides Electronic Bill Presentment and Paymentrestricted Common Stock ("EBPP") and related services to companies that generate recurring paper-based bills. EBPP is the process of sending bills to consumers securely through the Internet and processing Internet payment of bills utilizing an electronic transfer of funds. The Company's service offerings are supported by its systems infrastructure that integrates certain proprietary components with third-party hardware and software platforms to offer the Company's customers a scalable, branded and secure EBPP process. The Company currently markets its services through a direct sales force and through organizations that resell the Company's services to their customers and prospects. SARO, INC. Saro, Inc. ("Saro," or the "Purchaser") is a wholly owned subsidiary of CyberStarts, Inc., a financial services technology holding company ("CyberStarts"). The Purchaser's address is 1900 Emery Street NW, Second Floor, Atlanta, GA 30318, and its telephone number is (404) 267-5000. CyberStarts is a technology holding company with a competency in launching and running e-finance businesses. CyberStarts has four majority-owned operating units within the following three market segments: collections, claims, and business-to-business payments. CyberStarts also has a ventures unit to house its non-majority owned investments. USE OF PROCEEDS; PLANS FOR FUTURE OPERATIONS AFTER THE PROPOSED SALE The net proceeds to the Company from the Asset Purchase Transaction are expected to be approximately $4,800,000 (see "Purchase Price" below). From the net proceeds, the Company will pay approximately $3,800,000 to discharge its secured and certain unsecured debt obligations, and $105,000 will be placed in an escrow account to secure any payment of indemnity obligations of the Company to the Purchaser. The remaining proceeds, net of closing costs, (which includes the $600,000 payable as described below) is intended for redeployment and investment in a new company formed by senior management, known as Payment Data Systems, Inc. ("PDS"). PDS is a startup enterprise in the business of 1) processing ACH (Automated Clearing House) transactions such as Accounts Receivable Conversion, also known as Check Truncation, and related transactions such as Point of Sale or Point of Purchase, and Returned Check Re-presentment, 2) processing credit card transactions on behalf of billers or retailers as an Independent Sales Organization or ISO, and 3) creating and supporting WEB transactions (recurring and one-time payments), Customer Service Representative payment transactions, and consumer self-service telephone ("IVR") based payment transactions (the "New Business"). The New Business is intended to provide a unique integrated payments solution ("IPS"Restricted Shares") to Participants. Currently, a rapidly expanding electronic payments industry. Initially,total of 5,000,000 shares of Common Stock are reserved for issuance upon the New Business will be delivered via an outsource solution, but will ultimately include an in-house software offering. On June 2, 2003, PDS and Purchaser entered into an agreement whereby the Company (as a 14. successor to PDS), through its New Business, will be Purchaser's preferred credit card payment processing provider for a periodexercise of two years (with an automatic renewal clause) ("Preferred Provider Agreement"). Further, in accordance with the Company's New Business, the Company anticipates seeking strategic alliances, mergers, and acquisitions of other entities that would permit the Company to achieve synergies and economies of scale in the New Business ("Growth Strategies"). Currently, the Company is in discussions with various business entities regarding implementation of the Growth Strategies. Net proceeds from the sale of the assets will not be distributed to the stockholders; however, following the consummation of the Asset Purchase Transaction, the stockholders of the Company will retain their equity interest in the Company. The Company is also negotiating with senior management concerning appropriate compensation for contributions relating to the New Business. The Company will seek an independent valuation of such contributions before awarding any compensation. BACKGROUND OF THE PROPOSED SALE Since its inception, the Company has experienced a material shortfall from anticipated revenues, leading to a significant decrease in its cash position and a deficit in working capital. At March 31, 2003, the Company's principal source of liquidity consisted of $167,000 of cash and cash equivalents. The Company defaulted under its convertible debt agreement during the fourth quarter of 2002 and was unsuccessful in its attempt to raise additional capital. Consequently,Comprehensive Options. However, the Board of Directors believedproposes to amend the Comprehensive Plan to increase the number of shares available to 10,000,000 shares so that the Company's available cash along with its anticipated revenues would be insufficientCompany can 10. continue to meet its anticipated cash needsuse the Comprehensive Plan to attract and retain Participants. Information about the number of shares of Common Stock authorized for issuance under the foreseeable future. Accordingly, the Company reduced expenditures for operating requirements, including a reductionComprehensive Plan as of 36 employees in its workforce in November 2002. Due to the aforementioned, by FebruaryDecember 31, 2003, the Company began aggressively pursuing strategic alternatives, including investment in or sale of the Company or its primary assets.is as follows:
Weighted-average Number of securities Number of securities to be exercise price remaining available for issued upon exercise of of outstanding future issuance under outstanding options options Comprehensive Plan -------------------------- ----------------- ----------------------- Comprehensive Plan approved by shareholders 4,018,767 $ 0.63 704,233
TERMS AND CONDITIONS The Company contacted Stifel, Nicolaus & Co. ("Broker"), an investment banking companyComprehensive Plan provides that specializes in the sale of small and medium-sized technology businesses. On February 26, 2003, the Company entered into an agreement with Broker who was to contact potential investors and purchasers that might have an interest in investing in or acquiring the Company. No retainer was paid to Broker by the Company. During February 2003, Broker conducted due diligence on the Company, assembled a comprehensive list of potential investors and purchasers of the Company or its assets, which list was compiled from Broker's knowledge of the Company's industry, past Billserv contacts, and Broker's databases. On approximately March 5, 2003, Broker sent 141 executive summaries of the Company's business to potential investors and strategic purchasers. The executive summaries outlined the Company, its business and assets, and its current market and financial position. 15. Of the 141 executive summaries delivered to potential investors and strategic purchasers, only 37 such potential investors and purchasers requested a descriptive memorandum from Broker. The descriptive memorandums contained investment highlights of the Company, a description of the Company's business, benefits that could result from strategic combinations, financial information of the Company, and a list of key personnel of the Company. All potential investors and purchasers receiving a descriptive memorandum were required to execute confidentiality agreements with the Company. Broker continued to maintain personal contact with all potential investors and purchasers during this phase of the sales process. On approximately March 14, 2003, Broker received an indication of interest from CyberStarts and two other potential purchasers. No potential investors indicated an interest in the Company. Each indication of interest expressed a preliminary value the potential purchaser placed on the Company, its method of payment, and whether the prospective purchaser was interested in a stock or asset transaction. CyberStarts' indication of interest was the most favorable to the Company. Of the three indications of interest, only CyberStarts made a final bid on the assets of the Company. On April 16, 2003, the Company and CyberStarts signed a letter of intent for CyberStarts to acquire certain assets of the Company. On May 19, 2003, the Company and Saro, CyberStarts' wholly owned subsidiary, executed the Agreement. THE COMPANY'S REASONS FOR THE PROPOSED SALE; RECOMMENDATION OF THE BOARD OF DIRECTORS As described above, the decision of the Company's Board of Directors shall appoint a committee of two or more directors appointed to enter intoadminister the Agreement followed monthsComprehensive Plan. The committee may, at any time during the term of exploring and analyzing the advantages and disadvantagesComprehensive Plan, grant any Participant an option exercisable for such number of maintainingshares of Common Stock as it shall deem to be in the Company as an on-going entity, liquidating the Company, or selling certain assets and then redeploying retained assets in a different market by way of a debt-free corporation. In making its recommendation to the stockholdersbest interest of the Company and which will serve to further the purposes of the Comprehensive Plan. No Participant shall receive any grant of options under the Comprehensive Plan exercisable for more than 500,000 shares of Common Stock during one fiscal year of the Company. Options granted to Participants under the Comprehensive Plan will vest according to the vesting schedule provided in the applicable option agreement executed between the Company and the employee. Under the Comprehensive Plan, options must be granted at an exercise price per share that is no less than the fair market value of the Common Stock at the date of grant. The exercise price of an option may be paid in cash, certified or cashier's check, money order, or by delivery of already owned shares of Common Stock having a fair market value equal to the exercise price (to the extent such shares have been owned by the optionee for at least six months and only if permitted by the applicable option agreement), or by delivery of a combination of such methods. The options are not assignable or transferable other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order. During the lifetime of an optionee, the Comprehensive option is exercisable only by him, his guardian or legal representative. The expiration date of each option shall be fixed by the Committee, but such expiration date shall not exceed 10 years from the date of the grant.The Comprehensive Plan will automatically terminate on January 4, 2009, and any option outstanding on such date will remain outstanding until it has either expired or been exercised. The Board may terminate, amend or suspend the Comprehensive Plan from time to time as the Board deems advisable. RESTRICTED STOCK The committee, in its sole discretion, may make awards of Directors consideredrestricted stock to selected Participants, which awards shall be evidenced by an award agreement that contains such terms and conditions, including vesting, as the committee may determine. As a numbercondition to any award of factors,restricted stock, the committee may require a Participant to pay to the Company the amount (such as the par value of such shares) required to be received by the Company in order to assure compliance with applicable state law. Any award of restricted stock for which such requirement is established shall automatically expire if not purchased in accordance with the committee's requirements within sixty (60) days after the date of grant. Subject to the terms and conditions of the respective award agreement, the Participant, as the owner of the Common Stock issued as restricted stock and any retained distributions with respect thereto, shall have the rights of a stockholder, including, those noted immediately below that werebut not limited to, voting rights as to such Common Stock and the right to receive cash dividends or distributions thereon when, as and if paid. Within the limits set forth in the Comprehensive Plan, an award of restricted stock may be subject to such vesting requirements as may be fixed by the committee. Vesting may be accelerated by a change of control. Vesting may also be accelerated upon death, permanent disability or retirement. 11. Restricted stock and any retained distributions with respect thereto may not be sold, assigned, transferred, pledged, or otherwise encumbered during the restricted period, which shall be determined by the Boardcommittee and shall not be more than two years from the date such restricted stock was awarded. The committee may, at any time, reduce the restricted period with respect to any outstanding shares of Directors to favor a decision to consummaterestricted stock and any retained distributions with respect thereto awarded under the Asset Purchase Transaction: (i) the current financial condition and future prospects for the Company; (ii) management's expectations regarding probable trends in this industry; (iii) the price and terms of the Asset Purchase Transaction, as reflected in the Agreement; (iv) the sale of additional equity or convertible debt securities would have resulted in additional dilution to the Company's stockholders, and debt financing, if available, would most likely have involved restrictive covenants restricting the Company's operations or finances; and (iv) the fact that no firm offers to acquire the assets involving cash consideration exceeding that of the Purchaser had been received by the Company. 16. The Company's Board of Directors also considered the following potentially negative factors in its deliberations concerning the Asset Purchase Transaction: (i) the electronic presentment and payment processing service line represents the Company's primary business, and upon sale, the Company must seek other revenue generating opportunities; and (ii) the significant costs involved in connection with consummating the Asset Purchase Transaction (especially in light of the need to obtain a shareholder vote), the substantial management time and effort required to effectuate the sale and the potential disruption to the Company's operations. The Company's Board of Directors did not believe that the negative factors were sufficient, either individually or collectively, to outweigh potential advantages of the Asset Purchase Transaction. INTEREST OF CERTAIN PERSONS IN THE PROPOSED SALE The Asset Purchase Transaction is not conditioned upon any employment arrangements between the Purchaser and the current executive officers of the Company. However, the Asset Purchase Transaction is conditioned on Mr. Long, Mr. Hoch, and Ms. Hunter executing non-compete agreements prohibiting them from competing in the presentment services business for a period of two years. In consideration for entering into non-compete agreements, Mr. Long, Mr. Hoch, and Ms. Hunter are being compensated in the form of 250,000 stock options in CyberStarts, the parent company of the Purchaser. Mr. Long and Mr. Hoch are each receiving 100,000 options; Ms. Hunter is receiving 50,000 options. REGULATORY APPROVALS Consummation of the Asset Purchase Transaction does not require any regulatory approvals other than the federal filings required under applicable U. S. securities laws in connection with this Proxy Statement. MATERIALPlan. FEDERAL INCOME TAX CONSEQUENCES THIS SECTION IS A SUMMARY OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND THE STOCKHOLDERS OF THE COMPANY FROM THE ASSET PURCHASE TRANSACTION. EXCEPT WHERE SPECIFICALLY NOTED, THIS SUMMARY DOES NOT APPLY TO STATE OR LOCAL TAXES. THE SUMMARY IS BASED UPON THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, JUDICIAL DECISIONS, UNITED STATES TREASURY DEPARTMENT REGULATIONS PROMULGATED THEREUNDER, ADMINISTRATIVE RULINGS OF THE UNITED STATES TREASURY DEPARTMENT, AND OTHER INTERPRETATIONS THEREOF, ANY OF WHICH COULD BE CHANGED AT ANY TIME. NO RULING HAS 17. BEEN OR WILL BE REQUESTED FROM THE INTERNAL REVENUE SERVICE WITH RESPECT TO ANY CONSEQUENCES RESULTING FROM THE PROPOSED SALE. The Proposed Sale will not have any federal income tax consequences summarized below are based upon current tax laws and thus are subject to the Company's stockholders because no distributionschange. Moreover, this summary is not intended to be a complete description of sale proceeds will be made to the stockholders. Upon consummationall federal, state and local tax consequences of the Asset Purchase Transaction,Comprehensive Plan. The Comprehensive Plan permits Participants to receive grants of non-qualified stock options and qualified stock options. The Company has been advised that under the Internal Revenue Code, an optionee will not recognize any income for federal income tax purposes at the time a stock option is granted, nor will the Company be entitled to a tax deduction at that time. At the time of exercise, however, the optionee will recognize taxableordinary income in an amount equal to the excess of (i) the sumfair market value of the cash sale proceedsshares at the time of exercise over the option price of such shares. The Company generally will be entitled to a federal income tax deduction in an amount equal to the ordinary income recognized by the optionee upon exercise of a stock option. The Board of Directors believes that the Comprehensive Plan assists in attracting and retaining qualified employees and officers and has the effect of more significantly aligning the interests of the Purchased Assetsofficers and directors with the Assumed Liabilities, over (ii)Company's stockholders. The Board of Directors believes that increasing the sumnumber of shares under the Comprehensive Plan to 10,000,000 will permit the Company to continue utilizing the benefits of the Company's tax bases in the Purchased Assets and the Company's expensesComprehensive Plan. RECOMMENDATION OF BOARD OF DIRECTORS The Board of the Asset Purchase Transaction. The Company estimates that it will not have any federal tax liabilities in fiscal year 2003 relating to the Asset Purchase Transaction. ACCOUNTING TREATMENT For financial reporting purposes, the Asset Purchase Transaction will be recorded as a sale of the segment of the Company's business and reported as a discontinued operation. EXPENSES AND OTHER FEES Each party will bear its own expenses in respect of the Asset Purchase Transaction, whether or not consummated. SUMMARY OF THE ASSET PURCHASE AGREEMENT The following is a brief summary of certain provisions of the Agreement. THIS DESCRIPTION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF THE AGREEMENT, A COPY OF WHICH IS ATTACHED TO THIS PROXY STATEMENT AS APPENDIX "A" AND IS INCORPORATED HEREIN BY REFERENCE. THE TERMS NOT OTHERWISE DEFINED IN THIS SUMMARY OR ELSEWHERE IN THIS PROXY STATEMENT HAVE THE MEANING SET FORTH IN THE AGREEMENT. ALL STOCKHOLDERS ARE URGED TO CAREFULLY READ THE AGREEMENT IN ITS ENTIRETY. PURCHASE AND SALE OF ASSETS; ASSUMPTION OF LIABILITIES. Pursuant to the terms and conditions set forth in the Agreement, at Closing, the Company will sell, assign, transfer, convey and deliver to Purchaser, all of the Company's right, title and interest in and to certain assetsDirectors of the Company free and clear of all encumbrances except for certain permitted encumbrances. As defined inrecommends a vote FOR the Agreement, the term "Assets" means collectively, all right, title and interest in and to all assets, properties, rights and claims owned or primarily employed or held for the use in the conductapproval of the businessamendment to the Comprehensive Plan. PROPOSAL 3 APPROVAL OF AMENDMENT TO THE 1999 NON-EMPLOYEE DIRECTOR PLAN GENERAL The Board of Directors proposes to increase the number of shares of Common Stock available under the 1999 Non-Employee Director Plan (the "Non-Employee Director Plan") by 700,000, for a total of 1,500,000 shares. The material features of the Non-Employee Director Plan are discussed below, but the description is subject to and is qualified in its entirety by the Company, including the following Assets: business (goodwill), inventory, assumed contracts, intellectual property, tangible assets, business records, prepaid expenses, permits, accounts receivable earned by Purchaser after the Closing, intangibles, investments, cash, telephone, fax numbers, websites, and the Company's stock ownership in 18. Billserv Australia PTY Limited (the "JV"). The Company will retain its interest in the stock ownership of Bills.com and all assets listed on Schedule Hfull text of the Agreement.Non-Employee Director Plan, which is attached as ANNEX B to this Proxy Statement. The terms and conditionspurpose of the Agreement also provide forNon-Employee Director Plan is to advance the assumption of certain liabilities by Purchaser. This includes any liability arising after the Closing with respect to the Assumed Liabilities, other than any liability arising from tort, infringement or violation of law by the Company and any liability arising from any performance, payment, breach or default of any assumed contract to the extent such act occurred prior to the Closing. PURCHASE PRICE. The aggregate consideration for the Asset Purchase Transaction is approximately $4,800,000 plus the assumption of the Assumed Liabilities. At Closing, Purchaser will pay the Company $4,050,000 less the escrow amount of $105,000 (the "Cash Payment"). The Cash Payment will be consumed by the amount necessary to discharge the Company's secured and certain unsecured creditors. At Closing, Purchaser shall issue the Company a note (the "JV Note") for the remaining $600,000 (the "JV Purchase Price"). The JV Note will be a non-interest bearing, one-year note, which is fully secured by the Assets (the "JV Security Agreement"). Pursuant to the JV Note, the JV Purchase Price will be payable to Seller via wire transfer in four equal quarterly installments of $150,000 each (the "JV Quarterly Payments"), with the first JV Quarterly Payment due at Closing. In addition to the Purchase Price, the Company may earn an additional payment from Purchaser of $150,000 (the "Earnout") based on Gross Revenues (as defined by GAAP) associated with the Business calculated for a one (1) year period, beginning the first day of the first full month following Closing ("Annual Period"). If at the end of the Annual Period, the aggregate of Gross Revenues for the total of the twelve months in the Annual Period are equal to or exceed $5,000,000, then the Earnout shall be $150,000. In the event title to the JV does not pass to Purchaser at Closing due to circumstances outside the reasonable controlinterests of the Company by providing additional incentives to attract and retain qualified and competent non-employee directors, upon whose efforts and judgment the Company and Purchaser will negotiate a mutually agreeable earn-out provision whereby the Company is compensated based upon the financial performance of the Business over a period not to exceed one-year from a point at or reasonably after the Closing, which earn-out payment will not exceed $600,000 in total. THE CLOSING. The consummation of the Asset Purchase Transaction will take place at a closing to be held at the officessuccess of the Company not later than five days following(including its subsidiaries) is largely dependent. In furtherance of this purpose, the satisfactionNon-Employee Director Plan authorizes the granting of all conditionsnon-qualified stock options to purchase Common Stock to such directors. Currently, a total of 800,000 shares of Common Stock are authorized for issuance upon the exercise of the Agreement. REPRESENTATIONoptions. However, the Board of Directors proposes to amend the Non-Employee Director Plan to increase the number of shares available to 1,500,000 shares so that the Company can continue to use the Non-Employee Director Plan to attract and retain non-employee directors. Information about the number of shares of Common Stock authorized for issuance under the Non-Employee Director Plan as of December 31, 2003, is as follows: 12.
Number of securities Weighted-average remaining available for Number of securities to be exercise price future issuance under issued upon exercise of of outstanding Non-Employee outstanding options options Director Plan -------------------------- ---------------- ----------------------- Non-Employee Director Plan approved by shareholders 533,003 $ 1.88 266,997
TERMS AND WARRANTIES. The Agreement contains various representations and warrantiesCONDITIONS Under the Non-Employee Director Plan, options must be granted at an exercise price per share that is no less than the fair market value of the Company including, among others, representations and warranties related to: (i) corporate organization and similar corporate matters; (ii) authorization and enforceability; (iii) subsidiaries; (iv) consent and approval; (v) title to and condition of assets; (vi) litigation and claims pending; (vii) compliance with laws and regulations; (viii) financial statements and SEC reports; (ix) absence of certain changes or events since April 1, 2003; (xi) title to intellectual properties; (xii) contracts and agreements; (xiii) insurance; (xiv) brokers; (xv) accounts receivable; (xvi) warranty obligations; (xvii) business records; (xviii) taxes; (xix) compliance with laws; (xx) solvency; (xxi) employment matters; and (xxii) accuracy to material facts. The Agreement contains various representations and warranties of Purchaser including, among others: (i) representations and warranties related to corporate organizations and similar corporate 19. matters; (ii) authorization and enforceability; (iii) no violation of existing agreements; (iv) compliance with other instruments and laws; (v) litigation; (vi) brokers; and (vii) disclosure. PRE-CLOSING COVENANTS OF THE COMPANY. In addition to those representations and warranties listed above, the Company has also agreed to the following covenants pending closing: (i) the Company will promptly notify purchaser of any event of subsequent date that would render any representation or warranty listed above untrue or inaccurate in any material respect; and (ii) the Company will also notify Purchaser of any material adverse change in assets or the assumed liabilities, intellectual property or the financial condition of the Company's business. The Company has also agreed to conduct the business in the ordinary course consistent with past practices and will use reasonable commercial efforts to retain, protect and preserve the assets and intellectual property of the business, including the Company's relationship with its consultants, independent contractors, licensers, suppliers, vendors, representatives, distributors, and other customers all in the ordinary course of business. Furthermore, until Closing, the Company will allow representatives of Purchaser reasonable access upon reasonable notice to business records and facilities relating to the Assets. The Company shall use reasonable commercial efforts to obtain any and all consents necessary for the effective assignment of all the contracts to be assumed by Purchaser. The Company will also use reasonable commercial efforts to satisfy or cause to be satisfied all of the conditions precedent to Closing the Agreement. The Company has agreed that it will not directly or indirectly nor will it authorize or permit any affiliate or representative to solicit, initiate, encourage, induce or facilitate the making, submission or announcement of any acquisition proposal or take any actions that could reasonably be expected to lead to an acquisition proposal. The Company shall not furnish any information regarding the Company to any person in connection with or in response to an acquisition proposal or an inquiry or indication of interest that could lead to an acquisition proposal or engage in discussions or negotiations with any person with respect to any acquisition proposal. The Company shall not approve, endorse or recommend any acquisition proposal or enter into any letter or similar document or contract contemplating or otherwise relating to any acquisition, except with regard to a Superior Proposal. The Company will promptly prepare and file a proxy statement with the SEC and conduct a stockholders' meeting with regard to the Asset Purchase Transaction. The Company will satisfy secured and certain unsecured debts at or reasonably after Closing. MUTUAL COVENANTS. Both the Company and Purchaser have agreed to (i) take all action and do all things necessary in order to consummate and make effective the proposed sale; (ii) continue the enforceability and effect of the confidentiality agreement entered into by the parties; (iii) make all necessary filings with respect to the Asset Purchase Transaction in the Securities Act, the Exchange Act and applicable blue sky or similar securities laws; (iv) make pre-merger notification or other appropriate fillings with federal state or local government bodies or applicable foreign government agencies; (iv) obtain all consents waivers approvals and authorization orders required in connection with the authorization execution of the Agreement; (v) to cooperate and provide information necessary to the preparation of all documents, agreements, tax returns, and other instruments prior to the Closing; and (vi) use their respective reasonable commercial efforts to carry out the communications plan to their respective customers, suppliers, employees, investors and strategic partners concerning the purchase. 20. CONDITIONS TO CLOSING. The respective obligation of each parties to the agreement to effect the transaction to be performed by each party at Closing are subject to satisfaction of the following conditions: (i) no order shall have been entered and not vacated by a court or administrative agency of competent jurisdiction which enjoins or strains the acquisition; (ii) all permits, authorizations, approvals and orders shall have been attained and be in full force in effectCommon Stock at the date of Closing; and (iii) there shall be no litigation pending or threatened by any governmental entity in whichgrant. The exercise price of an injunction is oroption may be sought against the transactionpaid in cash, certified or acquisitioncashier's check, money order, or in which the relief sought against any partyby delivery of already owned shares of Common Stock having a fair market value equal to the Agreement asexercise price (to the extent such shares have been owned by the optionee for at least six months and only if permitted by the applicable option agreement), or by delivery of a resultcombination of such methods. The options are excisable only by the optionee or the optionee's legal representative and are not assignable or transferable other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order. The expiration date of each option shall not exceed ten (10) years from the date of the Agreementgrant. The Non-Employee Director Plan will automatically terminate on July 10, 2009, and any option outstanding on such date will remain outstanding until it has either expired or been exercised. The Board of Directors believes that the Non-Employee Director Plan assists in which in good faithattracting and judgmentretaining qualified non-employee directors and has the effect of more significantly aligning the interests of the boardnon-employee directors with the Company's stockholders. The Board of directorsDirectors believes that increasing the number of either party such adverse party hasshares under the probability of prevailing and such relief would have a material adverse effect on such party. Further, (i)Non-Employee Director Plan to 1,500,000 will permit the Agreement and transaction contemplated thereby shall be approved byCompany to continue utilizing the stockholdersbenefits of the Company; (ii) the Company shall discharge its debt to Laurus Master Fund, Ltd.; (iii) all of Purchaser's representations and warranties shall be true and correct; (iv) Purchaser shall have complied with all terms and conditions in the Agreement; (v) Purchaser shall have delivered the purchase price consideration; (vi) Purchaser shall have delivered the compliance certificates, secretary certificates and all other documents and Ancillary Agreements required under the Agreement; (vii) all representation and warranties of the Company shall be true and correct in all material respects; (viii) any and all required consents from third parties with regard to the Assumed Contracts shall be obtained; (ix) the secured creditors of the Company shall be paid; (x) there shall be no Material Adverse Change to the Company; (xi) the Company shall have executed and delivered any and all Ancillary Agreements and transfer documents; (xii) the Company shall have delivered to Purchaser all necessary financial statements; (xiii) the Company and Purchaser shall have executed the Transition Services Agreement; and (xiv) the Company shall deliver to all Purchaser all other closing deliverables including an opinion of counsel. POST CLOSING MATTERS. The Company shall execute all necessary documents to convey and assign the Assets purchased under the Agreement, pay its pro rata share of certain Tax liabilities, enter into a non-compete agreement with Purchaser with regard to the presentment service business, and obtain the discharge of certain unsecured creditors. Purchaser will execute all documents necessary to confirm assumption of the Assumed Liabilities, maintain for six months the Business Records of the Assets sold, and pay its pro rata share of certain Tax liabilities. TERMINATION. The Agreement may be terminated prior to Closing either before or after approval of the stockholders of the Company (A) by mutual written consent of both parties, (B) by either party if (i) the Closing shall not have occurred by July 15, 2003; (ii) if a government entity and a court of competent jurisdiction has a final and non-appealable order, decree or ruling permanently restraining or enjoining the transaction; and (iii) if the stockholders of the Company vote against the Closing of the Asset Purchase Transaction, (C) by Purchaser if (i) a triggering event occurs; or (ii) the Company materially breaches the Agreement, or (D) by the Company if Purchaser materially breaches the Agreement. If a party materially breaches the Agreement, the other party is entitled to a termination fee of $250,000. In the event the Company executes a Superior Proposal, the Company will be liable to Purchaser in the amount of $250,000 at such time as the Company closes and funds the Superior Proposal. 21. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representation and warranties made by the parties to the Agreement shall survive the Closing of the Agreement and continue in full force and effect until six months after the Closing. INDEMNIFICATION. For a period of six months following Closing, the Company has agreed to indemnity, defend and hold harmless Purchaser and its shareholders, officers, directors, employees, attorneys, all subsidiaries and affiliates of Purchaser, and their respective officers, directors, employees, and attorneys of such entities from, against, for and in respect of any and all losses asserted against, relating to, imposed upon, or incurred by Purchaser or any of the aforementioned by reason of, resulting from, based upon or rising out of the following: (i) the breach of the Agreement; (ii) any oral contract which the Company is a party to and which is not disclosed to Purchaser; and (iii) any Excluded Liability, except to the extent resulting from the Purchaser. For a period of six months following Closing, Purchaser has agreed to indemnity, defend and hold harmless the Company and its shareholders, officers, directors, employees, attorneys, all subsidiaries and affiliates of the Company, and their respective officers, directors, employees, and attorneys of such entities from, against, for and in respect of any and all losses asserted against, relating to, imposed upon, or incurred by the Company or any of the aforementioned by reason of, resulting from, based upon or rising out of the following: (i) the breach of the Agreement; or (ii) any Assumed Liability, except to the extent resulting from the Company. The parties' indemnity obligations are subject to a $37,500 floor and a cap up to the Purchaser Price plus the Earnout paid to the Company under the Agreement. ESCROW FUND. At the Closing, $105,000 shall be deposited with Wachovia Bank. Such deposit will constitute the escrow fund and to will be governed by the terms of the escrow agreement attached as Exhibit A to the Agreement. TRANSITION SERVICES AGREEMENT. The parties have entered into a Transition Services Agreement (attached to this Proxy as Appendix "B") dictating certain employees of the Company that will receive employment opportunities with Purchaser after the Closing, providing for certain informational services to be performed by the Company for the Purchaser prior to Closing, conditioning the Closing upon the Purchaser's renegotiation of the Company's office space lease and the Company's transfer to Purchaser of certain agreements, and providing for certain post-Closing services to be performed by Purchaser for the Company.Non-Employee Director Plan. RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors of the Company believes that the Asset Purchase Transaction is in the best interests of the Company and its stockholders. Accordingly, the Board of Directors has approved the Asset Purchase Transaction and recommends that the Company's stockholders vote FOR the approval of the Asset Purchase Transaction. PROPOSAL 3 CHANGE OF COMPANY NAME Upon the stockholder approval of the Asset Purchase Transaction, the Company will no longer have ownership of the name "Billserv, Inc." The Board of Directors of the Company, therefore, 22. proposes to change the Company's name to Payment Data Systems, Inc. ("PDS"), which name the Board believes best reflects the proposed business of the Company after the Asset Purchase Transaction. If stockholders approve this proposal, the Board of Directors will hold the authority to so change the name of the Company, subject to successful negotiations of compensation arrangements with senior management relating to their contribution of business associated with PDS. Pursuant thereto, the Board proposes to amend Article One of its Amended and Restated Articles of Incorporation as follows: "The name of the corporation is: Payment Data Systems, Inc." RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors of the Company believes that the proposed change of the name of the Company to Payment Data Systems, Inc. is in the best interests of the Company and its stockholders. Accordingly, the Board recommends a vote FOR the approval of the proposed name change.amendment to the Non-Employee Director Plan. PROPOSAL 4 RATIFICATION OF ERNSTAKIN, DOHERTY, KLEIN & YOUNG LLPFEUGE, P.C. AS INDEPENDENT AUDITORS The Board of Directors, of the Company, upon recommendation of its Audit Committee, appointed ErnstAkin, Doherty, Klein & Young LLPFeuge, P.C. as independent auditors to examine the Company's consolidated financial statements for the fiscal year ending December 31, 20022004 and to render other professional services as required. The Company is submitting the appointment of ErnstAkin, Doherty, Klein & Young LLPFeuge, P.C. to stockholders to obtain your ratification. Representatives of ErnstAkin, Doherty, Klein & Young LLPFeuge, P.C. will be present at the SpecialAnnual Meeting, will have the opportunity to make a statement if they desire to do so, and are expected to be available to respond to questions. RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors of the Company believes that ratification of ErnstAkin, Doherty, Klein & Young LLPFeuge, P.C. as the Company's independent auditors for the fiscal year ended December 31, 20022004 is in the best interests of the Company and its stockholders. Accordingly, the Board recommends a vote FOR the ratification of ErnstAkin, Doherty, Klein & Young LLPFeuge, P.C. as the Company's independent auditors for the fiscal year ended December 31, 2002.2004. 13. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under U.S. securities laws, directors, certain executive officers and persons holding more than 10% of the Company's Common Stock must report their initial ownership of the Common Stock, and any changes in that ownership, to the Securities and Exchange Commission. The Securities and Exchange Commission has designated specific due dates for these reports. Based solely on its review of copies of the reports filed with the Securities and Exchange Commission and written representations of its directors and executive officers, the Company believes all persons subject to reporting timely filed the required reports in 2002. 23. MANAGEMENT2003, except that Mr. Kirby filed a Form 4 on January 6, 2004 with respect to a stock option grant occurring on December 30, 2003. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth, for eachnames and ages of all of our directors and executive officerofficers, along with their respective positions, term of the Company,office and period such person's name, age and position with the Company and its principal subsidiaries. Each such executive officer serves at the pleasureposition(s) was held, is as follows: - -------------------------------------------------------------------------------- NAME POSITION HELD AGE - -------------------------------------------------------------------------------- Michael R. Long Chief Executive Officer, Chief Financial Officer, Chairman of the Board of Directors.
-------------------------- ---------------------------------------------------------- ------- NAME POSITION AGE -------------------------- ---------------------------------------------------------- ------- Michael R. Long Chairman and CEO 58 Louis A. Hoch President and COO 37 Terri A. Hunter Executive Vice President and CFO 40 Anthony L. Diamond Senior Vice President and CMO 43 Marshall N. Millard Secretary, Senior Vice President and General Counsel 41
DESCRIPTIONand Director 59 Louis A. Hoch President and Chief Operating Officer and Director 38 Peter G. Kirby Director 64 BIOGRAPHIES OF EXECUTIVE OFFICERS AND DIRECTORS MICHAEL R. LONG. See biography of Mr. Long on page 9.7. LOUIS A. HOCH. See biography of Mr. Hoch on page 8. TERRI A. HUNTER.7. PETER G. KIRBY. See biography of Ms. HunterMr. Kirby on page 9. ANTHONY L. DIAMOND. Age 42. Senior Vice President, Sales and Marketing. Mr. Diamond joined the Company in June 2000. He brought to Billserv, Inc. over 17 years of sales and marketing leadership from varied industries. Throughout his career, he has specialized in assessing corporate challenges, creating high performance operations and successfully launching new products. In 1995, upon leaving Azrock Industries as its Director of Marketing, Mr. Diamond founded Diamond, Werkenthien & Associates, a sales and marketing consulting firm with domestic and international clients. In June 1998, he sold his interest and joined a client company, Paris Technologies as Vice President of Marketing, where he built the channel strategy and introduced a new database technology to mid-size businesses throughout North America, Europe and Australia. In September 1999, Mr. Diamond became Vice President, Sales and Marketing at FAS, Inc., a leading provider of monitoring and Internet-based reporting on construction lending projects to major lenders nationwide. Mr. Diamond holds a degree in Advertising from the University of Texas at Austin. MARSHALL N. MILLARD. Age 41. Senior Vice President, General Counsel. Mr. Millard joined the Company in November 1998. He has more than fifteen years of experience providing legal counsel to publicly and privately held companies. From 1993 to 1998, he held corporate counsel positions at U.S. Long Distance, Inc. and its spin-off company, Billing Concepts, Inc. He is licensed to practice law in the Supreme Court and all lower courts in the State of Texas, the federal court for the Western District of Texas, and the Fifth Circuit Court of Appeals. 24. 7. EXECUTIVE COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth the compensation earned during each of the years ended December 31, 2003, 2002 and 2001 and 2000 to the Company's chief executive officerour Chief Executive Officer and each other executive officer ofthat earned over $100,000 during the Company (the "named executive officers").year ended December 31, 2003.
------------------------ ------------------------ ------------- LONG TERM ALL OTHER----------------------------------------------------------- ANNUAL COMPENSATION (1) COMPENSATION AWARDSLONG TERM COMPENSATION - ------------------------------------------ ------ ------------------------ ------------------------ ------------- SECURITIES RESTRICTED UNDERLYING----------------------------------------------------------------------------------------------------------- AWARDS ALL OTHER - ------------------------------------------------------------------------------------------- ALL OTHER NAME AND PRINCIPAL POSITIONPOSITION(S) YEAR SALARY ($) BONUS ($) STOCK ($)SECURITIES UNDERLYING COMPENSATION OPTIONS (#) ($) (2) - ------------------------------------------ ------ ------------ ----------- ---------- ------------- ------------------------------------------------------------------------------------------------------------------------ Michael R. Long .........................Long.......................... 2003 $190,000 400,000 $11,529 Chairman, Chief Executive Officer 2002 $190,000 - - 340,000 $11,130 Chairman and CEOChief Financial Officer 2001 $190,000 - - 325,000 $11,074 2000 $188,046 - - 165,000 $11,275 Louis A. Hoch............................ 2003 $175,000 425,000 $900 President and Chief Operating 2002 $175,000 - - 340,000 $ 1,950 President and COO$1,950 Officer 2001 $175,000 - - 250,000 $ 1,596 2000 $164,231 - - 90,000 $ 513$1,596 Terri A. Hunter.......................... 2002 $145,0002003 $152,499 - - 350,000 $ 1,560$540 Executive Vice President and Chief 2002 $145,000 350,000 $1,560 Financial Officer 2001 $145,000 - - 150,000 $ 1,368 and CFO 2000 $ 94,885 - - 125,000 $ 223 Anthony L. Diamond....................... 2002 $145,000 - - 275,000 $ 1,885 Executive Vice President 2001 $145,000 - - 100,000 $ 1,653 and CFO 2000 $ 60,367 - - 125,000 $ 193 Marshall N. Millard...................... 2002 $120,000 - - 130,000 $ 1,560 Secretary, Senior Vice 2001 $120,000 - - 30,000 $ 1,368 President and General Counsel 2000 $113,846 - - 50,000 $ 356$1,368
14. (1) Each of the named executives except for Ms. Hunter has entered into employment agreements expiring on December 31, 2003,July 25, 2004, which provide for annual salary and bonuses at the discretion of the Board of Directors, as well as health benefits.Directors. Ms. Hunter resigned her position as Executive Vice President and Mr. Diamond joined the Company in April 2000 and June 2000, respectively.Chief Financial Officer effective August 31, 2003. In 2003,2004, each of the named officers is to receive salary compensation as follows: Mr. Long, $190,000; and Mr. Hoch, $175,000; Mr. Diamond, $145,000; Ms. Hunter, $145,000; and Mr. Millard, $120,000.$175,000. (2) Reflects premiums paid for term life insurance coverage. OPTION GRANTS The following table provides information regarding the grant of stock options during fiscal year 20022003 to the named executive officers. 25. officers pursuant to our Employee Comprehensive Stock Plan.
NUMBERNumber of Securities % OF TOTAL POTENTIAL REALIZABLE OF OPTIONS EXERCISE VALUE SECURITIES GRANTED TO OR AT ASSUMED ANNUAL UNDERLYING EMPLOYEES IN BASE RATES OF STOCK OPTIONS FISCAL PRICE EXPIRATION PRICE APPRECIATION FOR NAME GRANTED 2002of Total Options Underlying Options Granted to Employees Exercise Price Name Granted in Fiscal 2003 ($/SHARE) DATE OPTION TERM (1) ---- ---------- ------------ --------- ---------- ------------------------- 5% ($) 10% ($) ------ -------Share) Expiration Date - ------------------ -------------------- -------------------- -------------- --------------- Michael R. Long 15,000 0.6% 0.26400,000 22.8% $ 0.14 12/13/12 - $ 498 325,000 12.4% 0.18 12/31/12 $16,162 $36,79030/13 Louis A. Hoch 15,000 0.6% 0.26425,000 24.2% $ 0.14 12/13/12 - $ 498 325,000 12.4% 0.18 12/31/12 $16,162 $36,79030/13 Terri A. Hunter 75,000 2.9% 0.26 12/13/12(1) - $ 2,490 275,000 10.5% 0.18 12/31/12 $13,676 $31,130 Anthony L. Diamond 75,000 2.9% 0.26 12/13/12 - $ 2,490 200,000 7.6% 0.18 12/31/12 $ 9,946 $22,640 Marshall N. Millard 30,000 1.1% 0.26 12/13/12 - $ 996 100,000 3.8% 0.18 12/31/12 $ 4,973 $11,320-
(1) The potential realizable value is calculated based on the term of the option and is calculated by assuming that the fair market value of commonWe did not grant any stock on the date of the grant as determined by the Board appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and the common stock received therefore is sold on the last day of the term of the option for the appreciated price. The 5% and 10% rates of appreciation are derived from the rules of the SEC and do not reflect our estimate of future stock price appreciation. The actual value realized may be greater or less than the potential realizable values set forth in the table.options to Ms. Hunter during fiscal year 2003. OPTION EXERCISES AND YEAR-END VALUES The following table sets forthprovides certain information with respectrelated to the exercise of options during the year ended December 31, 20022003 by the named executive officers and the number and value of unexercised options held by the named executive officers as ofat December 31, 2002.2003.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES ------------------------------------------------------------------------------------- SHARESNUMBER OF SECURITIES VALUE OF UNEXERCISED ACQUIRED VALUE NUMBER OFSHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT ON EXERCISE REALIZEDACQUIRED VALUE OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END ($) (1) - ----------------------------------------------------------------------------------------------------------------------------------------- ON EXERCISE REALIZED ----------------------------------------------------------- NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------------------------------------------------------------------------------------------- Michael R. Long - $ 0 308,335 606,665898,334 400,000 $ 0 -$ 8,000 Louis A. Hoch - $ 0 233,334 531,666765,000 425,000 $ 0 - Terri A. Hunter 0 83,334 466,666 0 - Anthony L. Diamond 0 66,668 358,332 0 - Marshall N. Millard 0 63,335 156,665 0 -$ 8,500
(1) Calculated using the year-end per share price of $0.18.$0.16. DIRECTORS COMPENSATION In 2003, we did not pay any cash compensation to our independent directors for their services on our Board of Directors. However, on December 30, 2003, we granted options to purchase 175,000 shares of our Common Stock at an exercise price of $0.14 per share to our independent director, Peter G. Kirby, as compensation for his service as a Director. 15. EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENT The Company has entered intoWe have employment agreements with its fiveour executive officers. These agreements expired December 31, 2002, but automatically renewed for successive 1-year terms. The employment agreements provide for an annual salary, bonuses at the discretion of the Board of Directors and health benefits. In 2003,2004, each of the named officers areis to receive salary compensation as follows: Mr. Long, $190,000;$190,000 and Mr. Hoch, $175,000; Ms. Hunter, $145,000; Mr. Diamond, $145,000; and Mr. Millard, $120,000. Since November 2002, the aforementioned officers (less Mr. Diamond and Mr. Millard) have deferred their salary compensation in the following amounts: Mr. Long, $62,115; Mr. Hoch, $20,192; and Ms. Hunter, $22,308. The Company's$175,000. Our agreements with itsour executive officers provide for change in control protection for each executive. The CompanyWe may terminate any such agreement not later than thirty (30) 26. days after a change of control. In such event, the executive would be entitled to deferred compensation. Deferred compensation is calculated as the greater of (A) the base salary payments the executive would have received had his or her employment continued for the remaining term of the agreement (including yearly increases calculated at the maximum increase for the prior two years); or (B) an amount equal to 2.95 times the highest annual compensation earned by the executive in the past two years. In addition, the executive would be entitled to all of the benefits otherwise provided in the agreement (such as automobile expenses) during a certain period of time defined in the agreement as the greater of the remaining term of the agreement or one year. The executive may also be entitled to an amount equal to the pro rata portion of the bonus compensation for the year in which the executive's employment is terminated determined on the basis of the number of days elapsed in such year prior to such termination. Upon termination of employment, each employee is prohibited from competing with the Companyus for a period of two (2) years. Mr. Long and Mr. Hoch will waive their rightsThe employment agreements were supposed to anyterminate upon the change of control that occurred on July 25, 2003, but were extended at our option for a period of one year. If an extended agreement is not renewed for a period of one year prior to the expiration of that extended agreement on July 25, 2004, such executive officer shall be entitled to the deferred compensation discussed in this paragraph in the event the stockholders approve the Asset Purchase Transaction. STOCK PERFORMANCE GRAPH [PERFORMANCE GRAPH]
- --------------------------------------------------------------------------------------------------- BASE 1999 2000 2001 2002 - --------------------------------------------------------------------------------------------------- Billserv, Inc. 100 282 93 39 6 - --------------------------------------------------------------------------------------------------- NASDAQ Composite 100 186 113 89 61 - --------------------------------------------------------------------------------------------------- NASDAQ Computer 100 205 114 86 55 - ---------------------------------------------------------------------------------------------------
27. SPECIALas provided above. ANNUAL MEETING ADVANCE NOTICE REQUIREMENTS A stockholder may recommend a nominee to become a Director of the Company by giving Michael R. Long, the Chief Executive Officer of the Company, (at the address set forth above) a written notice mailed to 12500 San Pedro, Suite 120, San Antonio, Texas, 78216 and setting forth certain information, including: (1) the name, age, and business and residence addresses of the person intended to be nominated, (2) a representation that the nominating stockholder is in fact a holder of record of Common Stock of the Company entitled to vote at the meeting and that he or she intends to be present at the meeting to nominate the person specified, (3) a description of all arrangements between the nominating stockholder, the nominee and other persons concerning the nomination, (4) any other information about the nominee that must be disclosed in proxy solicitations under Rule 14(a) of the Securities Exchange Act of 1934, and (5) the nominee's written consent to serve, if elected. Such nominations must be made pursuant to the same advance notice requirements for stockholder proposals. The Company's 20042005 Annual Meeting of Stockholders is currently scheduled for May 2004.2005. Copies of the Company's Bylaws are available upon written request made to Michael R. Long, the Chief Executive Officer of the Company, at the above address.12500 San Pedro, Suite 120, San Antonio, Texas, 78216. The requirements described above do not supersede the requirements or conditions established by the Securities and Exchange Commission for stockholder proposals to be included in the Company's proxy materials for a meeting of stockholders. The Chairman of the meeting may refuse to bring before a meeting any business not brought in compliance with applicable law and the Company's Bylaws. RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS GENERAL The accounting firmCHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On February 10, 2004, our Board of Directors, upon recommendation of the Audit Committee, dismissed Ernst & Young LLP has acted as our independent accountants and appointed the firm of Akin, Doherty, Klein & Feuge, P.C., a professional corporation, to auditserve as our independent public accountants for the fiscal year ending December 31, 2003. Ernst & Young's report on our consolidated financial statements for the fiscal year ended December 31, 2002 contained a qualified opinion as to the uncertainty of our ability to continue as a going concern. 16. During the Companyyears ended December 31, 2002 and its2001 and through the date hereof, there were no disagreements with Ernst & Young on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Ernst & Young's satisfaction, would have caused them to make reference to the subject matter of such disagreements in connection with their report on our consolidated subsidiaries since 1998. Representativesfinancial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(iv) of Regulation S-K. Ernst & Young's letter confirming this to the Securities and Exchange Commission pursuant to Item 304(a)(3) of Regulation S-K is incorporated herein by reference to Exhibit 16.1 to the Company's 2003 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. During the years ended December 31, 2002 and 2001 and through February 10, 2004, we did not consult with Akin Doherty with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K. FEES PAID TO THE INDEPENDENT ACCOUNTANTS The aggregate fees billed to us for professional accounting services, including the audit of our annual consolidated financial statements by our principal accountant for the fiscal years ended December 31, 2003 and 2002 included in our Form 10-K, are set forth in the table below. These amounts include approximately $35,800 and $100,820 of fees billed to us by Ernst & Young LLP, our former independent auditor, for 2003 and 2002, respectively, related to audit and non-audit services. 2003 2002 ------------- ------------- Audit fees $ 48,800 $ 88,320 Audit-related fees - 4,000 Tax fees 7,000 8,500 ------------- ------------- Total fees $ 55,800 $ 100,820 ============= ============= For purposes of the preceding table, the professional fees are expected to be present at the Special Meeting and be available to respond to appropriate questions. Such representatives will have the opportunity to make a statement if they desire to do so. AUDIT FEES Ernst & Young LLP billed the Company a total of $88,320classified as follows: o Audit Fees--These are fees for professional services in connection withbilled for the audit of the consolidated financial statements included in our Form 10-K filings, the review of consolidated financial statements included in our Form 10-Q filings, comfort letters, consents and assistance with and review of documents filed with the SEC. The fees in the 2003 column include amounts billed to us through the date of this Proxy Statement for the year ended December 31, 2003 and the fees in the 2002 financial statements. FINANCIAL INFORMATION REVIEW FEES Ernst & Young LLPcolumn include amounts billed to us through the Company $4,000 duringdate of this Proxy Statement for the years ended December 31, 2002. o Audit-Related Fees--These are fees for assurance and related services that traditionally are performed by our independent accountant. More specifically, in 2002 forthese professional services were provided in connection with the review and evaluation of financial information systems and related controls for purposes of obtaining a SAS 70 certification. ALL OTHER FEES Ernst & Young LLP billed the Company a total of $8,500o Tax Fees--These are fees for otherprofessional services rendered during 2002. Substantially all of these fees related toby our independent accountant for tax compliance, tax planning and tax returnadvice. Tax compliance involves preparation services. 28. The Audit Committee of the Board does not consider the provisionoriginal and amended tax returns. Tax planning and tax advice encompass a diverse range of subjects, including assistance with tax audits and appeals, tax advice related to dispositions, and requests for rulings or technical advice from taxing authorities. All of the services performed by our independent accountant described above were approved in advance by Ernst & Young LLP to be incompatible with the maintenance of Ernst & Young LLP's independence.our Audit Committee. 17. FINANCIAL STATEMENTS The Company's audited financial statements for the fiscal year ended December 31, 20022003 and Management's Discussion and Analysis of Financial Condition and Results of Operations are incorporated herein by reference to the Company's 20022003 Annual Report on Form 10-K as filed with the Securities and Exchange Commission, which is being mailed to stockholders with this Proxy Statement. PROPOSALS BY STOCKHOLDERS In accordance with rules established by the Securities Exchange Commission, any stockholder proposal submitted pursuant to Rule 14a-8 intended for inclusion in the proxy statement and form of proxy for next year's Annual Meeting of Stockholders must be received by the Company no later than December 31, 2003.2004. Proposals should be submitted to Michael R. Long, the Company's Chief Executive Officer, at 211 North Loop 1604 East,12500 San Pedro, Suite 200,120, San Antonio, Texas 78232.78216. To be included in the proxy statement, the proposal must comply with the requirements as to form and substance established by the Securities Exchange Commission and must be a proper subject for stockholder action under Nevada law. No shareholder proposals will be considered for the 2005 Annual Meeting after December 31, 2004. OTHER MATTERS As of the date of this Proxy Statement, the Board of Directors of the Company does not know of any business that will be presented for consideration at the SpecialAnnual Meeting other than that specified herein and in the Notice of SpecialAnnual Meeting of Stockholders. If other matters are presented, it is the intention of the persons designated as proxies to vote in accordance with their judgment on such matters. SOLICITATION The Company has retained the servicescost of a third party to aidsoliciting Proxies in the solicitation of Proxies.accompanying form will be borne by the Company. In addition to the solicitation of Proxies by the use of the mails, certain officers and associates (who will receive no compensation therefortherefore in addition to their regular salaries) may be used to solicit Proxies personally and by telephone or fax. Further,In addition, banks, brokers and other custodians, nominees and fiduciaries will be requested to forward copies of the Proxy materials to their principals and to request authority for the execution of Proxies. The Company will reimburse such persons for their expenses in so doing. Fees and expenses to be incurred by the Company in this connection are estimated not to exceed $15,000. The total expense of this solicitation will be borne by the Company and will include reimbursement paid to brokerage firms and others for their expenses in forwarding solicitation materials. This Proxy Statement and the accompanying form of Proxy are being mailed to stockholders on or about June 19, 2003. 29. A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002,2003, INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES THERETO, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE FURNISHED WITHOUT CHARGE TO ANY STOCKHOLDER OF THE COMPANY WHOSE PROXY IS SOLICITED BY THIS PROXY STATEMENT, UPON THE WRITTEN REQUEST OF ANY SUCH PERSON ADDRESSED TO MR. MICHAEL R. LONG, CHIEF EXECUTIVE OFFICER, BILLSERV,PAYMENT DATA SYSTEMS, INC., 211 NORTH LOOP 1604 EAST,12500 SAN PEDRO, SUITE 200,120, SAN ANTONIO, TEXAS 78232.78216. SUCH A REQUEST FROM A BENEFICIAL OWNER OF THE COMPANY'S COMMON STOCK MUST CONTAIN A GOOD FAITH REPRESENTATION BY SUCH PERSON THAT, AS OF THE RECORD DATE, HE OR SHE WAS A BENEFICIAL OWNER OF THE COMPANY'S COMMON STOCK. Please SIGN and RETURN the enclosed Proxy promptly. By Order of the Board of Directors: MICHAEL R. LONG Chief Executive Officer IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY 18. ANNEX A PAYMENT DATA SYSTEMS, INC. AMENDED AND RESTATED 1999 EMPLOYEE COMPREHENSIVE STOCK PLAN 1. PURPOSE. The purpose of this Amended and Restated 1999 Employee Comprehensive Stock Plan (the "Plan") is to further the success of Payment Data Systems, Inc., formerly billserv.com, Inc., and Billserv, Inc., a Nevada corporation (the "Company"), and certain of its affiliates by making available Common Stock of the Company to certain Employees and Consultants of the Company and its affiliates, and thus to provide an additional incentive to such individuals to continue in the service of the Company or its affiliates and to give them a greater interest as stockholders in the success of the Company. Subject to compliance with the provisions of the Plan and the Code, Incentive Stock Options as authorized by Section 422 of the Code and stock options which do not qualify under Section 422 of the Code are authorized and may be granted under the Plan. Further, the Company may grant Restricted Stock, as defined below. 2. DEFINITIONS. As used in this Plan the following terms shall have the meanings indicated: (a) "Award" means an award of stock options (including Incentive Stock Options) or Restricted Stock, on a stand alone, combination or tandem basis, as described in or granted under this Plan. (b) "Award Agreement" means a written agreement setting forth the terms of an Award, in the form prescribed by the Committee. (c) "Board" means the Board of Directors of the Company. (d) "Cause" shall mean, in the context of the termination of a Participant, as determined by the Board, in the reasonable exercise of its business judgment, the occurrence of one of the following events as they relate (1) to an Employee: (i) conviction of or a plea of nolo contendere to a charge of a felony (which, through lapse of time or otherwise, is not subject to appeal); (ii) willful refusal without proper legal cause to perform, or gross negligence in performing, Participant's duties and responsibilities; (iii) material breach of fiduciary duty to the Company through the misappropriation of Company funds or property or otherwise; or (iv) the unauthorized absence of Participant from work (other than for sick leave or disability) for a period of thirty working days or more during any period of forty-five working days, and (2) to a Contractor: (i) conviction of or a plea of nolo contendere to a charge of a felony (which, through lapse of time or otherwise, is not subject to appeal), (ii) serious misconduct in connection with performance of his services to the Company, a Parent, or any Subsidiary, or (iii) a material breach of any contractual agreement or other arrangement between the Contractor and the Company, its Parent, or any Subsidiary; provided, further, within one year following a Change of Control, "Cause," with respect to an Employee, shall be limited to the conviction of or a plea of nolo contendere to the charge of a felony (which, through lapse of time or otherwise, is not subject to an appeal), or a material breach of fiduciary duty to the Company through the misappropriation of Company funds or property or otherwise. (e) "Change of Control" shall be deemed to have occurred if (i) any "Person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 40% of the combined voting power of the Company's then outstanding voting securities, or (ii) at any time during the 24-month period after a tender offer, merger, consolidation, sale of assets or contested election, or any combination of such transactions, at least a majority of the Board shall cease to consist of "continuing directors" (meaning directors of the Company who either were directors prior to such transaction or who subsequently became directors and whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least two thirds of the directors then still in office who were directors prior to such transaction), or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 40% of the total voting power represented by the voting securities of the Company or such surviving 19. entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement of sale or disposition by the Company of all or substantially all of the Company's assets. (f) "Code" means the Internal Revenue Code of 1986, as amended. (g) "Committee" means the Committee administering the Plan described in Section 3 hereof. (h) "Common Stock" means the Company's common stock, par value $.001 per share. (i) "Consultant" means any person, except an Employee, engaged by the Company or a Parent or any Subsidiary of the Company to render personal services to such entity. The term "Consultant" as used in this Plan is limited to persons eligible to receive Common Stock from the Company or a Parent or any Subsidiary of the Company registered under Form S-8 of the Securities and Exchange Commission. As provided in Rule 405 promulgated under the Securities Act of 1933, as amended from time to time, or other applicable law, Consultants must be natural persons who provide bona fide services to the Company, which services may not be in connection with the offer or sale of securities in a capital-raising transaction or directly or indirectly related to promoting or maintaining a market for the Company's securities. (j) "Continuous Status as a Participant" means (1) for an Employee, that the employment relationship with the Company or a Parent, or any Subsidiary of the Company has not been terminated or interrupted, and (2) for a Consultant, the absence of any interruption, expiration, or termination of such person's consulting or advisory relationship with the Company or a Parent or any Subsidiary of the Company or the occurrence of any termination event as set forth in such person's Award Agreement. (k) "Date of Grant" means the date on which an Award is granted under an Award Agreement executed by the Company and a Participant pursuant to the Plan. (l) "Disinterested Person" means a "disinterested person" as such term is defined in Rule 16b-3 promulgated under the Exchange Act or any successor provision. (m) "Effective Date" means the effective date of this Plan specified in Section 14 hereof. (n) "Employee" means any person, including an officer, who is a common law employee of, receives remuneration for personal services to, is reflected on the official human resources database as an employee of, and is on the payroll of the Company or a Parent or any Subsidiary of the Company. A person is on the payroll if he is paid from the payroll department of the Company or a Parent or any Subsidiary of the Company. Persons providing services to the Company or a Parent or any Subsidiary of the Company pursuant to an agreement with a staff leasing organization, temporary workers engaged through or employed by temporary or leasing agencies, and workers who hold themselves out to the Company or a Parent or any Subsidiary of the Company to which they are providing services as being independent contractors, or as being employed by or engaged through another company while providing the services to the Company or a Parent or any Subsidiary of the Company are not Employees for purposes of the Plan, whether or not such persons are, or may be, reclassified by the courts, the Internal Revenue Service, the U.S. Department of Labor, or other person or entity as common law employees of the Company or a Parent or any Subsidiary of the Company, either solely or jointly with another person or entity. (o) "Exchange Act" means the Securities Exchange Act of 1934, as it may be amended from time to time. (p) "Good Reason" shall mean the occurrence of any of the following events: (a) removal from the principal office held by the Employee on the date of the most recent Award, or a material reduction in the Employee's authority or responsibility, including, without limitation, involuntary removal from the Board, but not including termination of the Employee for Cause; or (b) the Company otherwise commits a material breach of this Plan or the Employee's employment agreement or the Contractor's service agreement, if applicable; provided, however, that within one year following a Change of Control, "Good Reason" shall mean (i) removal from the 20. principal office held by the Employee on the date of the most recent Award, (ii) a material reduction in the Employee's authority or responsibility, including, without limitation, involuntary removal from the Board, but not including termination of the Employee for Cause; (iii) relocation of the Company's headquarters from the San Antonio, Texas metropolitan area, (iv) a material reduction of Employee's compensation, or (v) the Company otherwise commits a material breach of this Plan or the Employee's employment agreement or the Contractor's service agreement, if applicable. (q) "Incentive Stock Option" means an option qualifying under Section 422 of the Code. (r) "Parent" means a parent corporation of the Company as defined in Section 424(e) of the Code. (s) "Participants" means Employees or Consultants of the Company, its Subsidiaries and its Parent (including those directors of the Company who are also employees of the Company, its Parent or one or more of its Subsidiaries). (t) "Restricted Period" shall mean the period designated by the Committee during which Restricted Stock may not be sold, assigned, transferred, pledged, or otherwise encumbered, which period shall not be more than two years from the Date of Grant. (u) "Restricted Stock" shall mean those shares of Common Stock issued pursuant to an Award that remain subject to the Restricted Period. (v) "Retained Distributions" shall mean any securities or other property (other than cash dividends) distributed by the Company or otherwise received by the holder in respect of Restricted Stock during any Restricted Period. (w) "Retirement" shall mean retirement of an Employee from the employ of the Company, its Parent, or its Subsidiaries, as the case may be, in accordance with the then existing employment policies of any such employer. (x) "Subsidiary" means a subsidiary corporation of the Company as defined in Section 424(f) of the Code. 3. ADMINISTRATION OF THE PLAN. The Board shall appoint a committee (the "Committee") comprised of two or more directors to administer the Plan. Only directors who are Disinterested Persons shall be eligible to serve as members of the Committee. The Committee shall report all action taken by it to the Board, which shall review and ratify or approve those actions that are by law required to be so reviewed and ratified or approved by the Board. The Committee shall have full and final authority in its discretion, subject to the provisions of the Plan, to make determinations with respect to the participation of Participants in this Plan, to prescribe the form of Award Agreements embodying Awards made under the Plan, and, except as otherwise required by law or this Plan, to set the size and terms of Awards (which need not be identical or consistent with respect to each Participant) including vesting schedules, price, whether stock options granted hereunder shall constitute an Incentive Stock Option, restriction or option period, post-retirement and termination rights, payment alternatives such as cash, stock or other means of payment consistent with the purposes of this Plan, and such other terms and conditions as the Committee deems appropriate. Except as otherwise required by this Plan, the Committee shall have authority to interpret and construe the provisions of this Plan and the Award Agreements, to correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Award Agreement in the manner the Committee deems advisable for the administration of the Plan and make determinations pursuant to any Plan provision or Award Agreement, which shall be final and binding on all persons. The Committee may authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Committee. 4. COMMON STOCK SUBJECT TO PROVISIONS OF THIS PLAN. Upon approval of this Plan by the directors and shareholders of the Company, the total number of shares to be subject to options under this Plan shall be 10,000,000 of the authorized and unissued Common Stock of the Company. Thereafter, an amount of additional shares to be subject to options shall automatically be available for award under this Plan, such that at no 21. time shall the total number of shares subject to options under this Plan be less than five percent (5%) of the then issued and outstanding Common Stock of the Company. In all events, the total number of shares shall be subject to appropriate increase or decrease in the event of a stock dividend, split or reclassification of shares subject to this Plan. 5. ELIGIBILITY. Except as hereinafter provided, Awards may be granted to any Participant as the Committee shall determine from time to time. In determining the Participants to whom Awards shall be granted and the number of shares to be covered by each such Award, the Committee may take into account the nature of the services rendered by the respective Participants, their present and potential contributions to the Company's success and such other factors as the Committee in its sole discretion shall deem relevant. A Participant who has been granted an Award under the Plan may be granted an additional Award or Awards under the Plan, in the Committee's sole discretion. 6. AWARDS UNDER THIS PLAN. The Committee, in its sole discretion, may make Awards of stock options (including Incentive Stock Options and stock options that do not qualify as Incentive Stock Options) as described in Sections 7 and 8 hereof, and of Restrictive Stock, as described in Section 10 hereof. 7. OPTIONS AUTHORIZED. The options subject to Award under this Plan may be Incentive Stock Options or stock options that do not qualify as Incentive Stock Options (sometimes referred to herein as "nonqualified options" or "nonqualified stock options"). The Committee shall have the full power and authority to (i) determine which options shall be nonqualified stock options and which shall be Incentive Stock Options, (ii) grant only Incentive Stock Options or, alternatively, only nonqualified stock options, and (iii) in its sole discretion, grant to the holder of an outstanding option, in exchange for the surrender and cancellation of such option, a new option having a purchase price lower than that provided in the option so surrendered and canceled and/or containing such other terms and conditions as the Committee may prescribe in accordance with the provisions of the Plan. Under no circumstances may nonqualified stock options be granted where the exercise of such nonqualified stock options may affect the exercise of Incentive Stock Options granted pursuant to the Plan. In addition to any other limitations set forth herein, (1) no Participant shall receive any grant of options, whether Incentive Stock Options or nonqualified stock options, exercisable for more than five hundred thousand (500,000) shares of Common Stock during any one fiscal year of the Company, and (2) the aggregate fair market value (determined in accordance with Paragraph 8(a) of the Plan as of the time the option is granted) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant in any calendar year (under all plans of the Company and of any Parent or Subsidiary) shall not exceed one hundred thousand dollars ($100,000.00). 8. TERMS AND CONDITIONS OF OPTIONS. The grant of an option under the Plan shall be evidenced by an Award Agreement executed by the Company and the applicable Participant and shall contain such terms and be in such form as the Committee may from time to time approve, subject to the following limitations and conditions: (a) OPTION PRICE. The option exercise price per share with respect to each option shall be determined by the Committee, but shall in no instance be less than the par value of the shares subject to the option. In addition, the option exercise price per share with respect to Incentive Stock Options granted hereunder shall in no instance be less than the fair market value of the shares subject to the option as determined by the Committee. For the purposes of this Paragraph 8(a), fair market value shall be, where applicable, the closing price of the Common Stock on the Date of Grant of such option as reported on any national securities exchange on which the Common Stock may be listed. If the Common Stock is not listed on a national securities exchange but is publicly traded on the Nasdaq Stock Market's National Market or on another automated quotation system, the fair market value shall be the closing price of the Common Stock on the Date of Grant, or if traded on the Nasdaq Small Cap or Nasdaq Over-The-Counter market, the fair market value shall be the mean between the closing bid and ask prices on any such system or market. If the Common Stock was not traded on the Date of Grant of such option, the nearest preceding date on which there was a trade shall be substituted. Notwithstanding the foregoing, however, fair market value shall be determined consistent with Code Section 422(b)(4) or any successor provisions. The Committee may permit the option exercise price to be payable by transfer to the Company of Common Stock owned by the option holder with a fair market value at the time of the exercise equal to the option exercise price. 22. (b) PERIOD OF OPTION. The expiration date of each option shall be fixed by the Committee, but notwithstanding any provision of the Plan to the contrary, such expiration date shall not be more than ten (10) years from the Date of Grant of the option. (c) VESTING OF STOCKHOLDER RIGHTS. Neither the optionee nor his successor in interest shall have any of the rights of a stockholder of the Company until the shares relating to the option hereunder are issued by the Company and are properly delivered to such optionee, or successor. (d) EXERCISE OF OPTION. Each option shall be exercisable from time to time (but not less than six (6) months after the Date of Grant) over such period and upon such terms and conditions as the Committee shall determine, but not at any time as to less than one hundred (100) shares unless the remaining shares that have become so purchasable are less than twenty five (25) shares. After the death of the optionee, an option may be exercised as provided in Section 9(c) hereof. (e) DISQUALIFYING DISPOSITION. The Award Agreement evidencing any Incentive Stock Options granted under this Plan shall provide that if the optionee makes a disposition, within the meaning of Section 424(c) of the Code and regulations promulgated thereunder, of any share or shares of Common Stock issued to him pursuant to exercise of the option within the two-year period commencing on the day after the Date of Grant of such option or within the one-year period commencing on the day after the date of issuance of the share or shares to him pursuant to the exercise of such option, he shall, within ten (10) days of such disposition date, notify the Company of the sales price or other value ascribed to or used to measure the disposition of the share or shares thereof and immediately deliver to the Company any amount of federal income tax withholding required by law. (f) LIMITATION ON GRANTS TO CERTAIN STOCKHOLDERS. An Incentive Stock Option may be granted only to an Employee Participant, and only if such Participant, at the time the option is granted, does not own, after application of the attribution rules of Code Section 424, stock possessing more than ten percent (10%) of the total combined voting power of all classes of Common Stock of the Company or of its Parent or Subsidiaries. The preceding restrictions shall not apply to an Employee Participant if at the time the option is granted the option price is at least one hundred ten percent (110%) of the fair market value (as defined in Section 8(a) above) of the Common Stock subject to the option and such option by its terms is not exercisable after the expiration of five (5) years from the Date of Grant. (g) RESTRICTION ON ISSUING SHARES. The exercise of each option shall be subject to the condition that if at any time the Company shall determine in its discretion that the satisfaction of withholding tax or other withholding liabilities, or that the listing, registration, or qualification of any shares otherwise deliverable upon such exercise upon any securities exchange or under any state or federal law, or that the consent or approval of any regulatory body, is necessary or desirable as a condition of, or in connection with, such exercise or the delivery or purchase of shares pursuant thereto, then in any such event, such exercise shall not be effective unless such withholding, listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Company. (h) CONSISTENCY WITH CODE. Notwithstanding any other provision in this Plan to the contrary, the provisions of all Award Agreements relating to Incentive Stock Options pursuant to the Plan shall not violate the requirements of the Code applicable to the Incentive Stock Options authorized hereunder. 9. EXERCISE OF OPTION. (a) Any option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Committee and set forth in the Award Agreement. An option shall be deemed exercised when (i) the Company has received written notice of such exercise in accordance with the terms of the Award Agreement, (ii) full payment of the aggregate option exercise price of the shares as to which the option is exercised has been made and (iii) arrangements that are satisfactory to the Committee in its sole discretion have been made for the Participant's payment to the Company of the amount, if any, that the Committee determines to be necessary for the Company to withhold in accordance with applicable federal or state income tax withholding requirements. 23. (b) Unless otherwise provided in the Award Agreement and as permitted by applicable law, upon Retirement or other termination of the Participant's Continuous Status as a Participant, other than (a) a termination that is either (i) for Cause, or (ii) voluntary on the part of a Participant and without the written consent of the Company, a Parent, or any Subsidiary, or (b) a termination by reason of death, the Participant may (unless otherwise provided in his Award Agreement) exercise his option at any time within three (3) months after such termination of the Participant's Continuous Status as a Participant (or within one (1) year after termination of the Participant's Continuous Status as a Participant due to permanent and total disability within the meaning of Code Section 22(e)(3)), or within such other time as the Committee shall authorize, but in no event may the Participant exercise his Option after ten (10) years from the Date of Grant thereof (or such lesser period as may be specified in the Award Agreement), and only to the extent of the number of shares for which his options were exercisable by him at the date of the termination of the Participant's Continuous Status as a Participant. In the event of the termination of the Continuous Status as a Participant of a Participant to whom an option has been granted under the Plan that is either (i) for Cause or (ii) voluntary on the part of the Participant and without written consent, any option held by him under the Plan, to the extent not previously exercised, shall forthwith terminate on the date of such termination of the Participant's Continuous Status as a Participant. Options granted under the Plan shall not be affected by any change of employment so long as the Employee holder continues to be an Employee of the Company, a Subsidiary or a Parent. The Award Agreement may contain such provisions as the Committee shall approve with respect to the effect of approved leaves of absence. (c) Unless otherwise provided in the Award Agreement and as permitted by applicable law, in the event a Participant to whom an option has been granted under the Plan dies during, or within three (3) months after the Retirement or other termination of, the Participant's Continuous Status as a Participant, such option (unless it shall have been previously terminated pursuant to the provisions of the Plan or unless otherwise provided in his Award Agreement) may be exercised (to the extent of the entire number of shares covered by the option whether or not purchasable by the Participant at the date of his death) by the executor or administrator of the optionee's estate or by the person or persons to whom the optionee shall have transferred such option by will or by the laws of descent and distribution, at any time within a period of one (1) year after his death, but not after the exercise termination date set forth in the relevant Award Agreement. (d) If as of the date of termination of the Participant's Continuous Status a Participant (other than as a result of the Participant's death) the Participant is not entitled to exercise his or her entire options, the shares of Common Stock covered by the unexercisable portion of the option shall revert to the Plan. If the Participant (or his or her designee or estate as provided in Section 9(c) above) does not exercise his or her options within the time specified in the Plan and the Award Agreement, the unexercised options shall terminate and the shares of Common Stock covered by such options shall revert to the Plan. 10. TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS. (a) GENERAL. The Committee, in its sole discretion, may make Awards of Restricted Stock to selected Participants, which Awards shall be evidenced by an Award Agreement that contains such terms and conditions, including vesting, as the Committee may determine. As a condition to any Award of Restricted Stock hereunder, the Committee may require a Participant to pay to the Company the amount (such as the par value of such shares) required to be received by the Company in order to assure compliance with applicable state law. Any Award of Restricted Stock for which such requirement is established shall automatically expire if not purchased in accordance with the Committee's requirements within sixty (60) days after the Date of Grant. Subject to the terms and conditions of the respective Award Agreement, the Participant, as the owner of the Common Stock issued as Restricted Stock and any Retained Distributions with respect thereto, shall have the rights of a stockholder, including, but not limited to, voting rights as to such Common Stock and the right to receive cash dividends or distributions thereon when, as and if paid. Within the limits set forth in the Plan, an Award of Restricted Stock may be subject to such vesting requirements as may be fixed by the Committee. Vesting may be accelerated by a Change of Control. Vesting may also be accelerated upon death, permanent disability or Retirement. 24. Unless otherwise provided in the Award Agreement, in the event that an Award of Restricted Stock is made to a Participant whose employment or service is subsequently terminated by reason of death, permanent disability or Retirement or for such other reason as the Committee may provide, such Participant (or his estate or beneficiary) will be entitled to receive such additional portion of his Restricted Stock and any Retained Distributions with respect thereto that the Participant would have received had the Participant continued services or remained in the employment of the Company, Parent, or Subsidiary, as applicable, through the date on which the next portion of the shares of non-vested Restricted Stock subject to the Award of Restricted Shares would have vested. Unless otherwise provided in the Award Agreement, in the event an award of Restricted Stock is made to a Participant whose Continuous Status as a Participant is subsequently terminated by the Participant for Good Reason or by the Company, Parent or Subsidiary as applicable, other than for Cause, then in any such event, the Participant will be entitled to receive such additional portion of his or her shares of Restricted Stock and any Retained Distributions with respect thereto that the Participant would have received had the Participant remained in Continuous Status as a Participant through the date on which the next portion of the shares of unvested Restricted Stock subject to the Award of Restricted Stock would have vested. Unless otherwise provided in the Award Agreement, in the event that an Award of Restricted Stock is made to a Participant whose Continuous Status as a Participant is terminated by voluntary resignation or for Cause, then all such Restricted Stock and any Retained Distributions with respect thereto as to which the Restricted Period still applies shall be forfeited by such Participant and shall again become available for grant under the Plan. (b) TRANSFERABILITY. Restricted Stock and any Retained Distributions with respect thereto may not be sold, assigned, transferred, pledged, or otherwise encumbered during the Restricted Period, which shall be determined by the Committee and shall not be more than two years from the date such Restricted Stock was awarded. The Committee may, at any time, reduce the Restricted Period with respect to any outstanding shares of Restricted Stock and any Retained Distributions with respect thereto awarded under the Plan. Shares of Restricted Stock, when issued, will be represented by a stock certificate or certificates registered in the name of the Participant to whom such Restricted Stock shall have been granted and shall bear a restrictive legend to the effect that ownership of such Restricted Stock (and any related Retained Distributions) and the enjoyment of all rights appurtenant thereto are subject to the restrictions, terms and conditions provided in the Plan and the applicable Award Agreement. Each certificate shall be deposited by the Participant with the Company, together with stock powers or other instruments of assignment, each endorsed in blank, which will permit transfer to the Company of all or any portion of the Restricted Stock and any securities constituting Retained Distributions that shall be forfeited or that shall not become vested in accordance with the respective Award Agreement. The certificate or certificates issued for the Restricted Stock may bear such legend or legends as the Committee may, from time to time, deem appropriate to reflect the restrictions under the Plan for such Restricted Stock. (c) STOCK CERTIFICATES; ADDITIONAL RESTRICTIONS. Shares of Restricted Stock shall constitute issued and outstanding shares of Common Stock for all corporate purposes. Each Participant will have the right to vote the Restricted Stock held by such Participant, to receive and retain all cash dividends and distributions thereon and exercise all other rights, powers and privileges of a holder of Common Stock with respect to such Restricted Stock, with the exception that: (i) the Participant will not be entitled to delivery of the stock certificate or certificates representing such Restricted Stock until the Restricted Period applicable to such shares or portion thereof shall have expired and unless all other vesting requirements with respect thereto shall have been fulfilled; (ii) other than cash dividends and distributions and rights to purchase stock which might be distributed to stockholders of the Company, the Company will retain custody of all Retained Distributions made, paid, declared or otherwise received by the holder thereof with respect to Restricted Stock (and such Retained Distributions will be subject to the same restrictions, terms and conditions as are applicable to the Restricted Stock with respect to which they were made, paid or declared) until such time, if ever, as the Restricted Period applicable 25. to the shares with respect to which such Retained Distributions shall have been made, paid, declared or received shall have expired, and such Retained Distributions shall not bear interest or be segregated in separate accounts; and (iii) upon the breach of any restrictions, terms or conditions provided in the Plan or the respective Award Agreement or otherwise established by the Committee with respect to any Restricted Stock or Retained Distributions, such Restricted Stock and any related Retained Distributions shall thereupon be automatically forfeited. (d) MERGERS AND OTHER CORPORATE CHANGES. Unless otherwise provided in the Award Agreement, upon the occurrence of a Change of Control, all restrictions imposed on the Participant's Restricted Stock and any Retained Distributions shall automatically terminate and lapse and the Restricted Period shall automatically terminate; provided, however, that if the Change of Control occurs within six months of the Date of Grant the restrictions and Restricted Period shall terminate on the six month anniversary of the Date of Grant. 11. ADJUSTMENTS. The Committee, in its discretion, may make such adjustments in the option price, the number or kind of shares and other appropriate provisions covered by outstanding Awards that are required to prevent any dilution or enlargement of the rights of the holders of such options that would otherwise result from any reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, issuance of rights or any other change in the capital structure of the Company. The Committee, in its discretion, may also make such adjustments in the aggregate number and class of shares that may be the subject of Awards which are appropriate to reflect any transaction or event described in the preceding sentence. 12. AMENDMENT, SUSPENSION, AND TERMINATION OF THE PLAN. The Board may at any time suspend or terminate the Plan or may amend it from time to time in such respects as the Board may deem advisable in order that the Awards granted thereunder may conform to any changes in the law or in any other respect that the Board may deem to be in the best interests of the Company; provided, however, that without approval by the stockholders of the Company voting the proper percentage of its voting power, no such amendment shall make any change in the Plan for which stockholder approval is required in order to comply with (i) Rule 16b-3, as amended, promulgated under the Exchange Act, (ii) the Code or regulatory provisions dealing with Incentive Stock Options, (iii) any rules for listed companies promulgated by any national stock exchange on which the Company's Common Stock is traded or (iv) any other applicable rule or law. Unless sooner terminated hereunder, the Plan shall terminate ten (10) years after the Effective Date. No amendment, suspension, or termination of the Plan shall, without a Participant's consent, impair or negate any of the rights or obligations under any Award theretofore granted to such Participant under the Plan. 13. TAX WITHHOLDING. The Company shall have the right to withhold from any payments made under this Plan, or to collect as a condition of payment, any taxes required by law to be withheld. At any time when a Participant is required to pay to the Company an amount required to be withheld under applicable income tax laws in connection with a distribution of shares of Common Stock pursuant to this Plan, the Participant may satisfy this obligation in whole or in part by electing to have the Company withhold from such distribution shares of Common Stock having a value equal to the amount required to be withheld. The value of the shares of Common Stock to be withheld shall be based on the fair market value, as determined pursuant to Section 8(a) hereof, of the Common Stock on the date that the amount of tax to be withheld shall be determined (the "Tax Date"). Any such election is subject to the following restrictions: (i) the election must be made on or prior to the Tax Date; (ii) the election must be irrevocable; and (iii) the election must be subject to the disapproval of the Committee. To the extent required to comply with rules promulgated under Section 16 of the Exchange Act, elections by Participants who are subject to Section 16 of the Exchange Act are subject to the following additional restrictions: (i) no election shall be effective for a Tax Date which occurs within six (6) months of the grant of the Award; and (ii) the election must be made either (a) six (6) months or more prior to the Tax Date or (b) during the period beginning on the third business day following the date of release for publication for the Company's quarterly or annual summary statements of sales and earnings and ending on the twelfth business day following such date. 14. EFFECTIVE DATE OF THE PLAN. This Plan shall become effective on the date (the "Effective Date") of the last to occur of (i) the adoption of the Plan by the Board and (ii) the approval, within twelve (12) months of such adoption, by a majority (or such other proportion as may be required by state law) of the outstanding 26. voting shares of the Company, voted either in person or by proxy, at a duly held stockholders meeting or by written stockholder consent but in any event not before the effectiveness of the Company's Form 10 Registration Statement filed under the Exchange Act. 15. SPECIAL PROVISIONS REGARDING CHANGE OF CONTROL. The Board or the Committee may, from time to time, make special provisions for one or more Participants respecting a possible Change of Control of the Company, a Subsidiary, or Parent, and, to the extent that any such special provisions made with the consent of the affected Employee or Consultant may have the effect of accelerating vesting of stock options granted under the Plan or removal of restrictions on Restricted Stock allotted under the Plan or the effect of preventing a termination or dilution of benefits, such special provisions shall be controlling over and shall be deemed to be an amendment of any inconsistent terms of the applicable Award Agreement. 16. MISCELLANEOUS PROVISIONS. (a) If approved by the Board, the Company or any Parent or Subsidiary may lend money or guarantee loans by third parties to an individual to finance the exercise of any option granted under the Plan to continue to hold Common Stock thereby acquired. No such loans to finance the exercise of an Incentive Stock Option shall have an interest rate or other terms that would cause any part of the principal amount to be characterized as interest for purposes of the Code. (b) This Plan is intended and has been drafted to comply in all respects with Rule 16b-3, as amended, under the Exchange Act ("Rule 16b-3"). If any provision of this Plan does not comply with Rule 16b-3, this Plan shall be automatically amended to comply with Rule 16b-3. (c) No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continue in service as an Employee or Consultant of or for the Company, a Parent, or any Subsidiary for any period of specific duration. Nothing in this Plan shall interfere with or limit in any way the right of the Company, a Parent, any Subsidiary to terminate any Participant's service as an Employee or Consultant at any time, with or without cause, nor confer upon any Participant any right to continue service as an Employee or Consultant for the Company, a Parent, or any Subsidiary. (d) To the extent that federal laws do not otherwise control, this Plan shall be construed in accordance with and governed by the laws of the State of Nevada or the property laws of any particular state. (e) In case any one or more of the provisions of this Plan shall be held invalid, illegal or unenforceable in any respect under applicable law and regulation (including Rule 16b-3), the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provision which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Plan to be construed in compliance with all applicable laws (including Rule 16b-3) so as to foster the intent of this Plan. Notwithstanding anything in this Plan to the contrary, the Committee, in its sole and absolute discretion, may bifurcate this Plan so as to restrict, limit or condition the use of any provision of this Plan to Participants who are subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning this Plan with respect to other Participants. (f) None of a Participant's rights or interests under the Plan may be assigned or transferred in whole or in part, either directly or by operation of law or otherwise (except pursuant to a qualified domestic relations order or, in the event of a Participant's death, by will or the laws of descent and distribution), including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner, and no such right or interest of any Participant in the Plan shall be subject to any obligation or liability of such individual. (g) No Restricted Stock or any Retained Distributions shall be issued hereunder unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state, or other securities laws. 27. (h) The expenses of the Plan shall be borne by the Company. (i) By accepting any Award under the Plan, each Participant or beneficiary claiming under or through him shall be conclusively deemed to have indicated his acceptance ratification of, and consent to, any action taken under the Plan by the Company, the Committee or the Board. (j) Awards granted under the Plan shall be binding upon the Company, its successors and assigns. (k) The appropriate officers of the Company shall cause to be filed any reports, returns, or other information regarding Awards hereunder or any Common Stock issued pursuant hereto as may be required by Section 13 or 15(d) of the Exchange Act, or any other applicable statute, rule or regulation. (1) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required. 28. ANNEX B PAYMENT DATA SYSTEMS, INC. AMENDED AND RESTATED 1999 NON-EMPLOYEE DIRECTOR PLAN 1. PURPOSE. The purpose of this Plan is to advance the interests of Payment Data Systems, Inc., formerly billserv.com, Inc., and Billserv, Inc., a Nevada corporation (the "Company"), by providing an additional incentive to attract and retain qualified and competent directors, upon whose efforts and judgment the success of the Company is largely dependent, through the encouragement of stock ownership in the Company by such persons. 2. DEFINITIONS. As used herein, the following terms shall have the meaning indicated: (a) "Board" shall mean the Board of Directors of Payment Data Systems, Inc. (b) "Committee" shall mean the committee, if any, appointed by the Board pursuant to Section 12 hereof. (c) "Date of Grant" shall mean the date on which an Option is granted to an Eligible Person pursuant to Section 4 or Section 5 hereof. (d) "Director" shall mean a member of the Board or a member of the board of directors of a Parent on the date of adoption of the Plan. (e) "Eligible Person(s)" shall mean those persons who are Directors of the Company or a Parent and who are not employees of the Company or a Subsidiary. (f) "Fair Market Value" of a Share on any date of reference shall be the closing price on the business day immediately preceding such date. For this purpose, the closing price of the Shares on any business day shall be (i) if the Shares are listed or admitted for trading on any United States national securities exchange, the last reported sales price of Shares on such exchange, as reported in any newspaper of general circulation, (ii) if actual transactions in the Shares are included in the Nasdaq National Market or are reported on a consolidated transaction reporting system, the closing price of the Shares on such system, (iii) if Shares are otherwise quoted on the Nasdaq system, or any similar system of automated dissemination of quotations of securities prices in common use, the mean between the closing high bid and low asked quotations for such day of Shares on such system, and (iv) if none of clause (i), (ii) or (iii) is applicable, the mean between the high bid and low asked quotations for Shares as reported by the National Daily Quotation Service if at least two securities dealers have inserted both bid and asked quotations for Shares on at least five (5) of the ten (10) preceding days. (g) "Internal Revenue Code" or "Code" shall mean the Internal Revenue Code of 1986, as it now exists or may be amended from time to time. (h) "Nonqualified Stock Option" shall mean an option that is not an incentive stock option as defined in Section 422 of the Internal Revenue Code. (i) "Option" shall mean any option granted under Section 4 or 5 of this Plan. (j) "Optionee" shall mean a person to whom an Option is granted under this Plan or any successor to the rights of such person under this Plan by reason of the death of such person. (k) "Parent" shall mean a parent corporation of the Company as defined in Section 424(c) of the Code, if any. (l) "Payment Date" shall have the meaning set forth in Section 2(a). 29. (m) "Plan" shall mean this 1999 Non-Employee Director Plan of Payment Data Systems, Inc. (n) "Prior Plan" shall mean any plan which may have been in place prior to the execution of this plan. (o) "Share(s)" shall mean a share or shares of the common stock, ($0.001 per value, of the Company. (p) "Subsidiary" shall mean a subsidiary corporation of the Company as defined in Section 424(f) of the Code. 3. SHARES AND OPTIONS. The maximum number of Shares to be issued pursuant to Options under this Plan shall be Eight Hundred Thousand (800,000) Shares. Shares issued pursuant to Options granted under this Plan may be issued from Shares held in the Company's treasury or from authorized and unissued Shares. If any Option granted under this Plan shall terminate, expire, or be canceled or surrendered as to any Shares, new Options may thereafter be granted covering such Shares. Any Option granted hereunder shall be a Nonqualified Stock Option. 4. AUTOMATIC GRANT OF OPTIONS. (a) Options shall automatically be granted to Directors as provided in this Section 4. Each Option shall be evidenced by an option agreement (an "Option Agreement") and shall contain such terms as are not inconsistent with this Plan or any applicable law. Any person who files with the Committee, in a form satisfactory to the Committee, a written waiver of eligibility to receive any Option under this Plan shall not be eligible to receive any Option under this Plan for the duration of such waiver. (b) The Options automatically granted to Directors under this Plan shall be in addition to regular director's fees and other benefits with respect to the Director's position with the Company or its Subsidiaries. Neither the Plan nor any Option granted under the Plan shall confer upon any person any right to continue to serve as a Director. (c) No Options shall otherwise be granted hereunder, and neither the Board nor the Committee, if any, shall have any discretion with respect to the grant of Options within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, or any successor rule. 5. OPTION PRICE. (a) The Option price per Share of any Option granted pursuant to this Plan shall be one hundred percent (100%) of the Fair Market Value per Share on the Date of Grant. 6. EXERCISE OF OPTIONS. Options may be exercised at any time after the date on which the Options, or any portion thereof, are vested until the Option expires pursuant to Section 7; provided, however, that no Option shall be exercisable prior to six (6) months from the Date of Grant. An Option shall be deemed exercised when (i) the Company has received written notice of such exercise in accordance with the terms of the Option Agreement, (ii) full payment of the aggregate Option price of the Shares as to which the Option is exercised has been made and (iii) arrangements that are satisfactory to the Committee in its sole discretion have been made for the Optionee's payment to the Company of the amount, if any, that the Committee determines to be necessary for the Company to withhold in accordance with applicable federal or state income tax withholding requirements. Pursuant to procedures approved by the Committee, tax withholding requirements, at the option of an Optionee, may be met by withholding Shares otherwise deliverable to the Optionee upon the exercise of an Option. Unless further limited by the Committee in any Option Agreement, the Option price of any Shares purchased shall be paid solely in cash by certified or cashier's check, by money order, with Shares (but with Shares only if permitted by the Option Agreement or otherwise permitted by the Committee in its sole discretion at the time of exercise) or by a combination of the above; provided, however, that the Committee in its sole discretion may accept a personal check in full or partial payment of any Shares. If the exercise price is paid in whole or in part with Shares, the value of the Shares surrendered shall be their Fair Market Value on the date the Shares are received by the Company. 7. TERMINATION OF OPTION PERIOD. The unexercised portion of an Option shall automatically and without notice terminate and become null and void at the time of the earliest to occur of the following: 30. (a) one (1) year after the date that an Optionee ceases to be a Director (including for this purpose a Director of a Parent) by reason of death of the Optionee, or; (b) the tenth (10th) anniversary of the Date of Grant of the Option. 8. ADJUSTMENT OF SHARES. (a) If at any time while this Plan is in effect or unexercised Options are outstanding, there shall be any increase or decrease in the number of issued and outstanding Shares through the declaration of a stock dividend or through any recapitalization resulting in a stock split-up, combination or exchange of Shares, then and in such event: (i) appropriate adjustment shall be made in the maximum number of Shares then subject to being optioned under this Plan, so that the same proportion of the Company's issued and outstanding Shares shall continue to be subject to being so optioned; and (ii) appropriate adjustment shall be made in the number of Shares and the exercise price per Share thereof then subject to any outstanding Option, so that the same proportion of the Company's issued and outstanding Shares shall remain subject to purchase at the same aggregate exercise price. In addition, the Committee shall make such adjustments in the Option price and the number of shares covered by outstanding Options that are required to prevent dilution or enlargement of the rights of the holders of such Options that would otherwise result from any reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, issuance of rights, spin-off or any other change in capital structure of the Company. (b) Except as otherwise expressly provided herein, the issuance by the Company of shares of its capital stock of any class, or securities convertible into shares of capital stock of any class, either in connection with a direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of or exercise price of Shares then subject to outstanding Options granted under this Plan. (c) Without limiting the generality of the foregoing, the existence of outstanding Options granted under this Plan shall not affect in any manner the right or power of the Company to make, authorize or consummate (i) any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business; (ii) any merger or consolidation of the Company; (iii) any issue by the Company of debt securities, or preferred or preference stock that would rank above the Shares subject to outstanding Options; (iv) the dissolution or liquidation of the Company; (v) any sale, transfer or assignment of all or any part of the assets or business of the Company; or (vi) any other corporate act or proceeding, whether of a similar character or otherwise. 9. TRANSFERABILITY OF OPTIONS. Each Option Agreement shall provide that such Option shall not be transferable by the Optionee other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order and that, so long as an Optionee lives, only such Optionee or his guardian or legal representative shall have the right to exercise the related Option. 10. ISSUANCE OF SHARES. No person shall be, or have any of the rights or privileges of, a stockholder of the Company with respect to any of the Shares subject to an Option unless and until certificates representing such Shares shall have been issued and delivered to such person. As a condition of any transfer of the certificate for Shares, the Committee may obtain such agreements or undertakings, if any, as it may deem necessary or advisable to assure compliance with any provision of this Plan, any Option Agreement or any law or regulation, including, but not limited to, the following: (i) A representation, warranty or agreement by the Optionee to the Company, at the time any Option is exercised, that he or she is acquiring the Shares to be issued to him or her for investment and not with a view to, or for sale in connection with, the distribution of any such S