<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
TOWNE SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
GEORGIA 7374 62-1618121
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
DREW W. EDWARDS
CHIEF EXECUTIVE OFFICER
TOWNE SERVICES, INC.
3295 RIVER EXCHANGE DRIVE
SUITE 350
NORCROSS, GEORGIA 30092
(770) 734-2680
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices and Agent for Service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT D. PANNELL, ESQ. M. HILL JEFFRIES, ESQ.
SUSAN L. SPENCER, ESQ. R. BRANDON ASBILL, ESQ.
JONATHAN R. COE, ESQ. MICHELE J. NELSON, ESQ.
NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. ALSTON & BIRD LLP
FIRST UNION PLAZA, SUITE 1400 ONE ATLANTIC CENTER
999 PEACHTREE STREET, N.E. 1201 WEST PEACHTREE STREET
ATLANTA, GEORGIA 30309 ATLANTA, GEORGIA 30309
(404) 817-6000 (404) 881-7000
(404) 817-6050 (FAX) (404) 881-4777 (FAX)
</TABLE>
---------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for any offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=====================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS MAXIMUM MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value......... 4,600,000 $11.00 $50,600,000 $14,927
=====================================================================================================================
</TABLE>
(1) Includes 600,000 shares which the underwriters have an option to purchase
from the selling shareholders to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A) MAY DETERMINE.
================================================================================
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 21, 1998
PROSPECTUS
4,000,000 SHARES
TOWNE SERVICES, INC.
[LOGO]
COMMON STOCK
This is an initial public offering of 4,000,000 shares of common stock of
Towne Services, Inc. There is currently no public market for the common stock.
The Company has applied for listing of the common stock on the Nasdaq National
Market under the symbol "TWNE." The Company expects that the initial public
offering price will be between $9.00 and $11.00 per share. The market price of
the shares after this offering may be higher or lower than the public offering
price.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds to Towne Services.................................. $ $
</TABLE>
Certain selling shareholders identified in this prospectus have granted the
underwriters an over-allotment option which allows the underwriters to purchase
600,000 additional shares. Any such additional shares will be purchased directly
from the selling shareholders. Towne Services will not receive any of the
proceeds from the sale of such shares.
WHEAT FIRST UNION
J.C. BRADFORD&CO.
STEPHENS INC.
, 1998
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 8
Use of Proceeds............................................. 12
Dividend Policy............................................. 12
Dilution.................................................... 13
Capitalization.............................................. 14
Selected Financial Data..................................... 15
Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 16
Business.................................................... 24
Management.................................................. 34
Principal and selling shareholders.......................... 42
Certain Transactions........................................ 44
Description of Capital Stock................................ 45
Shares Eligible for Future Sale............................. 49
Underwriting................................................ 51
Legal Matters............................................... 52
Experts..................................................... 52
Additional Information...................................... 52
Index to Financial Statements............................... F-1
</TABLE>
------------------------
Throughout this prospectus, we refer to Towne Services as either "Towne
Services" or the "Company."
Unless otherwise stated, all information in this prospectus assumes (i)
that the shares of common stock will be sold to the public for $10.00 per share,
and (ii) that the underwriters will not exercise their over-allotment option to
purchase any of the 600,000 shares subject to that option.
In addition, share numbers have been adjusted to reflect a 100-for-1 split
of the common stock which occurred in January 1997 and assume the conversion of
15,000 shares of preferred stock into approximately 1,200,000 shares of common
stock upon completion of this offering.
------------------------
This prospectus contains certain "forward-looking statements" concerning
Towne Services' operations, performance and financial condition, including its
future economic performance, plans and objectives and the likelihood of success
in developing and expanding its business. These statements are based upon a
number of assumptions and estimates which are subject to significant
uncertainties, many of which are beyond the control of Towne Services. The words
"may," "would," "could," "will," "expect," "anticipate," "believe," "intend,"
"plan," "estimate" and similar expressions are meant to identify such
forward-looking statements. Actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to, those
set forth in "Risk Factors."
------------------------
Towne Services' principal executive offices are located at 3295 River
Exchange Drive, Suite 350, Norcross, Georgia 30092, and its telephone number is
(770) 734-2680.
<PAGE> 4
[GRAPHIC DESCRIBING HOW TOWNE SERVICES' SYSTEMS WORKS]
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and does not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section and the financial
statements and notes to the financial statements, before making any decision to
invest in the common stock.
TOWNE SERVICES
Towne Services designs, develops and markets products and services that
convert the in-house credit transactions of small businesses into automated
"virtual credit card" accounts which are processed electronically. Usually,
in-house credit transactions are completed without a credit card or cash,
recorded and processed manually and billed to the customer at a later date. To
automate this process, Towne Services offers two main electronic processing
systems, TOWNE CREDIT(SM) and TOWNE FINANCE(SM), which process small business'
in-house credit transactions in much the same way as credit card transactions
are processed.
The TOWNE CREDIT system electronically processes in-house consumer credit
transactions of small and medium size retail merchants. The TOWNE FINANCE
system, a commercial version of TOWNE CREDIT, is an automated asset management
and financing system that processes "business-to-business" credit transactions
for small commercial businesses. Through the use of Towne Services' products and
services, small businesses can automate certain manual processes, accelerate
cash flow, provide better customer service, reduce paperwork and shift many
other administrative burdens to Towne Services. In addition, Towne Services
provides complementing products and services to banks that enable them to
provide accounts receivable financing to these small businesses and to monitor
the accounts receivable and generate reports. These products and services allow
the banks to generate interest-bearing revolving credit accounts and attract new
business customers for both the banks and Towne Services.
HOW TOWNE SERVICES' PRODUCTS WORK
Towne Services designed its products and services to be simple to use, fast
and reliable. A typical Towne Services transaction begins when a store clerk
enters transaction information into a point of sale terminal or computer. The
business owner or manager later transmits this information to Towne Services
electronically. Towne Services processes the information, creates transaction
reports for the business, transmits the accounts receivable information to the
business' bank and invoices the business' customers directly. The bank then
advances funds to the business against these accounts. Towne Services tracks
payments made on these accounts and provides frequent updates to the business
and its bank.
Towne Services' electronic processing systems enable businesses to offer
in-house credit to their customers at costs comparable to traditional credit
card transactions. As with credit card transactions, the business pays a
discount fee to the bank on each transaction that is processed. In addition, the
business' customer pays interest and fees to the bank for amounts owed on
account. Towne Services generates recurring revenue by collecting a portion of
the discount fee and, on occasion, interest paid on these accounts and by
charging monthly transaction processing fees. Towne Services also generates
revenue by charging its business and bank customers initial set-up fees.
TOWNE SERVICES' MARKET
A variety of small and medium size retail merchants use the TOWNE CREDIT
system, including hardware stores, clothing stores, florists, auto parts stores,
pharmacies and private clubs. Towne Services markets the TOWNE FINANCE products
and services to small commercial businesses, such as furniture manufacturers,
equipment distributors, plumbing suppliers and other industry supply stores.
Towne Services believes there are
3
<PAGE> 6
more than 5 million small and medium size retail merchants and 12 million small
commercial businesses in the United States. Many of these small businesses
extend in-house credit and process these credit transactions manually. Towne
Services believes that the market for its electronic processing products and
services is largely untapped, as most electronic payment processing companies
focus on credit and debit card transactions and on larger businesses.
TOWNE SERVICES' STRATEGIES
Towne Services has grown significantly since the release of TOWNE CREDIT in
June 1997. The total number of sales people, bank contracts and business
customers for TOWNE CREDIT and TOWNE FINANCE as of the end of each of the last
12 months follows:
<TABLE>
<CAPTION>
1997 1998
----------------------------------------------- ---------------------------------
JUNE JULY AUG. SEPT. OCT. NOV. DEC. JAN. FEB. MARCH APRIL MAY
---- ---- ---- ----- ---- ---- ---- ---- ---- ----- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales people.............. 7 8 9 13 14 11 12 13 14 25 44
Bank contracts............ 29 34 41 41 58 65 74 85 97 122 130
Business customers........ 34 38 49 59 69 81 96 117 135 161 189
</TABLE>
Towne Services' goal is to continue to grow significantly to become one of
the leading providers of electronic processing products and services for the
in-house credit transactions of small and medium size businesses in the United
States. Towne Services plans to attain this goal by implementing the following
key business strategies:
Expand Direct Sales and Marketing Efforts Nationwide
Since the release of TOWNE CREDIT, Towne Services has expanded its
direct sales and marketing force from 7 persons located in 3 states to 44
persons located in 30 states. Towne Services intends to hire additional
sales and marketing personnel nationwide to strengthen its direct marketing
efforts, increase its customer base and expand into new markets. Towne
Services also plans to expand its advertising and increase its
participation in conventions, seminars and trade programs which cater to
small and medium size businesses and the banks that service these
businesses across the United States.
Continue to Leverage Community Bank Relationships
Towne Services' executive officers and directors have an average of 15
years experience in the electronic processing and financial services
industries, and several members of its board of directors either run
community banks or run companies that have community banks as customers.
Towne Services' management leverages this experience and these contacts to
develop relationships with community banks and banking organizations. The
community banks market Towne Services' products and services to small
businesses in their communities. Through these relationships, Towne
Services believes it attracts business customers that would be difficult to
reach through traditional marketing methods. Towne Services plans to sign
agreements with more community banks in its current and new markets. In
addition, Towne Services intends to leverage the market power and
credibility of community banks by providing new products and services that
allow these banks to attract new customers for both the banks and Towne
Services.
Expand Strategic Relationships
Towne Services has established strategic relationships that enhance
its products and services and its channels of distribution. Towne Services
has agreements with certain companies whose products and services enhance
the TOWNE CREDIT and TOWNE FINANCE systems, including Datamatx Inc.,
Wallace
4
<PAGE> 7
and de Mayo P.C. and Cash Management Services, Inc. Towne Services also has
marketing relationships with other entities, such as Phoenix International
Ltd., Inc. and The Kentucky Bankers Bank, that have community banks as
customers. Towne Services intends to enter more strategic relationships
with companies that can expand its products and services and provide access
to large groups of community banks and small businesses.
Capitalize on Electronic Processing System
The installation of TOWNE CREDIT and TOWNE FINANCE by a business
customer establishes an electronic link with Towne Services. Towne Services
intends to capitalize on this electronic distribution channel by developing
and implementing multiple products and services that the customer can
access through this channel to help automate its operations, run its
business more efficiently and provide better service for its customers.
Towne Services plans to use this electronic connection to cross-market both
existing and new products and services to its customers, which should allow
it to develop and maintain long-term customer relationships.
Pursue Strategic Acquisitions
Towne Services intends to pursue acquisitions of providers of
complementary products and services that may enhance and expand its
operations, product and service offerings, market share or geographic
presence. For example, Towne Services has entered into a non-binding letter
of intent to acquire certain assets and liabilities of Credit Collection
Solutions, Inc., a company that has developed computer software for
processing payments and tracking collections. For more information on this
proposed acquisition, please see "Business -- Potential Acquisitions."
5
<PAGE> 8
THIS OFFERING
Common stock offered by Towne
Services................................ 4,000,000 shares
Common stock offered by selling
shareholders (this occurs only if the
underwriters exercise the over-
allotment option)..................... 600,000 shares
Common stock to be outstanding after
this offering........................... 18,691,722 shares
Assumed price per share to public....... $10.00
Estimated net proceeds to Towne Services
(after deducting expenses related to
this offering)........................ $36,000,000
Use of proceeds......................... Towne Services expects to use the
proceeds to enhance its sales and
marketing efforts, expand its
products and services, pay off
certain debts and for general
corporate purposes, including
acquisitions.
Towne Services will not receive any
of the proceeds from any shares
sold by the selling shareholders.
Dividend policy......................... Towne Services does not plan to pay
cash dividends in the near future.
Nasdaq National Market symbol........... TWNE
6
<PAGE> 9
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
INCEPTION THREE MONTHS
PERIOD ENDED YEARS ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
------------ ----------------------- -----------------------
1995(1) 1996 1997 1997 1998
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.......................... $ 6,000 $ 105,285 $ 722,364 $ 96,663 $ 547,954
Costs of processing, servicing and
support......................... 2,250 219,621 832,102 102,684 374,128
Research and development.......... 0 51,871 332,470 11,231 74,024
Sales and marketing............... 3,739 118,163 839,323 94,337 485,562
Stock compensation expense........ 0 10,020 0 0 2,450,907(2)
General and administrative........ 18,410 358,606 1,118,642 170,416 1,347,282
---------- ---------- ---------- ---------- ----------
Total costs and expenses.......... 24,399 758,281 3,122,537 378,668 4,731,903
---------- ---------- ---------- ---------- ----------
Operating loss.................... (18,399) (652,996) (2,400,173) (282,005) (4,183,949)
Financing costs for stock issued
to nonemployees................. 0 0 0 0 2,205,000(2)
---------- ---------- ---------- ---------- ----------
Net loss.......................... (18,625) (662,307) (2,495,101) (300,420) (6,453,238)
Net loss per common share(3)...... $ (0.00) $ (0.10) $ (0.26) $ (0.04) $ (0.53)
========== ========== ========== ========== ==========
Weighted average common shares
outstanding(3).................. 5,000,000 6,337,356 9,600,592 8,006,626 12,072,425
========== ========== ========== ========== ==========
OTHER OPERATING DATA AT END OF
PERIOD:
Number of sales people............ 0 2 12 2 25
Number of bank contracts(4)....... 0 17 74 27 122
Number of business customers...... 0 11 96 24 161
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1998
---------------------------
ACTUAL AS ADJUSTED(5)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $3,111,539 $37,656,596
Total assets................................................ 5,476,001 39,979,091
Long-term debt, net of discounts............................ 1,289,162 28,559
Shareholders' equity........................................ 2,463,601 38,580,294
</TABLE>
- ---------------
(1) The Company was incorporated on October 23, 1995. The inception period is
from that date to December 31, 1995 (the "Inception Period").
(2) During the three months ended March 31, 1998, the Company sold shares of
common stock and issued options to acquire common stock at what management
believed to be the fair market value of the common stock at that time. The
Company retained an independent appraiser who subsequently valued the common
stock at a higher price. The Company recorded a one time non-cash charge for
the difference between the two values. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) See Note 2 of notes to the Company's financial statements for a description
of the method used to determine the share calculations.
(4) Number of bank contracts includes each TOWNE CREDIT and TOWNE FINANCE
processing agreement executed with a bank. In some cases, Towne Services
enters into an agreement with a bank that has several branches or with a
bank holding company that is the parent of several different banks. The
numbers presented above do not reflect the number of branches operated by
the bank or the number of banks owned by a bank holding company, unless the
subsidiary banks or branches have entered into separate written agreements
with Towne Services.
(5) Adjusted to reflect the sale of 4,000,000 shares of common stock by Towne
Services and the application of the estimated net proceeds from this
offering. See "Use of Proceeds."
7
<PAGE> 10
RISK FACTORS
An investment in the shares of common stock involves a high degree of risk.
You should carefully consider the following factors and other information in
this prospectus before deciding to invest in any shares of common stock.
LIMITED OPERATING HISTORY AND PRIOR LOSSES
Incorporated on October 23, 1995, Towne Services had no significant
operations until it released its TOWNE CREDIT product and related services in
June 1997. Accordingly, the Company has only a limited operating history. The
Company has incurred significant losses in each quarter since it commenced
operations. Towne Services had net losses of approximately $19,000, $660,000 and
$2.5 million for its Inception Period and for the subsequent years ended
December 31, 1996 and 1997, respectively. For the three months ended March 31,
1998, the Company had a net loss of approximately $6.5 million. The Company
expects that it will continue to incur net losses until it is able to attain
sufficient revenues to support its business. The Company can provide no
assurances as to when, if ever, this may occur.
The Company's prospects must be evaluated in light of the risks, expenses
and difficulties frequently encountered by companies in their early stages of
development and in relatively new and changing markets. Towne Services' products
and services are relatively new. Businesses and banks may not accept the
Company's products and services quickly or at all. Although the Company has
experienced growth in revenues in recent periods, there can be no assurance that
revenue growth can be sustained or that the Company will become profitable. The
Company's ability to achieve and maintain profitability depends on a number of
factors, including increasing revenues while reducing costs, maintaining current
customers, attracting new business, implementing its business strategies and
many things outside its control. There can be no assurance that the Company will
be successful in the future.
ABILITY TO EXPAND SALES AND MARKETING FORCES AND STRATEGIC RELATIONSHIPS
An integral part of Towne Services' strategy is to hire additional sales
and marketing personnel and expand its strategic relationships. Competition for
experienced sales and marketing personnel is intense. Towne Services may not be
able to retain existing personnel or to locate and attract additional qualified
personnel in the future. In addition, Towne Services has relationships with
various companies and organizations for the marketing, support and endorsement
of its products and services. The loss of any of these strategic relationships
or the failure to enter into additional strategic relationships could prevent or
delay Towne Services' growth and could have a material adverse effect on its
business and financial results. See "Business -- Towne Services' Strategies" and
"-- Sales and Marketing."
ABILITY TO GROW AND TO MANAGE GROWTH
Towne Services may not be successful in implementing its growth strategies
or managing its growth. The Company's ability to grow will depend on a number of
factors beyond its control, including the availability of sufficient capital to
fund its growth, new technologies, general economic and industry conditions,
competition and demand for its products and services. Further, the Company's
growth has placed, and will continue to place, significant demands on all
aspects of its business, including its systems and personnel. There can be no
assurance that the Company will be able to fund its growth, manage costs, adapt
its operating systems, respond to changing business conditions or otherwise
achieve or accommodate growth. See "Business -- Towne Services' Strategies" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have varied in the past and are likely to
vary significantly in the future. Historical results cannot be relied upon to
indicate future results. Revenues are difficult to forecast, in large part
because the market for Towne Services' products and services is emerging and
because the Company's processing volume differs substantially from customer to
customer. The Company's future success depends on
8
<PAGE> 11
a number of factors, many of which are unpredictable and beyond the Company's
control. These factors include market acceptance of its current and future
products and services; growth in its customer base; increased competition; the
introduction of new technologies; personnel changes; costs related to expansion
of its operations; customer budgets; seasonal trends in consumer purchasing;
general economic factors and the effect of potential acquisitions. Due to all of
these factors, it is likely that in some future period the Company's results of
operations will fall below market expectations. This would likely cause the
price of the common stock to drop substantially.
HIGHLY COMPETITIVE INDUSTRY
The electronic transaction processing industry is intensely competitive.
Increased competition is likely from both existing competitors and new entrants
into Towne Services' existing or future markets. The Company believes there are
low barriers to entry in its markets. Competitors may offer new products and
services, change prices, improve customer service and hire additional personnel,
all of which may result in greater competition and lower market share for the
Company. Further, competitors may be able to adapt more quickly to new
technologies and changes in customer requirements and may also be able to devote
greater resources to marketing. Many of the Company's competitors have longer
operating histories, greater name recognition, larger customer bases and
substantially greater resources than the Company.
ACQUISITION RISKS
An inability to acquire and integrate additional businesses, products or
services may negatively affect the Company's financial results and its ability
to grow. There can be no assurance that the Company will be able to identify and
acquire suitable candidates on good terms, arrange adequate financing, complete
any transaction or successfully integrate the acquired business. Future
acquisitions may also distract management and result in dilution to current
shareholders, additional debt, loss of key employees, integration costs,
expenses related to goodwill and other intangible assets, and unforeseen
liabilities, all of which could have a material adverse effect on the Company.
In addition, the Company competes with other electronic processing companies for
acquisition candidates.
RISK OF POSSIBLE SYSTEM FAILURE
The Company's operations depend on its ability to protect its network
infrastructure and equipment against damage from human error, natural disasters,
power and telecommunications failures, intentional acts of vandalism and similar
events. Despite precautions taken by the Company, the occurrence of human error,
a natural disaster or other unanticipated problems could halt the Company's
services, damage network equipment and result in substantial expense for the
Company to repair or replace damaged equipment. In addition, the failure of the
Company's telecommunications providers to supply the necessary services could
also interrupt the Company's services. The inability of the Company to supply
services to its customers could negatively affect the Company's business and
financial results and may also harm the Company's reputation.
CHANGES IN TECHNOLOGY
Other companies may develop new technologies or introduce new products that
are more effective than Towne Services' products and services. This may make the
products and services offered by Towne Services obsolete or less attractive to
potential customers.
DEPENDENCE ON KEY PERSONNEL
Towne Services believes that its ability to successfully implement its
growth strategies and to operate its business depends on the continued
employment of its senior managers and sales and marketing personnel. If members
of management become unable or unwilling to continue in their present positions,
Towne Services' business and financial results could be negatively affected.
Towne Services maintains key man life insurance on certain of its executive
officers. See "Management."
9
<PAGE> 12
RELIANCE ON SIGNIFICANT NEW CUSTOMERS
Towne Services has relied upon and expects to continue to rely upon fees
from significant new customers for a substantial portion of its revenues. The
amount of revenues derived from any given customer during a given period of time
may vary significantly, and Towne Services expects that the identity of
customers accounting for large portions of revenues will change from quarter to
quarter and year to year. The inability of Towne Services to sell its products
and services to a significant number of new customers would have a material
adverse effect on its business, results of operations and financial condition.
See "Business Customers."
LOSS OF CUSTOMERS
Customer attrition is a normal part of the electronic processing business.
The Company has experienced and will experience losses of small business
customers due to attrition. Towne Services' written agreements with its
customers generally provide that either party may terminate the agreement upon
30 to 60 days' notice for any reason. Consolidation in the financial services
industry in the United States may result in fewer potential bank customers. In
addition, the Company may elect not to process or continue processing for
customers that experience financial difficulties or other problems.
TAX ISSUES
The Company has net operating loss carryforwards ("NOLs") of approximately
$4.2 million which will expire if not utilized by 2011 and 2012. Due to changes
in the Company's ownership structure, the Company's use of its NOLs as of
October 1, 1997 of approximately $2.5 million will be limited to approximately
$550,000 in any given year to offset future taxes. If the Company does not
realize taxable income in excess of the limitation in future years, certain NOLs
will be unrealizable. NOLs generated after October 1, 1997 may be further
limited as a result of future sales of common stock by the Company.
At March 31, 1998, the Company had available NOLs of approximately $4.2
million. Once these NOLs are utilized or expire, the Company's projected
effective tax rate will increase, which will adversely affect the Company's
operating results and financial condition. In addition, Towne Services may
become subject to state taxation of fees charged for its transaction processing
products and services, which would decrease its profits, if any, and may have a
negative impact on its financial condition and results of operations.
CONCENTRATION OF STOCK OWNERSHIP
Following this offering, the Company's senior officers and directors will
beneficially own approximately 43.3% of the outstanding common stock.
Accordingly, they will control Towne Services and will have the power to elect a
majority of the directors, appoint management and approve certain actions
requiring the approval of a majority of its shareholders. The interests of
senior management could conflict with the interests of the other shareholders of
Towne Services. See "Management" and "Principal and Selling Shareholders."
SUBSTANTIAL DISCRETION OF MANAGEMENT CONCERNING USE OF PROCEEDS
Towne Services expects to use approximately 10.5 million of the net
proceeds of this offering for specific, identified purposes, with the remaining
net proceeds to be used for working capital and general corporate purposes
including possible acquisitions. Accordingly, management will have substantial
discretion in spending a large part of the net proceeds to be received by Towne
Services. See "Use of Proceeds."
PRODUCT RISKS
Towne Services may be liable if the use of any of its products causes
damage to its customers' businesses. Towne Services also may be required to
recall certain of its products if they become damaged or unable to perform their
intended functions. Towne Services has not experienced any product recalls or
product liability judgments or claims. However, a product recall or product
liability judgment against Towne Services could negatively affect its business
and financial results.
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
Towne Services believes that its technologies, trademarks and other
proprietary rights are important to its success. The Company attempts to protect
itself through a combination of copyright law, trademark and trade
10
<PAGE> 13
secret laws, employee and third party confidentiality agreements and other
methods. However, unauthorized parties may attempt to copy aspects of the
Company's technology, products and services or to otherwise obtain and use
information that the Company regards as proprietary, despite the Company's
efforts to protect them. Third parties may claim that the Company's current or
future products and services infringe the patent, copyright or trademark rights
of such third parties. No assurance can be given that, if such actions or claims
are brought, the Company will ultimately prevail. Any such claims, whether with
or without merit, could be costly and time consuming, cause delays in
introducing new or improved products and services, require Towne Services to
enter royalty or licensing agreements or discontinue using the challenged
technology and otherwise could have a material adverse effect on the Company's
business and financial results. See "Business -- Trademarks and Other
Proprietary Rights."
NO PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE
Before this offering, there has not been a market for the Company's common
stock. The Company has applied for listing of the common stock on the Nasdaq
National Market but cannot guarantee that an active trading market will develop
for the common stock. The initial public offering price for the common stock
will be determined by negotiation between the Company and the underwriters and
may not reflect the market price of the common stock after this offering.
Investors may not be able to resell their shares at or above the initial public
offering price. See "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share will exceed the net tangible
book value per share. Accordingly, purchasers of common stock sold in this
offering will experience immediate and substantial dilution of $7.95 per share
in their investment. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON MARKET PRICE
A substantial number of outstanding shares of common stock, as well as
shares of common stock issuable on exercise of stock options and warrants
granted or to be granted by the Company, are or will be eligible for future sale
in the public market at prescribed times pursuant to Rule 144 or Rule 701 under
the Securities Act of 1933. Sales of a large number of shares in the market
after this offering, or the perception that such sales may occur, could cause
the market price of the common stock to drop. These factors could also make it
more difficult for the Company to raise additional funds in the future through
the sale of common stock.
There will be 18,691,722 shares of common stock outstanding immediately
after this offering. Of these shares, the 4,000,000 shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act of 1933, except for any shares purchased by "affiliates" of Towne
Services, as defined in Rule 144. The remaining 14,691,722 shares of common
stock outstanding will be "restricted securities" within the meaning of Rule
144. In connection with this offering, Towne Services' directors, executive
officers and certain of its shareholders have agreed that, with certain
exceptions, they will not sell any shares of common stock without the consent of
Wheat First Securities, Inc. for 180 days after the date of this prospectus.
After this 180 day period, these shares may be sold in the future without
registration under the Securities Act of 1933 to the extent permitted by Rule
144 as an exemption from registration under the Securities Act of 1933. In
addition, the Company's chief executive officer and certain of its shareholders
have registration rights allowing them to cause Towne Services to register their
shares for sale under certain circumstances. See "Management -- Employment
Agreements," "Certain Transactions," "Underwriting" and "Shares Eligible for
Future Sale."
CERTAIN ANTI-TAKEOVER PROVISIONS; EMPLOYMENT AGREEMENTS
Certain provisions of the Company's Articles of Incorporation and Bylaws
could make it more difficult for a third party to acquire control of Towne
Services, even if such change in control would be beneficial to shareholders.
See "Description of Capital Stock." Certain of the Company's executive officers
have employment agreements that contain change in control provisions. These
provisions may discourage or prevent a tender offer, proxy contest or other
attempted takeover. See "Management -- Employment Agreements."
11
<PAGE> 14
USE OF PROCEEDS
The net proceeds to Towne Services from the sale of 4,000,000 shares of
common stock offered by the Company in this offering are estimated to be
approximately $36.0 million after deducting underwriting discounts and other
estimated offering expenses payable by the Company. Towne Services will not
receive any proceeds from any sale of shares offered by the selling shareholders
if the underwriters exercise their over-allotment option. See "Principal and
Selling Shareholders."
Towne Services intends to use a total of approximately $10.5 million of the
net proceeds of this offering as follows: (i) approximately $4.0 million to
enhance its sales and marketing efforts, including hiring additional sales and
marketing personnel; (ii) approximately $5.0 million to upgrade, enhance and
expand its products and services; and (iii) approximately $1.5 million to repay
the indebtedness outstanding under the Company's loan facility with Sirrom
Investments, Inc. (the "Sirrom Loan Facility"). The Sirrom Loan Facility matures
on December 18, 2002, bears interest at 14% per year and was obtained to provide
working capital for Towne Services.
Towne Services intends to use the balance of the net proceeds, expected to
be approximately 25.5 million, for working capital and general corporate
purposes, including possible acquisitions. Towne Services continues to evaluate
potential strategic acquisitions of providers of complementary technologies and
services and to carry on discussions with several potential acquisition
candidates. Other than the proposed acquisition of assets from Credit
Collections Solutions, Inc., the Company is not currently a party to any written
agreements or commitments with respect to any such acquisitions. There can be no
assurance that any acquisitions will be consummated on terms favorable to the
Company, if at all. Pending application of the net proceeds as described above,
Towne Services intends to invest the net proceeds in short-term,
interest-bearing investment grade securities. See "Risk Factors -- Ability to
Grow and Manage Growth," "Business -- Towne Services' Strategies" and
"Business -- Potential Acquisitions."
DIVIDEND POLICY
Towne Services has not paid cash dividends in the past and does not
anticipate paying any cash dividends on its common stock in the foreseeable
future. Towne Services intends to retain its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions. Unless waived in writing by the lenders, the Sirrom Loan Facility
restricts the declaration and payment of dividends. In addition, the terms of
the Series A Preferred Stock prevent the payment of dividends on the common
stock unless full cumulative dividends have been paid on the Series A Preferred
Stock. Any payment of future dividends on the common stock will be at the
discretion of the Company's board of directors and will depend upon, among other
things, the Company's earnings, financial condition, capital requirements, level
of indebtedness, contractual restrictions with respect to the payment of
dividends and other factors that the Company's board of directors deems
relevant. See "Description of Capital Stock."
12
<PAGE> 15
DILUTION
The net tangible book value of the Company at March 31, 1998 was $2.2
million or $0.16 per share. Net tangible book value per share represents the
amount by which the Company's net tangible assets exceed the Company's total
liabilities divided by the fully diluted number of shares of common stock
outstanding. After giving effect to the sale of 4,000,000 shares of common stock
offered by the Company in this offering and the application of the estimated net
proceeds as set forth under "Use of Proceeds," the Company's pro forma net
tangible book value as of March 31, 1998 would have been $38.3 million, or $2.05
per share. This represents an immediate increase of $1.89 in net tangible book
value per share to existing shareholders and an immediate dilution of $7.95 in
net tangible book value per share to persons purchasing shares in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price............................... $10.00
Net tangible book value before this offering.............. $0.16
Increase attributable to the sale of shares offered
hereby................................................. 1.89
Pro forma net tangible book value after this offering....... 2.05
------
Dilution in net tangible book value to new investors........ $ 7.95
======
</TABLE>
The following table sets forth the number of shares of common stock
purchased from the Company, the total consideration paid and the average price
per share paid by existing shareholders and to be paid by the new investors
purchasing shares of common stock offered hereby.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........................ 14,690,722 78.6% $11,118,505 21.8% $ 0.76
New investors................................ 4,000,000 21.4 40,000,000 78.2 10.00
---------- ----- ----------- -----
Total.............................. 18,690,722 100.0% 51,118,505 100.0%
========== ===== =========== =====
</TABLE>
If the underwriters exercise their over-allotment option in full, sales by
selling shareholders in this offering will reduce the number of shares of common
stock held by existing shareholders to 14,090,722 or 75.4%, and will increase
the number of shares to be held by new investors to 4,600,000 or 24.6%, of the
total number of shares of common stock to be outstanding after this offering.
See "Principal and Selling Shareholders" and "Description of Capital Stock."
The above table assumes no exercise of outstanding stock options or
warrants but includes approximately 1,200,000 shares of common stock which will
be issued upon conversion of the Series A Preferred Stock outstanding upon
completion of this offering. At March 31, 1998 there were outstanding options
and warrants to purchase 3,319,361 shares of common stock at a weighted average
exercise price of $1.13 per share. See "Management -- Stock Option Plans" and
Note 6 of the notes to the Company's financial statements.
13
<PAGE> 16
CAPITALIZATION
The following table sets forth the Company's capitalization at March 31,
1998 (i) on a historical basis and (ii) as adjusted to give effect to the sale
by the Company of 4,000,000 shares of common stock offered hereby and the
application of the estimated net proceeds therefrom. See "Selected Financial
Data" and "Use of Proceeds." This table should be read in conjunction with the
Company's financial statements and the related notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial information appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Long-term debt, including current maturities, net of
original issue discount................................... $1,331,129 $ 70,526
---------- -----------
Warrants with redemption feature............................ 353,000 0
---------- -----------
Shareholders' equity:
Preferred stock, 20,000,000 shares authorized; 15,000
shares of Series A issued and outstanding, actual; and
none outstanding, as adjusted(1)....................... 1,508,000 0
Common stock, 50,000,000 shares authorized; 13,181,740
shares issued and outstanding, actual; and shares
issued and outstanding, as adjusted(2)................. 10,670,872 48,534,962
Warrants outstanding...................................... 20,000 20,000
Accumulated deficit....................................... (9,735,271) (9,974,668)
---------- -----------
Total shareholders' equity........................ 2,463,601 38,580,294
---------- -----------
Total capitalization.............................. $4,147,730 $38,650,820
========== ===========
</TABLE>
- ---------------
(1) The 15,000 shares of Series A Preferred Stock outstanding immediately prior
to this offering automatically convert into approximately 1,200,000 shares
of common stock upon completion of this offering. See "Description of
Capital Stock." The issuance of such shares of common stock upon completion
of this offering is reflected in the as adjusted column.
(2) Excludes 3,319,361 shares of common stock subject to options and warrants
outstanding at March 31, 1998 with a weighted average exercise price of
$1.13 per share. See "Management -- Stock Option Plans" and "Certain
Transactions."
14
<PAGE> 17
SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to, and
should be read in conjunction with, the Company's financial statements and the
related notes thereto and other financial information included elsewhere in this
prospectus, as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected financial data of the Company
as of December 31, 1996 and 1997 and for its Inception Period from October 23,
1995 to December 31, 1995 and for the years ended December 31, 1996 and 1997
were derived from the Company's financial statements that have been audited by
Arthur Andersen LLP, independent public accountants. The selected financial data
as of December 31, 1995 and March 31, 1998 and for the three months ended March
31, 1997 and 1998 were derived from unaudited financial statements which, in the
opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the Company's financial
condition and results of operations. These results may not be indicative of
future results.
<TABLE>
<CAPTION>
INCEPTION
PERIOD ENDED YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
------------ ---------------------- ----------------------
1995(1) 1996 1997 1997 1998
------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues....................................... $ 6,000 $ 105,285 $ 722,364 $ 96,663 $ 547,954
Costs of processing, servicing and support..... 2,250 219,621 832,102 102,684 374,128
Research and development....................... 0 51,871 332,470 11,231 74,024
Sales and marketing............................ 3,739 118,163 839,323 94,337 485,562
Stock compensation expense..................... 0 10,020 0 0 2,450,907(2)
General and administrative..................... 18,410 358,606 1,118,642 170,416 1,347,282
--------- --------- ---------- --------- ----------
Total costs and expenses....................... 24,399 758,281 3,122,537 378,668 4,731,903
--------- --------- ---------- --------- ----------
Operating loss................................. (18,399) (652,996) (2,400,173) (282,005) (4,183,949)
--------- --------- ---------- --------- ----------
Interest expense (income), net................. (131) 5,802 95,946 19,063 64,289
Other expense (income)......................... 357 3,509 (1,018) (648) 0
Financing costs for stock issued to
nonemployees................................. 0 0 0 0 2,205,000(2)
--------- --------- ---------- --------- ----------
Total other expenses........................... 226 9,311 94,928 18,415 2,269,289
--------- --------- ---------- --------- ----------
Net loss....................................... (18,625) (662,307) (2,495,101) (300,420) (6,453,238)
Net loss per common share(3)................... $ (0.00) $ (0.10) $ (0.26) $ (0.04) $ (0.53)
========= ========= ========== ========= ==========
Weighted average common shares
outstanding(3)............................... 5,000,000 6,337,356 9,600,592 8,006,626 12,072,425
========= ========= ========== ========= ==========
OTHER OPERATING DATA AT END OF PERIOD:
Number of sales people......................... 0 2 12 2 25
Number of bank contracts(4).................... 0 17 74 27 122
Number of business customers................... 0 11 96 24 161
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31, 1998
------------------------------- ---------------------------
1995 1996 1997 ACTUAL AS ADJUSTED(4)
------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $17,517 $ 1,677 $2,025,165 $3,111,539 $37,656,596
Total assets.................................... 28,226 366,806 3,586,432 5,476,001 39,979,091
Long-term debt.................................. 30,000 90,000 1,289,666 1,289,162 28,559
Shareholders'(deficit) equity................... (2,875) 119,092 1,261,663 2,463,601 38,580,294
</TABLE>
- ---------------
(1) The Company was incorporated on October 23, 1995. The Inception Period is
from that date to December 31, 1995.
(2) During the three months ended March 31, 1998, the Company sold shares of
common stock and issued options to acquire common stock at what management
believed to be the fair market value of the common stock at that time. The
Company retained an independent appraiser who subsequently valued the common
stock at a higher price. The Company recorded a one time non-cash charge for
the difference between the two values. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) See Note 2 of notes to the Company's financial statements for a description
of the method used to determine the share calculations.
(4) Number of bank contracts includes each TOWNE CREDIT and TOWNE FINANCE
processing agreement executed with a bank. In some cases, Towne Services
enters into an agreement with a bank that has several branches or with a
bank holding company that is the parent of several different banks. The
numbers presented above do not reflect the number of branches operated by
the bank or the number of banks owned by the bank holding company unless the
branches or subsidiary banks have entered into a separate written agreement
with Towne Services.
(5) Adjusted to reflect the sale of 4,000,000 shares of common stock by Towne
Services and the application of the estimated net proceeds from this
offering. See "Use of Proceeds".
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the notes to the financial statements included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
Towne Services designs, develops and markets products and services that
convert the in-house credit transactions of small businesses into automated
"virtual credit card" accounts which are processed electronically. Usually,
in-house transactions are completed without a credit card or cash, recorded and
processed manually and billed to the customer at a later date. Through the use
of Towne Services' products and services, small businesses can automate certain
manual processes, accelerate cash flow, provide better customer service, reduce
paperwork and shift many other administrative burdens to Towne Services. In
addition, Towne Services provides complementing products and services to banks
that enable them to provide accounts receivable financing to these small
businesses and to monitor the accounts receivable and generate reports.
During the Inception Period, the Company's activities primarily related to
raising capital, recruiting personnel, researching and developing new products
including TOWNE CREDIT, purchasing operating assets and establishing a market
for its products. During 1996 and 1997 and the three months ended March 31,
1998, the Company invested the majority of its resources in researching and
developing its products, expanding its marketing activities, building community
bank and merchant sales channels and developing its general and administrative
infrastructure.
The Company's revenues currently are generated through initial set-up fees,
discount fees and monthly transaction processing fees. Set-up fees include
charges for installation, implementation and training of the Company's business
customers and banks. The Company recognizes revenues related to its set-up fees
upon execution of the related contract or, if appropriate, upon settlement of
any contract contingencies. Set-up fees charged to each bank vary depending on
the asset size of the bank and the number of its branches. The Company also
charges set-up fees to its business customers based either upon a flat rate or
upon the expected transaction volume.
As with credit card transactions, the Company's business customer pays a
discount fee to its bank equal to a percentage of the value of each transaction
processed. In addition, the business' customer pays to the bank interest and
fees for amounts owed on account. The Company generates recurring revenue by
collecting a portion of the discount fee and, on occasion, interest paid on
these accounts, as well as by charging monthly transaction processing fees.
Monthly transaction processing fees include charges for electronic processing,
statement rendering and mailing, settling payments, recording account changes
and new accounts, leasing and selling point of sale terminals and collecting
debts.
Costs of processing, servicing and support include installation costs for
the Company's products and costs related to customer service, information
systems personnel and installation services. These expenses also include
commissions and royalties related to Towne Services' indirect marketing
relationships.
Research and development expenses consist of salary and related personnel
costs, including costs for employee benefits, computer equipment and support
services, used in product and technology development. The Company believes that
its research and development expenditures, which aid in the design of new
products and product enhancements to respond to changes in customer demand, are
essential for obtaining and retaining a leadership position in its marketplace.
Most research and development expenditures are expensed as incurred; however,
the Company has capitalized certain development costs under Statement of
Financial Accounting Standards ("SFAS") No. 86 when the products reached
technological feasibility.
16
<PAGE> 19
Sales and marketing expenses consist primarily of salaries and commissions,
travel expenses, advertising, trade show expenses, personnel recruiting costs
and costs of marketing materials. These expenses also include the costs incurred
to develop the Company's indirect marketing channels.
General and administrative expenses consist primarily of salaries and other
personnel costs for the Company's executive, administrative, finance and human
resources personnel, costs of support services and professional services fees.
No provision for federal or state income taxes has been recorded because
the Company has experienced cumulative net losses since inception.
Towne Services had net losses of approximately $19,000, $660,000 and $2.5
million for its Inception Period and for the subsequent years ended December 31,
1996 and 1997, respectively. For the three months ended March 31, 1998, the
Company had a net loss of approximately $6.5 million. As of December 31, 1997,
the Company had an accumulated deficit of $3.2 million. As of March 31, 1998,
this accumulated deficit was $9.7 million. These losses resulted from
significant costs incurred in the development and sale of the Company's products
and services and the establishment of distribution channels.
The Company's business has grown rapidly with total revenues increasing
from $6,000 in the Inception Period to $105,000 in 1996, $722,000 in 1997 and
$548,000 in the first quarter of 1998. However, the Company has experienced net
losses in each of these periods and expects to continue to incur losses for the
foreseeable future. The number of Company employees has increased from 1 at
December 31, 1995 to 70 at March 31, 1998. The Company currently intends to
expand its sales and marketing operations, to invest more in product research
and development, to pursue strategic acquisitions and to improve its internal
operating and financial infrastructure, all of which will increase its operating
expenses.
Because of the Company's limited operating history, management believes
that period-to-period comparisons of its operating results are not meaningful.
Although the Company has experienced significant revenue growth recently, there
can be no assurance that such growth rates are sustainable, and they should not
be relied upon as indicators of future performance. The Company's prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stage of development and relatively new
and changing markets. There can be no assurance that the Company will be
successful in addressing such risks and difficulties or that it will achieve
profitability in the future. See "Risk Factors -- Limited Operating History and
Prior Losses", "Fluctuations in Operating Results" and "Ability to Grow and to
Manage Growth."
17
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth certain historical operating information for
the Company, in dollars and as a percentage of total revenues, for the periods
indicated.
<TABLE>
<CAPTION>
INCEPTION
PERIOD ENDED THREE MONTHS ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31, MARCH 31,
------------ ------------------------- -------------------------
1995 1996 1997 1997 1998
------------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Revenues...................... $ 6,000 $ 105,285 $ 722,364 $ 96,663 $ 547,954
Costs of processing, servicing
and support................. 2,250 219,621 832,102 102,684 374,128
Research and development...... 0 51,871 332,470 11,231 74,024
Sales and marketing........... 3,739 118,163 839,323 94,337 485,562
Stock compensation expense.... 0 10,020 0 0 2,450,907
General and administrative.... 18,410 358,606 1,118,642 170,416 1,347,282
-------- --------- ----------- --------- -----------
Total costs and expenses...... 24,399 758,281 3,122,537 378,668 4,731,903
-------- --------- ----------- --------- -----------
Operating loss................ (18,399) (652,996) (2,400,173) (282,005) (4,183,949)
-------- --------- ----------- --------- -----------
Interest (income) expense,
net......................... (131) 5,802 95,946 19,063 64,289
Other expense (income)........ 357 3,509 (1,018) (648) 0
Financing costs for stock
issued to nonemployees...... 0 0 0 0 2,205,000
-------- --------- ----------- --------- -----------
Total other expenses.......... 226 9,311 94,928 18,415 2,269,289
-------- --------- ----------- --------- -----------
Net loss...................... $(18,625) $(662,307) $(2,495,101) $(300,420) $(6,453,238)
======== ========= =========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
PERIOD ENDED THREE MONTHS ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31, MARCH 31,
------------ ------------------------- -------------------------
1995 1996 1997 1997 1998
------------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Revenues...................... 100% 100% 100% 100% 100%
Costs of processing, servicing
and support................. 38 209 115 106 68
Research and development...... 0 49 46 12 14
Sales and marketing........... 62 112 116 98 89
Stock compensation expense.... 0 10 0 0 447
General and administrative.... 307 340 155 176 246
-------- --------- ----------- --------- -----------
Total costs and expenses...... 407 720 432 392 864
-------- --------- ----------- --------- -----------
Operating loss................ 307 620 332 292 764
-------- --------- ----------- --------- -----------
Interest (income) expense,
net......................... (2) 6 13 20 12
Other expense (income)........ 6 3 0 (1) 0
Finance costs for stock issued
to nonemployees............. 0 0 0 0 402
-------- --------- ----------- --------- -----------
Total other expenses.......... 4 9 13 19 414
-------- --------- ----------- --------- -----------
Net loss...................... 311% 629% 345% 311% 1,178%
======== ========= =========== ========= ===========
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1998
Revenues. The Company's revenues increased from $97,000 for the first
quarter ended March 31, 1997 to $548,000 for the first quarter ended March 31,
1998. During these two periods, set-up fees accounted for approximately 96% and
65% of total revenues, respectively. Recurring revenues accounted for
approximately 4% and 35% of total revenues, respectively, during these two
periods. The increase in revenues during these periods resulted primarily from
an increase in the number of customers and higher set-up and transaction
processing fees charged to new customers. The increase in recurring revenues as
a percentage of total revenues resulted primarily from an increase in the
monthly transaction processing fees that generate recurring revenues.
18
<PAGE> 21
Costs of Processing, Servicing and Support. Costs of processing, servicing
and support increased from $103,000 for the three months ended March 31, 1997 to
$374,000 for the three months ended March 31, 1998. These costs were
approximately 106% and 68% of total revenues, respectively, for these two
periods. The dollar amount of costs of processing, servicing and support
increased as a result of the addition of new customers, additional servicing and
increased support functions required to support the Company's growth. The
Company anticipates that these costs will continue to increase as new customers
are added. If the Company is successful in establishing operating leverage, it
anticipates that at some future point these costs will begin to decrease on a
per customer and per transaction basis.
Research and Development. The Company increased its research and
development expenses from $11,000 for the three months ended March 31, 1997 to
$74,000 for the three months ended March 31, 1998. Research and development
expenses represented approximately 12% and 14% of total revenues, respectively,
during these two periods. Towne Services expects that the dollar amount of
research and development expenses will continue to increase as the Company
recruits and hires additional experienced programmers and develops new products
and services. The Company does not expect to incur significant costs to make its
products Year 2000 compliant because it believes its products are currently
designed to properly function through and beyond the year 2000.
Sales and Marketing. Sales and marketing expenses increased from $94,000
for the three months ended March 31, 1997 to $486,000 for the three months ended
March 31, 1998. Sales and marketing expenses were approximately 98% and 89% of
total revenues, respectively, during these two periods. The increase in the
dollar amount of these expenses is primarily the result of a significant
increase in the number of sales personnel in remote locations, related travel
expenses and increased costs for marketing materials used to recruit potential
bank and business customers. The Company anticipates that sales and marketing
expenses will continue to increase as it continues to expand its direct sales
and marketing force and hires additional personnel to promote its indirect sales
channels.
Stock Compensation Expense. Stock compensation expense increased from $0
for the three months ended March 31, 1997 to $2.5 million for the three months
ended March 31, 1998. During the three months ended March 31, 1998, the Company
sold shares of common stock and issued options to acquire common stock at what
management believed to be the fair market value of the common stock at that
time. The Company retained an independent appraiser who subsequently valued the
common stock at a higher price. The Company recorded a one time non-cash charge
for the difference between the two values.
General and Administrative. General and administrative expenses increased
from $170,000 for the three months ended March 31, 1997 to $1.3 million for the
three months ended March 31, 1998. These costs represented approximately 176%
and 246% of total revenues, respectively, for these two periods. The increase in
the dollar amount of these expenses was primarily the result of increases in the
number of administrative and operational employees and the costs associated with
executive and administrative expenses related to the Company's growth. The
Company anticipates that these expenses will continue to increase in the near
future as it upgrades internal and financial reporting systems to enhance
management's ability to obtain and analyze information about its operations.
Also, the Company anticipates additional costs related to being a public
company, including annual and other public reporting costs, directors' and
officers' liability insurance, investor relations programs and professional
services fees.
Interest (Income) Expense, Net. Interest expense increased from $19,000
for the three months ended March 31, 1997 to $64,000 for the three months ended
March 31, 1998. Interest expense increased due primarily to borrowings under the
Sirrom Loan Facility obtained in late 1997.
Income Taxes. As of March 31, 1998, Towne Services had NOLs of
approximately $4.2 million for federal tax purposes which will expire if not
utilized by 2011 and 2012. The Company has not recognized any benefit from the
future use of such NOLs because management's assumptions of future profitable
operations contain risks that do not provide sufficient assurance to recognize
such tax benefits currently.
19
<PAGE> 22
COMPARISON OF INCEPTION PERIOD AND YEARS ENDED DECEMBER 31, 1996 AND DECEMBER
31, 1997
Revenues. The Company's revenues increased from $6,000 for the Inception
Period to $105,000 in 1996 and $722,000 in 1997. During these three periods,
set-up fees accounted for approximately 96%, 93% and 54% of the Company's total
revenues in the Inception Period, 1996 and 1997, respectively. Recurring
revenues accounted for approximately 4%, 5% and 18% of total revenues in the
Inception Period, 1996 and 1997, respectively. The increases in the dollar
amount of revenues during these periods resulted primarily from an increase in
the number of customers and higher set-up and transaction processing fees
charged to new customers. The increases in recurring revenues as a percentage of
revenues resulted primarily from an increase in the monthly transaction
processing revenues that generate recurring revenues.
Costs of Processing, Servicing and Support. Costs of processing, servicing
and support increased from $2,000 for the Inception Period to $220,000 in 1996
and $832,000 in 1997. The costs were approximately 38%, 209% and 115% of total
revenues, respectively, for these three periods. The dollar amount of costs of
processing, servicing and support increased as a result of the addition of new
customers, additional servicing and increased support functions required to
support the Company's growth.
Research and Development. The Company increased its research and
development expenses from $0 during the Inception Period to $52,000 in 1996 and
$332,000 in 1997. Research and development expenses represented approximately
0%, 49% and 46% of total revenues, respectively, during these three periods.
These increases in dollar amounts were due primarily to the continued
development of TOWNE CREDIT and TOWNE FINANCE.
Sales and Marketing. Sales and marketing expenses increased from $4,000 in
the Inception Period to $118,000 in 1996 and to $839,000 in 1997. Sales and
marketing expenses were approximately 62%, 112% and 116% of total revenues,
respectively, during these three periods. These increases in dollar amounts were
primarily the result of a significant increase in the number of sales personnel
and locations, related travel expenses and increased costs for marketing
materials used to recruit potential bank and merchant customers.
General and Administrative. General and administrative expenses increased
from $18,000 in the Inception Period to $359,000 in 1996 to $1.1 million in
1997. These costs were approximately 307%, 340% and 155% of total revenues,
respectively, for these three periods. These increases in dollar amounts were
primarily the result of increases in the number of administrative and
operational employees, and the costs associated with administrative expenses and
building infrastructure to support the Company's growth.
Interest (Income) Expense, net. Interest expense increased from $0 for the
Inception Period to $6,000 in 1996 and $96,000 in 1997. Interest expense
increased from 1996 to 1997 primarily as a result of the Sirrom Loan Facility
which was obtained in late 1997.
Income Taxes. As of December 31, 1997, Towne Services had NOLs of
approximately $3.0 million for federal tax purposes which will expire if not
utilized by 2011 and 2012. The Company has not recognized any benefit from the
future use of such NOLs because management's assumptions of future profitable
operations contain risks that do not provide sufficient assurance to recognize
such tax benefits currently.
20
<PAGE> 23
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited statements of operations data for
the nine quarters ended March 31, 1998, as well as such data expressed as a
percentage of the Company's total revenues for the periods indicated. This data
has been derived from unaudited interim financial statements that, in the
opinion of management, include all adjustments (consisting primarily of
recurring accruals) necessary for a fair presentation of such information when
read in conjunction with the Company's financial statements and the related
notes thereto appearing elsewhere in this prospectus. The operating results for
any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER MARCH
1996 1996 1996 1996 1997 1997 1997 1997 1998
----- ----- --------- -------- ----- ----- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 6 $ 19 $ 29 $ 51 $ 97 $ 88 $ 198 $ 340 $ 548
Costs of processing, servicing
and support.................. 17 32 41 130 103 150 222 357 374
Research and development....... 0 2 0 50 7 38 114 173 74
Sales and marketing............ 15 34 31 38 94 118 207 421 486
Stock compensation expense..... -- -- -- 10 -- -- -- -- 2,451
General and administrative..... 24 74 70 190 141 210 268 500 1,347
---- ----- ----- ----- ----- ----- ----- ------- -------
Total costs and expenses....... 56 142 142 418 345 516 811 1,451 4,732
---- ----- ----- ----- ----- ----- ----- ------- -------
Operating loss................. (50) (123) (113) (367) (248) (428) (613) (1,111) (4,184)
---- ----- ----- ----- ----- ----- ----- ------- -------
Interest (income) expense,
net.......................... -- 2 2 2 19 26 29 22 64
Other expense (income)......... -- -- -- 3 (1) -- -- -- --
Financing costs for stock
issued to nonemployees....... -- -- -- -- -- -- -- -- 2,205
---- ----- ----- ----- ----- ----- ----- ------- -------
Total other expenses........... -- 2 2 5 18 26 29 22 2,269
---- ----- ----- ----- ----- ----- ----- ------- -------
Net loss....................... $(50) $(125) $(115) $(372) $(266) $(454) $(642) $(1,133) $(6,453)
==== ===== ===== ===== ===== ===== ===== ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER MARCH
1996 1996 1996 1996 1997 1997 1997 1997 1998
----- ----- --------- -------- ----- ----- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... 100% 100% 100% 100% 100% 100% 100% 100% 100%
Costs of processing, servicing
and support.................. 283 168 141 255 106 170 112 105 68
Research and development....... 0 11 0 98 7 43 58 51 14
Sales and marketing............ 250 179 107 75 97 134 105 124 89
Stock compensation expense..... 0 0 0 20 0 0 0 0 447
General and administrative..... 400 389 241 373 145 239 135 147 246
---- ----- ----- ----- ----- ----- ----- ------- -------
Total costs and expenses....... 933 747 490 820 356 586 410 427 864
---- ----- ----- ----- ----- ----- ----- ------- -------
Operating loss................. (833) (647) (390) (720) (256) (486) (310) (327) (764)
---- ----- ----- ----- ----- ----- ----- ------- -------
Interest (income) expense,
net.......................... 0 11 7 4 20 30 15 6 12
Other expense (income)......... 0 0 0 6 (1) 0 0 0 0
Financing costs for stock
issued to nonemployees....... 0 0 0 0 0 0 0 0 402
---- ----- ----- ----- ----- ----- ----- ------- -------
Total other expenses........... 0 11 7 10 19 30 15 6 414
---- ----- ----- ----- ----- ----- ----- ------- -------
Net loss....................... (833)% (658)% (397)% (729)% (274)% (516)% (324)% (333)% (1,178)%
==== ===== ===== ===== ===== ===== ===== ======= =======
</TABLE>
During the Company's short history, its operating results have varied
significantly and are likely to fluctuate significantly in the future as a
result of a combination of factors. These factors include the market acceptance
of the Company's products and services; growth in its customer base; increased
competition; the introduction of new technologies; personnel changes; costs
related to expansion of operations; customer budgets; seasonal trends in
consumer purchasing; and general economic factors. In addition, the amount of
revenues associated with particular set-up fees can vary significantly based
upon the number of products used by customers for any particular period. The
Company establishes its expenditure levels for product
21
<PAGE> 24
development, sales and marketing and other operating expenses based, in large
part, on its anticipated revenues. As a result, if revenues fall below
expectations, operating results and net income are likely to be adversely and
disproportionately affected because only a portion of the Company's expenses
vary with its revenues.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through sales of its equity securities in private placements and through
borrowings under the Sirrom Loan Facility. Through December 1997, the Company
received aggregate net proceeds of $4.3 million from the sale of its common
stock. In March 1998, the Company received net proceeds of $1.5 million from the
sale of its Series A Preferred Stock in a private placement.
On December 18, 1997, the Company entered into the Sirrom Loan Facility
under which it borrowed $1.5 million for general working capital purposes. At
March 31, 1998, $1.5 million remained outstanding under the Sirrom Loan
Facility. At March 31, 1998, the Company also had two lines of credit under
which it could borrow up to a total of $750,000 and no amounts were outstanding
under these credit facilities. These lines of credit were obtained for working
capital purposes, and one of them was guaranteed by various officers and
directors of the Company. The terms of the Sirrom Loan Facility and the lines of
credit place certain restrictions on the Company's ability to declare and pay
dividends, incur additional debt and enter into agreements for mergers,
acquisitions or sales of substantial assets. The Sirrom Loan Facility matures on
December 18, 2002 and accrues interest at 14% per year. The first line of credit
is for $500,000, matures on July 10, 2000, is secured by certain lease contracts
on point of sale terminals and accrues interest at the lender's prime rate plus
1/2%. The second line of credit is for $250,000, matures on June 4, 1998 and
accrues interest at the lender's prime rate. The Company plans to terminate the
Sirrom Loan Facility and the lines of credit after completion of this offering.
The Company currently is negotiating with certain other financial institutions
to establish a credit facility for future working capital and acquisition
financing, but there can be no assurance that such negotiations will be
successful.
Net cash used in operating activities was approximately $2.2 million for
the year ended December 31, 1997 and $1.5 million for the quarter ended March
31, 1998. Net cash used in operating activities during 1997 represents a $2.5
million net operating loss partially offset by a $600,000 increase in accounts
payable and accrued expenses, $120,000 of growth in accounts receivable and a
$260,000 increase in other assets. Net cash used in operating activities for the
quarter ended March 31, 1998 represents a net operating loss of $6.5 million
partially offset by a $600,000 increase in accounts payable and accrued
expenses, $240,000 growth in accounts receivable and a $150,000 increase in
other assets.
Cash provided by financing activities of $5.0 million in 1997 and another
$2.7 million in the first quarter of 1998 consisted primarily of the proceeds
from the issuance of securities and a five year note payable for $1.5 million.
Purchase of computer equipment used in conducting the Company's business
represented the primary component of cash used in investing activities.
As of March 31, 1998, the Company had $3.5 million in cash and cash
equivalents. The net proceeds from this offering remaining after deducting (i)
underwriting discounts, (ii) estimated offering expenses, and (iii) the
repayment of the indebtedness outstanding under the Sirrom Loan Facility are
expected to total approximately $34.5 million. The Company believes that such
remaining net proceeds, together with existing cash and cash equivalents and
cash generated from operations, will be sufficient to fund its anticipated
operating costs and to meet its anticipated working capital and liquidity needs
for the next 12 months. The Company currently intends to use such remaining net
proceeds for working capital and general corporate purposes, including enhancing
its sales and marketing efforts, expanding its products and services and for
possible acquisitions. However, no assurance can be made with respect to the
actual timing and amount of the expenditures and any acquisitions. In addition,
no assurance can be given that the Company will complete any acquisitions on
terms favorable to the Company, if at all, or that additional sources of
financing will not be required during these time periods or thereafter. The
Company's estimates are forward looking statements that
22
<PAGE> 25
are subject to risks and uncertainties. Actual results and working capital needs
could differ materially from those estimated due to a number of factors,
including the factors discussed under "Risk Factors."
EFFECTS OF ACCOUNTING STANDARDS
SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" issued by the Financial Accounting
Standards Board ("FASB") requires the Company to review for impairment, and
potentially write down, the carrying values of long-lived assets and certain
identifiable intangibles to be held and used by the Company. The Company adopted
SFAS No. 121, effective January 1, 1996, with no material impact on its
financial statements. The Company periodically reviews the values assigned to
long-lived assets, such as property and equipment, to determine if any
impairments are other than temporary. Management believes that the long-lived
assets in the accompanying financial statements are appropriately valued.
SFAS No. 123, "Accounting for Stock Based Compensation" establishes a fair
value based method for financial accounting and reporting stock-based employee
compensation plans or similar equity instruments. Companies may elect to
continue to measure compensation cost for those plans using the method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities electing to remain with the
accounting in APB No. 25 must make pro forma disclosures of net income and, if
presented, earning per share, as if the fair value-based method of accounting
defined in the statement had been applied. The Company has elected to account
for its stock-based compensation plan under APB No. 25 but has computed, for pro
forma disclosure purposes, the value of all options granted during 1996, 1997
and the first quarter of 1998 using the minimum value option pricing model as
prescribed by SFAS No. 123. See Note 5 of notes to the Company's financial
statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share.
The Company adopted the new guidelines for the calculation and presentation of
earnings per share, and all prior periods have been restated. Basic loss per
share is based on the weighted average number of shares outstanding. Diluted
loss per share is based on the weighted average number of shares outstanding and
the dilutive effect of common stock equivalent shares issuable upon the exercise
of stock options and warrants (using the treasury stock method). All common
stock equivalents have been excluded as their effect would be anti-dilutive.
23
<PAGE> 26
BUSINESS
GENERAL
Towne Services designs, develops and markets products and services that
convert the in-house credit transactions of small businesses into automated
"virtual credit card" accounts which are processed electronically. Usually,
in-house credit transactions are completed without a credit card or cash,
recorded and processed manually and billed to the customer at a later date. To
automate this process, Towne Services offers two main electronic processing
systems, TOWNE CREDIT(SM) and TOWNE FINANCE(SM), which process small business'
in-house credit transactions in much the same way as credit card transactions
are processed.
The TOWNE CREDIT system electronically processes in-house consumer credit
transactions of small and medium size retail merchants. The TOWNE FINANCE
system, a commercial version of TOWNE CREDIT, is an automated asset management
and financing system that processes "business-to-business" credit transactions
for small commercial businesses. Through the use of Towne Services' products and
services, small businesses can automate certain manual processes, accelerate
cash flow, provide better customer service, reduce paperwork and shift many
other administrative burdens to Towne Services. In addition, Towne Services
provides complementing products and services to banks that enable them to
provide accounts receivable financing to these small businesses and to monitor
the accounts receivable and generate reports. These products and services allow
the banks to generate interest-bearing revolving credit accounts and attract new
business customers for both the banks and Towne Services.
Towne Services' electronic processing systems enable businesses to offer
in-house credit to their customers at costs comparable to traditional credit
card transactions. As with credit card transactions, the business pays a
discount fee to the bank on each transaction that is processed. In addition, the
business' customer pays interest and fees to the bank for amounts owed on
account. The discount fees and interest create a pool of funds from which Towne
Services collects its transaction fees, thereby generating recurring revenue.
The remaining amounts generate fee income for the bank. Towne Services also
generates non-recurring revenue by charging its business and bank customers
initial set-up fees.
TOWNE SERVICES' MARKET
Towne Services provides its products and services to retail merchants and
small commercial businesses that extend in-house credit to their customers and
to the banks these businesses use. The electronic payments processing industry
generally has not offered the Company's target customers a way to process their
in-house credit transactions electronically, focusing instead on credit and
debit card transactions. Maintaining and processing manual in-house charge
accounts can be time consuming and costly -- the business owner usually records
data by hand, updates books and records, purchases supplies for rendering
invoices, prepares and mails statements and collects payment. These businesses
often must wait weeks or even months to receive their money. Historically, banks
have not provided accounts receivable financing due to their inability to
control the assets securing the business' loan, the costly administrative
burdens and the lack of timely information.
A variety of small and medium size retail merchants use the TOWNE CREDIT
system, including hardware stores, clothing stores, florists, auto parts stores,
pharmacies and private clubs. Towne Services markets the TOWNE FINANCE products
and services to small commercial businesses, such as furniture manufacturers,
equipment distributors, plumbing suppliers and other industry supply stores.
Towne Services believes there are more than 5 million small and medium size
retail merchants and 12 million small commercial businesses in the United
States. Many of these small businesses extend in-house credit and process these
credit transactions manually. Towne Services believes that most community banks
desire to establish and maintain close relationships with members of the
communities in which they do business, including the small businesses. Towne
Services believes that the market for its electronic processing products and
services is largely untapped, as most electronic payment processing companies
focus on credit and debit card transactions and on larger businesses. In
addition, the Company believes its TOWNE CREDIT and TOWNE FINANCE systems are
well-designed to help banks that service small businesses provide accounts
receivable financing and other bank products and programs that may attract new
business and generate a new source of fee income for the bank.
24
<PAGE> 27
TOWNE SERVICES' STRATEGIES
Towne Services has grown significantly since the release of TOWNE CREDIT in
June 1997. The total number of sales people, bank contracts and business
customers for TOWNE CREDIT and TOWNE FINANCE as of the end of each of the last
12 months follows:
<TABLE>
<CAPTION>
1997 1998
----------------------------------------------- ---------------------------------
JUNE JULY AUG. SEPT. OCT. NOV. DEC. JAN. FEB. MARCH APRIL MAY
---- ---- ---- ----- ---- ---- ---- ---- ---- ----- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales people................. 7 7 9 13 14 14 16 16 17 28 44
Bank contracts............... 29 34 41 41 58 65 74 85 97 122 130
Business customers........... 34 38 49 59 69 81 96 117 135 161 189
</TABLE>
Towne Services' goal is to continue to grow significantly to become one of
the leading providers of electronic processing products and services for the
in-house credit transactions of small and medium size businesses in the United
States. Towne Services plans to attain this goal by implementing the following
key business strategies:
Expand Direct Sales and Marketing Efforts Nationwide
Since the release of TOWNE CREDIT, Towne Services has expanded its direct
sales and marketing force from 7 persons in 3 states to 44 persons located in 30
states. Of this total, 23 persons are dedicated to developing bank customer
relationships and 21 are focused on developing small business customers. Towne
Services intends to hire additional sales and marketing personnel nationwide to
strengthen its direct marketing efforts, increase its customer base and expand
into new markets. Towne Services also plans to expand its advertising and
increase its participation in conventions, seminars and trade programs which
cater to small and medium size businesses and the banks that service these
businesses across the United States.
Continue to Leverage Community Bank Relationships
Towne Services' executive officers and directors have an average of 15
years experience in the electronic processing and financial services industries,
and several members of its board of directors either run community banks or run
companies that have community banks as customers. Towne Services' management
leverages these expertise and contacts to develop relationships with community
banks and banking organizations. These community banks market Towne Services'
products and services to small businesses in their communities. Through these
relationships, Towne Services believes it attracts business customers that would
be difficult to reach through traditional marketing methods. Towne Services
plans to sign agreements with more community banks in its current and new
markets. In addition, Towne Services intends to leverage the market power and
credibility of community banks by providing new products and services that allow
these banks to attract new customers for both the banks and Towne Services.
Expand Strategic Relationships
Towne Services has established strategic relationships that enhance its
products and services and its channels of distribution. Towne Services has
agreements with certain companies whose products and services enhance the TOWNE
CREDIT and TOWNE FINANCE systems, including Datamatx, Wallace and de Mayo and
Cash Management Services. Towne Services also has marketing relationships with
other companies, such as Phoenix International Ltd. and The Kentucky Bankers
Bank, that have community banks as customers. Towne Services intends to enter
more strategic relationships with companies that can expand its products and
services and provide access to large groups of community banks and small
businesses.
Capitalize on Electronic Processing System
The installation of TOWNE CREDIT and TOWNE FINANCE by a business customer
establishes an electronic link with Towne Services. Towne Services intends to
capitalize on this electronic distribution channel by developing and
implementing multiple products and services that the customer can access through
its connection to Towne Services to help automate its operations, run its
business more efficiently and provide
25
<PAGE> 28
better service for its customers. Towne Services plans to use this electronic
connection to cross-market both existing and new products and services to its
customers, which should allow it to develop and maintain long-term customer
relationships.
Pursue Strategic Acquisitions
Towne Services intends to pursue acquisitions of providers of complementary
products and services that may enhance and expand its operations, product and
service offerings, market share or geographic presence. For example, Towne
Services has entered into a non-binding letter of intent to acquire certain
assets and liabilities of Credit Collection Solutions, Inc., a company that has
developed computer software for processing payments and tracking collections.
For more information on this proposed acquisition, please see "-- Potential
Acquisitions."
PRODUCTS AND SERVICES
Towne Services designs its products and services to be simple to use, fast
and reliable. Towne Services' automated processing systems, TOWNE CREDIT and
TOWNE FINANCE, process in-house credit transactions for small businesses in much
the same way as credit card transactions are processed.
TOWNE CREDIT
TOWNE CREDIT is an automated transaction processing system designed for
consumer-based credit transactions conducted by small businesses. The system
uses remote point of sale terminals and communications networks to capture and
transmit transaction data and generate a "virtual credit card" account funded by
a business' bank. A typical in-house credit transaction for Towne Services'
business customers is processed through TOWNE CREDIT as follows:
Step 1: The participating business sells goods or services on an
in-house account. No money changes hands and no credit cards are used.
Step 2: The business enters sales information at the point of sale
into an electronic cash register or computer terminal loaded with Towne
Services' proprietary computer software.
Step 3: The business owner closes out its daily transactions and
electronically transmits transaction data to Towne Services through the
computer system across telecommunications lines.
Step 4: Towne Services processes the data, calculates receivables,
performs other accounting functions and transmits reports to the business
and its community bank upon request by the next business day.
Step 5: The community bank retrieves the sales and payment
information and advances funds to the business' bank account based upon
pre-set lending terms.
Step 6: Towne Services bills the business' customer, collects and
processes the customer's payment and transmits payment information to the
bank for credit to the business' bank account.
Steps 1 and 2. When a customer makes a purchase on account, a store clerk
records the transaction on a point of sale terminal provided by Towne Services.
The PC-based terminal stores names and addresses of customers, account balances
and payment activity, which the business owner can retrieve quickly at the point
of sale. The business can use this terminal instead of the traditional cash
register, as it will record and store information from cash sales and credit and
debit card transactions. Businesses that do not want a new terminal can have the
TOWNE CREDIT software loaded on an existing computer. The TOWNE CREDIT system
captures the transaction data, including dollar amount and customer information,
for use in billing, tracking inventory and generating sales and tax reports.
26
<PAGE> 29
The bank leases the TOWNE CREDIT point of sale terminal from Towne Services
and provides it to the business. The Company customizes and regularly updates
the software that drives the terminals and provides terminal maintenance
services for its customers.
Steps 3 and 4. On a daily basis, the business owner or manager transmits
the sales activity by batch to the Company's computer processing center in
Norcross, Georgia, across an ordinary telephone line or Internet connection. The
Company's customer communication software enables it to support a wide range of
business customers, including those in rural areas that might otherwise have
difficulty in transmitting data because of unstable land line communications.
Towne Services' communications and computer processing systems are flexible
and scalable, meaning that it can add more processing capacity, increase
processing speed and support numerous customer operating systems and data
protocols. The Company's electronic processing network is capable of
simultaneously managing batches of transactions from multiple businesses and
data from numerous days' transactions from a single business. The Company's
system provides for the redundant capture of transaction data at both the point
of sale terminal and at its communications network center. This data capture
redundancy helps to protect the business and the Company against potential loss
of data.
Towne Services' systems process data from purchase transactions, calculate
receivables, post these transactions and perform other accounting functions
automatically. Towne Services can program its systems to generate daily
customized receivables, ledger and other reports used by its customers to manage
their businesses. The Company's network systems then transmit reports to
businesses and their banks by the business day following receipt of transaction
data.
Steps 5 and 6. The community bank that serves the business usually offers
a line of credit, in which case the bank funds the prior day's sales at
discounts similar to those in major credit card transactions. Through a graphic
interface with the Company's communications server, the bank has daily access to
the information it needs to finance the business' accounts receivable. If no
line of credit is in place, the business' funds are deposited at the bank as
they are collected by the Company. TOWNE CREDIT works with the bank's current
loan processing systems and creates the general ledger account entries necessary
for the bank to account for the line of credit loans to the business. Towne
Services assumes no credit risk from business customers in these transactions.
With TOWNE CREDIT, many administrative burdens of running a small business
are outsourced to Towne Services. The Company generates and prints statements
and sends them to the business' customers. Towne Services maintains an automated
lock box through which payments can be received. The lock box gives the business
the benefit of controlled remittance processing and allows the bank to control
the payments associated with the accounts, thus applying them to the outstanding
loan balance. If a customer chooses to pay the business directly when he or she
receives the bill, the business owner can record that payment in the point of
sale terminal to be processed electronically on the Company's system. The system
allows businesses to quickly track account balances and payment history and
verify customer transaction information by checking the receivables reports
generated or, if needed, by dialing into the Company's processing network to
verify or update information.
Towne Services also settles payments for its customers. Settlement involves
managing a record of each business transaction and transferring funds received
to the business' community bank for credit to its bank account. The Company
transmits, upon request, transaction information directly to the bank and
arranges for funds to be transferred from its automated lock box via Automated
Clearing House (ACH) or Fedwire transfer to the community bank. Funds are then
transferred to the business' bank account via the bank's internal deposit
system. Settlement payments made to the business' bank account reflect a
discount from the full transaction price, which generally includes the Company's
processing fees.
TOWNE CREDIT enables businesses to streamline front desk and back office
procedures. Through TOWNE CREDIT, businesses receive accelerated funding for
in-house charge accounts and eliminate costly and inefficient manual processing.
Sales also may be enhanced by the business' ability to offer finance options,
such as sales on account, to its customers. The bank that serves the business
generates fee income in the form
27
<PAGE> 30
of transaction discounts and may profit from interest-bearing consumer credit
accounts. If the bank elects not to fund the business' accounts receivable, the
system still functions as an automated billing and collection system, and the
bank generates fee income. In both cases, the TOWNE CREDIT processing system
provides the Company with fee income.
TOWNE FINANCE
The Company's automated asset management and financing software system,
TOWNE FINANCE, is a commercial version of TOWNE CREDIT that addresses
"business-to-business" credit transactions. TOWNE FINANCE facilitates accounts
receivable financing for small commercial businesses by allowing these
businesses and their community banks to better manage and control assets that
fluctuate in value. TOWNE FINANCE transaction processing occurs in much the same
way as TOWNE CREDIT processing, but on a larger and more sophisticated basis.
For example, a furniture manufacturer may need additional working capital
to purchase raw materials and cover the incremental costs associated with
payroll and general overhead. The furniture manufacturer's traditional payment
terms can limit cash flow. By the time it invoices customers and receives
payment, many expenses associated with the finished product have been incurred.
With TOWNE FINANCE, the manufacturer has the ability to convert the invoices to
needed cash to finance its ongoing operations. TOWNE FINANCE enables financial
institutions to offer these businesses the same convenient services available to
its TOWNE CREDIT customers.
TOWNE FINANCE facilitates the process through which a bank can loan money
to a small commercial business. Using TOWNE FINANCE, banks can assign percentage
values to specific assets of its small business customers, such as accounts
receivable, inventory, real estate, furniture, fixtures and equipment. By
assigning these values, banks can develop a risk-based formula for lending to
their business customers. TOWNE FINANCE tracks the accounts receivable,
maintains a parallel aging of the accounts and allows the bank to control
advances and pay downs based on daily activity of new sales and account
payments. The system supports discretionary lines of credit as well as automatic
daily funding of eligible assets. TOWNE FINANCE works with the banks' current
loan processing systems and creates the general ledger account entries necessary
for community banks to account for these asset-based accounts receivable loans.
Once a bank customer agrees to use TOWNE FINANCE, the bank must approve a
credit line for the customer. After credit is established, the Company loads
historical invoice data onto its host computer. The bank will advance funds to a
customer at a discount to their aggregate value. The bank specifies a set of
standards at the processing level and assigns a loan officer to monitor the
credit as it would any other loan. Towne Services then takes over the statement
rendering and remittance processing functions for the bank much like it does for
TOWNE CREDIT. Access to an automated lock box allows the bank to control the
payments associated with the accounts and apply the payments to the outstanding
loan balance. After payments are received, Towne Services processes the payments
and transmits funds electronically to the customers' operating account at the
bank.
The bank provides a line of credit that is controlled using TOWNE FINANCE
daily processing and reporting functions. The bank retains all credit and
funding responsibility and the Company provides a specialized sales force, back
room processing and monitoring services. Towne Services assumes no credit risk
from the business' customers.
TOWNE FINANCE allows community banks to provide a profitable and cost
effective accounts receivable financing program for its small commercial
customers. Community banks using TOWNE FINANCE gain interest-bearing loans on
funds (net of all processing expenses) and strengthen relationships with
business customers that experienced cash flow problems or that might have
otherwise turned to non-traditional lenders. Many non-traditional accounts
receivable lenders, however, are unable to process efficiently an accounts
receivable program based upon the small size of these small commercial customers
invoices. Therefore, Towne Services fills an underserved niche in the
marketplace.
28
<PAGE> 31
Supporting Services and New Products
The Company provides an array of value-added services in connection with
its TOWNE CREDIT and TOWNE FINANCE processing systems, including marketing
programs and materials and collection services. Towne Services plans to design
and develop new and improved products and services to help its customers
automate their businesses and provide better service to their clients.
Marketing Programs and Materials. The Company's primary marketing tool is
its direct sales force. However, the Company also offers a number of services
designed to allow community banks to target businesses in their communities.
Towne Services provides advertising, marketing brochures and inserts and direct
mail to increase market penetration for its bank customers.
Collection Services. The Company's processing systems help its customers
identify delinquent accounts. Towne Services maintains an agreement with Wallace
and de Mayo, a national collections company, that enables its customers to have
on-line access to professional debt collection services. Towne Services
maintains an electronic interface with Wallace and de Mayo so account
information is readily delivered to assist in collecting past due amounts.
New Product Development. Towne Services plans to design and develop new
and improved products and services that small business customers can access
through their electronic connection to the Company to help automate their
businesses and provide better service to their clients. For instance, the
Company has recently commenced testing on an enhanced version of an automated
processing system that offers community banks the opportunity to set up formal
lease programs with local dealers, distributors and manufacturers of leased
products. This system, TOWNE LEASE(SM), is designed to provide documentation,
statement rendering and remittance processing for merchants and community banks
who desire to offer product leasing to their customers. The community bank will
be able to electronically transmit lease contract information to Towne Services
for entry into its host processing system. During the term of a lease, Towne
Services performs all servicing aspects of the lease. The community bank
accesses lease information and receives general ledger postings. Like TOWNE
CREDIT and TOWNE FINANCE, TOWNE LEASE is a technology designed to allow the
community bank to access, process and download their financial data from the
Company's computer network system.
POTENTIAL ACQUISITIONS
Towne Services intends to pursue acquisitions of providers of complementary
products and services that may enhance and expand its operations, product and
service offerings, market share and geographic presence. For example, Towne
Services has entered into a non-binding letter of intent to acquire certain
assets and liabilities of Credit Collection Solutions, Inc. ("Credit
Collection"), a company that has developed computer software for processing
payments and tracking collections. Pursuant to this letter, the Company could
assume liabilities not to exceed $500,000 and may issue up to 100,000 shares of
its common stock if certain financial results are achieved from the acquired
assets. The parties' obligations under the letter of intent are conditioned upon
several matters, including completion of diligence and the execution of a
definitive purchase agreement. The letter provides that Credit Collection may
not negotiate or enter into any other transaction related to the assets Towne
Services might acquire or the related business until June 30, 1998 or until the
parties' decide otherwise. In addition, Credit Collection must pay a $250,000
termination fee to Towne Services upon the occurrence of certain events. Credit
Collection's obligations are secured by a lien on most of its assets.
SALES AND MARKETING
Towne Services employs a direct sales force of 44 persons located in 30
states. The Company's direct sales force develops relationships with banks and
small business customers. The Company employs two distinct sales forces to
market its products and services. The bank sales force focuses on developing
relationships with banks through which TOWNE CREDIT and TOWNE FINANCE are
marketed to business customers. The Company's business representatives call on
small business customers of banks that have contracted with Towne Services, as
well as other merchants who might use its products.
29
<PAGE> 32
Towne Services has leveraged its board members' and senior managers'
expertise and contacts to develop relationships with community banks and banking
organizations. The Company has over 130 agreements with community banks located
in 13 states who work directly with Towne Services' sales force to market TOWNE
CREDIT and TOWNE FINANCE to the banks' customers. Through these relationships
with the community banks, Towne Services believes it attracts businesses that
would be difficult to reach through traditional marketing methods. Towne
Services believes that endorsements by local community bankers are the most
effective sales tools to reach small businesses. Banks often have long standing
relationships with the small business owners and provide immediate credibility
and access for the Company's products and services. Towne Services believes that
its relationships with the community banks enable it to attract small business
customers that would be difficult and expensive to reach when employing
traditional marketing methods.
Through its community bank contacts, Towne Services personnel arrange a
meeting with the bank's lending officers to introduce its products and services
and explain their potential benefits to the bank. At this meeting, Towne
Services distributes questionnaires to bank employees to gather information on
potential businesses that might be interested in TOWNE CREDIT or TOWNE FINANCE.
The bank then arranges a meeting with targeted local business owners to
introduce Towne Services and demonstrate its products. Towne Services provides
sales personnel, speakers, slide and video presentations and demonstration
equipment at these meetings. Towne Services' small business sales people are
responsible for follow up sales and service. During the weeks following the bank
meeting, the small business sales representatives will contact other attendees
and attempt to arrange one-on-one meetings with them.
Towne Services also markets TOWNE CREDIT and TOWNE FINANCE through several
companies that have merchants and community banks across the United States as
their customers or members. Towne Services has established strategic
relationships with companies such as Phoenix International, Ltd., and the
Bankers Bank of Kentucky to cross-market its products and services to their
customers. In addition, Towne Services has agreements with Cash Management
Services, Datamatx and Wallace and de Mayo to incorporate their products into
Towne Services' systems. These alliances enable Towne Services to reach and
provide services to large groups of community banks and small businesses in new
geographic markets. Towne Services will continue to pursue additional alliances
with companies and organizations that will provide the Company access to large
groups of banks and small businesses nationwide such as bankers banks, trade
associations and merchant franchise operations.
RECRUITING AND TRAINING
In June 1997, when TOWNE CREDIT was first released, Towne Services had 7
sales and marketing personnel. By December 31, 1997, the Company had more than
doubled its sales and marketing force to 16 persons. As of April 30, 1998, the
sales force had increased to 44 persons in 30 states. Towne Services hires sales
personnel who are experienced in marketing products and services to community
banks and small businesses. Towne Services has an experienced in-house recruiter
who focuses full time on hiring sales personnel. In recruiting experienced sales
personnel, Towne Services focuses on hiring persons who have established
relationships with banks and small businesses in a particular market.
Towne Services has developed a four-week training program for members of
its sales force led by Towne Services' training and sales managers. The first
week includes three days of instruction on point of sale systems and the
Company's policies and procedures, followed by two days of assisting on sales
calls with selected members of the bank and small business sales forces. During
the second week, the training focuses on more specific aspects of TOWNE CREDIT
and TOWNE FINANCE, such as installation and training, pricing models and a
review of sales manuals. The two weeks of classes emphasize customer service and
presentation and communication skills. The sales representatives also spend an
additional two days during the second week participating in sales. Once the
representatives complete the training class, they are paired with a bank or
business sales representative for two weeks of training in the field working
with more experienced sales representatives. After satisfactory completion of
the four weeks of training, new members of the Company's sales force get
assigned to a territory.
30
<PAGE> 33
TECHNOLOGY
The Company's electronic processing systems involve communicating data to
and from remote customer locations and Towne Services' computer processing
center. Towne Services uses its proprietary technologies together with third
party telecommunications networks to transmit and process transaction data for
its customers. Transactions are interactively processed and returned to the
sending system. Towne Services' systems can use telephone lines, internet
connections, satellite linkages and bank automated teller machine communication
lines to transport transaction data. This system architecture allows Towne
Services to access customers located across the country.
The Company designed its communications systems to support a large number
of telecommunications lines and high volumes of data traffic. This configuration
is scalable, allowing Towne Services to add new servers and new communications
lines as needed without having to rebuild its communications system. The
Company's communications servers process multiple data protocols. This allows
Towne Services to service a wide range of customers without requiring them to
change the communications systems they currently use.
Towne Services' communications and processing system servers can manage
data traffic across multiple time zones as well as balance both client/server
and on-line batch mode processing loads. This "cluster processing" uses multiple
servers that work in tandem. A bank of pentium-based processors work in a shared
network environment to co-process reporting jobs. The host processing system is
scalable which means the Company can add new servers to the processing pool to
increase throughput with minimal downtime.
Towne Services designed its systems using software and hardware capable of
interacting with the variety of operating platforms used by its customers,
including client/server and mainframe operating systems. Towne Services has
developed software to support a wide range of operating systems used by its
customers, including UNIX, RED HAT LINUX, MAC OS8, Windows NT and DOS based
systems. Towne Services' transaction reporting software is not hardware
dependent, which allows Towne Services to change its equipment to take advantage
of the most recent technologies in its operations. This could include a complete
change-over of operating systems and/or hardware.
The Company's computer processing system stores data redundantly (at both
the customer terminal location and at the Company's processing center) and in a
secure environment. Potential service interruptions are minimized by hosting the
client's data on multiple servers and locations so that no single hardware
failure would result in service interruption. In addition, the Company keeps
mirror servers on location, creates daily digital backup tapes and stores them
in fireproof safes and maintains a full "hot-site" backup processing center at
another location from its main processing center. The Company believes that its
system configuration and disaster recovery measures adequately protect it
against system failures that may occur due to destruction of its processing
center, natural disasters, bomb threats or other loss or impairment of its
network capabilities. See "Risk Factors -- Risk of Possible System Failure."
Towne Services designed its products and services to be simple to use, fast
and reliable. The Company dedicates significant resources to developing new
proprietary technologies to enhance services for its customers. The Company
believes its continuing investment in technology will allow it to remain
competitive in the industry.
CUSTOMERS
Many small businesses offer in-house credit as a means to better serve
their customers. Many community banks seek new ways to provide better services
for their customers while generating income for the bank. The electronic
transaction processing industry generally has not offered these businesses or
banks a way to process their in-house credit transactions electronically or
provide accounts receivable financing, focusing instead on credit and debit card
transactions and on larger businesses.
The Company provides processing services to a diverse customer base of over
180 small and medium size retail merchants and small commercial businesses
located in 8 states. A variety of small and medium size retail merchants use the
TOWNE CREDIT system, including hardware stores, clothing stores, florists, auto
parts stores, pharmacies and private clubs. TOWNE CREDIT merchant customers
typically have $1 million or less in
31
<PAGE> 34
annual revenues. TOWNE FINANCE products and services are marketed to small
commercial businesses with $5 million or less in revenues, such as furniture
manufacturers, equipment distributors, plumbing suppliers and agricultural
supply stores.
The Company has executed over 130 contracts with banks in 13 states. Most
of the Company's current bank customers have asset sizes of $2 billion or less.
These bank customers market Towne Services' products and services to small
businesses in their communities. There are approximately 11,000 financial
institutions in the United States that the Company considers to be potential
bank customers. Towne Services believes that most of these community banks
desire to establish long-term relationships with these businesses and that TOWNE
CREDIT and TOWNE FINANCE are well-designed to help these banks obtain that goal.
The majority of the Company's contracts with its customers are cancelable
at will or on short notice or provide for renewal at frequent periodic
intervals, and, accordingly, the Company may have to rebid or modify such
contracts on a frequent basis. No single small business customer accounted for
more than 1% of the total revenues of the Company in 1997 or in the three months
ended March 31, 1998. No single bank customer accounted for more than 5% of the
total revenues of the Company in 1997. One bank customer accounted for
approximately 22% of the Company's total revenues for the three months ended
March 31, 1998 due to a comparatively large one time set-up fee. The Company
anticipates that one or more new customers will continue to account for large
portions of the revenues generated for the particular quarter in which the
underlying bank contract is signed. Towne Services believes that the identity of
bank customers accounting for large portions of revenues will change from
quarter to quarter and year to year.
CUSTOMER SERVICES
Towne Services' products are supported by two levels of customer service.
First, each customer bank provides first line customer service support to the
merchants on accounting and loan related issues. Second, Towne Services provides
a help desk for technical support for its network systems and terminals.
The Company is committed to providing superior service for its current
customer base. The Company provides many service features to its merchants,
including toll-free customer service and terminal support during business hours
and on an emergency basis. In addition, Towne Services provides emergency
48-hour hardware replacement, turnkey installation and training for new
merchants and flexible reporting capabilities, both in frequency and format.
Towne Services attempts to establish long-term relationships through the
continued support and interaction of professional account managers.
The Company maintains a staff of trained client service representatives.
This staff trains customers on the use of Towne Services' processing system and
hardware at the customer location. Customer service representatives provide
technical support for all of the Company's products and services through a
call-in support center available during normal business hours. After hours,
customers can reach the Company's technical support personnel by pager. These
customer service representatives respond to inquires about the Company's
products and services and assist merchants in resolving terminal, network and
communication problems.
COMPETITION
Towne Services is aware of other companies who have successfully marketed
business-to-business software and marketing support to banks that allows the
banks to track and finance the in-house charge accounts of its customers similar
to a factoring operation. Most of these competitors do not offer a point of sale
system, but rather require merchants to forward paper invoices to the banks
where bank personnel input the invoices onto the software purchased by the
banks. One such company has a system similar to TOWNE FINANCE but does not
market the system to banks, acting instead as the lender itself.
The electronic transaction processing industry is intensely competitive.
Increased competition is likely from both existing competitors and new entrants
into its existing or future markets. The Company believes there are low barriers
to entry in its markets. Towne Services may not be able to compete successfully
as other companies develop new products and services, change prices, improve
customer service and hire additional
32
<PAGE> 35
personnel. Competitors may offer new products and services resulting in greater
competition and lower market share for the Company. Many of the Company's
competitors have longer operating histories, greater name recognition, larger
customer bases and substantially greater resources than the Company. Competitors
may be able to adapt more quickly to new technologies and changes in customer
requirements and may also be able to devote greater resources to marketing.
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
The Company attempts to protect itself through a combination of copyright
law, trademark and trade secret laws, employee and third party confidentiality
agreements and other methods. However, unauthorized parties may attempt to copy
aspects of the Company's technology, products and services or to otherwise
obtain and use information that the Company regards as proprietary, despite the
Company's efforts to protect them. Third parties may claim that the Company's
current or future products and services infringe the patent, copyright or
trademark rights of such third parties. No assurance can be given that, if such
actions or claims are brought, the Company will ultimately prevail. Any such
claims, whether with or without merit, could be costly and time consuming, cause
delays in introducing new or improved products and services, require Towne
Services to enter royalty or licensing agreements or discontinue using the
challenged technology and otherwise could have a material adverse effect on the
Company's business and financial results.
EMPLOYEES
At April 30, 1998, the Company had 76 full-time employees, of which 44 were
in sales and marketing, 17 were in operations and 15 were corporate and general
administrative employees. Of these employees, 40 were based in Norcross,
Georgia, and 36 were based in 29 other states. Towne Services employs all of its
employees pursuant to a co-employment agreement with Vincam Human Resources,
Inc. ("Vincam"). Pursuant to this agreement, Vincam (which is not an affiliate
of Towne Services) assumes certain employer's rights as to Towne Services
employees, and Towne Services retains supervision and control over the employees
as necessary to conduct its business. Vincam provides certain benefits to the
employees, such as group health insurance and a 401(k) plan. Towne Services pays
Vincam a management fee and reimburses it for the employees' salaries and
benefits. Towne Services does not anticipate any material disruption in its
business in the event of termination of the agreement with Vincam. None of the
Company's employees is represented by a collective bargaining agreement nor has
the Company ever experienced any work stoppage. Management believes that the
Company's relationship with its employees is satisfactory.
SEASONALITY
The electronic transaction processing industry in general is prone to
seasonal fluctuations in purchase activity. Although the Company generally
experiences seasonality in its business, fluctuations are less pronounced than
in the industry, due in part to the Company's diverse customer base. The Company
expects its revenues will be higher in the third and fourth calendar quarters
and lower in the first calendar quarter of each year. The decline in retail
activity following the holiday season results in lower first quarter revenues.
PROPERTY AND FACILITIES
The Company leases its principal executive offices in Norcross, Georgia and
does not maintain offices or facilities at other locations. The Company believes
that its current facilities will be adequate to support its operations for the
next 12 months.
LEGAL PROCEEDINGS
The Company is not a party to any pending material legal proceedings.
33
<PAGE> 36
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Towne Services and their ages and
positions as of May 1, 1998, are as follows.
<TABLE>
<CAPTION>
NAME AGE CLASS(1) POSITION
- ---- --- -------- --------
<S> <C> <C> <C>
Drew W. Edwards........................ 33 III Chief Executive Officer and Chairman of
the Board of Directors
Henry M. Baroco........................ 54 II President, Chief Operating Officer and
Director
Bruce F. Lowthers, Jr.................. 33 -- Senior Vice President and Chief
Financial Officer
Cleve B. Shultz........................ 30 -- Executive Vice President and Secretary
G. Lynn Boggs.......................... 42 III Director
Frank W. Brown......................... 44 I Director
John W. Collins........................ 50 III Director
Joe M. Rodgers......................... 64 II Director
J. Daniel Speight, Jr.................. 41 I Director
Glenn W. Sturm......................... 44 II Director
J. Stephen Turner...................... 51 II Director
Bahram Yusefzadeh...................... 52 I Director
</TABLE>
- ---------------
(1) Class I term expires in 1999; Class II term expires in 2000; and Class III
term expires in 2001.
BIOGRAPHICAL INFORMATION
Drew W. Edwards is a co-founder of Towne Services and has been Chief
Executive Officer and Chairman of the Board of Directors since its formation.
From 1990 until forming Towne Services, Mr. Edwards served in various marketing
and management positions with The Bankers Bank in Atlanta, Georgia, most
recently as its Senior Vice President and Director of Sales and Marketing. The
Bankers Bank is a leading provider of correspondent banking services in the
southeastern United States. From 1987 to 1990, Mr. Edwards worked for the
Federal Reserve Bank of Atlanta.
Henry M. Baroco has been President, Chief Operating Officer and a director
of Towne Services since 1996. Mr. Baroco has over 30 years of experience with
various credit, leasing and lending organizations. Before joining Towne
Services, Mr. Baroco had been Senior Vice President and General Manager of the
vendor finance division of CIT Industrial Finance since September 1995. From
November 1993 to September 1995, he served as Senior Vice President of Sales and
Marketing for Norwest Equipment Finance. From April 1991 to November 1993, Mr.
Baroco was Senior Vice President and General Manager of Sales and Marketing for
LB Credit Corporation. Mr. Baroco also worked in various capacities for GE
Capital -- Vendor Financial Services for over 18 years.
Bruce F. Lowthers, Jr. has been Senior Vice President and Chief Financial
Officer of Towne Services since November 1997. Prior to joining Towne Services,
Mr. Lowthers had been Chief Financial Officer and Treasurer of Quest Group
International, Inc., a telecommunications company, since September 1994. From
June 1992 to September 1994, he was an audit manager with Ernst & Young, LLP.
Mr. Lowthers is a certified public accountant.
Cleve B. Shultz has been Executive Vice President of Towne Services since
April 1998. He served as the Company's Senior Vice President from January 1996
to April 1998. Prior to joining the Company, Mr. Shultz had been Vice
President-Marketing at The Bankers Bank since August 1993. Before joining The
Bankers Bank, Mr. Shultz served as campaign director for Representative John
Linder's successful 1992 campaign for the U.S. House of Representatives, 4th
Congressional District of Georgia.
34
<PAGE> 37
G. Lynn Boggs is a co-founder of Towne Services and has been a director
since its formation. Mr. Boggs has been Senior Vice President and branch manager
of Vining-Sparks Investment Banking Group, L.P., a fixed income broker-dealer to
financial institutions in Nashville, Tennessee, since June 1996. Mr. Boggs has
been in the securities industry for the past 12 years. From October 1994 to June
1996, he was Senior Vice President-Investments at PaineWebber, Inc. in
Nashville, Tennessee. From March 1993 to October 1994, he was Senior Vice
President -- Investments for Prudential Securities in Nashville. From 1989 to
March 1993, he was Senior Vice President of Vining-Sparks.
Frank W. Brown has been a director of Towne Services since March 1998. Mr.
Brown has been a principal with Brown, Burke Capital Partners, Inc. since 1991.
Brown, Burke Capital Partners provides financial advisory services to
community-oriented financial institutions middle market corporations in
connection with mergers and acquisitions and financing. He is also the Managing
Member of Capital Appreciation Management Company, L.L.C., which is the managing
general partner of Capital Appreciation Partners, L.P., an Atlanta-based
merchant banking fund and a shareholder of Towne Services. From 1977 to 1991,
Mr. Brown worked in various corporate finance and investment banking positions
with Bankers Trust Company, The First Boston Corporation and The
Robinson-Humphrey Company.
John W. Collins has been a director of Towne Services since its formation.
Mr. Collins is currently the Chairman of the Board of Directors and Chief
Executive Officer of The InterCept Group, Inc., a provider of fully-integrated
electronic commerce products and services for community financial institutions.
Mr. Collins has over 25 years of experience in multiple areas of electronic
commerce for community financial institutions. Prior to co-founding The
InterCept Group in 1996, he had served as a director and executive officer of
several of its predecessor companies and subsidiaries since 1986.
Joe M. Rodgers has been a director of Towne Services since May 1998. He has
been Chairman of The JMR Group, a private investment company specializing in
merchant and investment banking, since February 1993. Mr. Rodgers served as
Chairman of the Board of Directors and Chief Executive Officer of Berlitz
International, Inc., a foreign language services company, from December 1991
until February 1993. From 1985 to 1989, Mr. Rodgers served as United States
Ambassador to France. Mr. Rodgers is also a director of AMR Corporation/American
Airlines, Inc.; American Constructors, Inc.; Gaylord Entertainment Company;
Gryphon Holdings, Inc.; Lafarge Corporation; SunTrust Bank, Nashville, N.A.;
Thomas Nelson, Inc.; Tractor Supply Company; and Willis Corroon Group, PLC.
J. Daniel Speight, Jr. has been a director of Towne Services since its
formation. Mr. Speight is the President, Chief Executive Officer and a director
of FLAG Financial Corporation, a bank holding company. He served as Chief
Executive Officer and a director of Middle Georgia Bankshares, Inc. from 1989
until its merger with FLAG Financial in March 1998. He has been President, Chief
Executive Officer and a director of Citizens Bank, a subsidiary of FLAG
Financial in Vienna, Georgia, since 1984. Mr. Speight is currently a director
(past chairman) of The Bankers Bank and a member of the State Bar of Georgia. He
is past Chairman of the Georgia Bankers Association Community Banking Committee,
past President of The Community Bankers Association of Georgia and past director
of the Independent Bankers Association of America.
Glenn W. Sturm has been a director of Towne Services since 1996. Mr. Sturm
has been a partner in the law firm of Nelson Mullins Riley & Scarborough, L.L.P.
since 1992, where he serves as Corporate Chairman and as a member of the
executive committee. Since 1996, Mr. Sturm has been a director of Phoenix
International Ltd., Inc., a publicly-held provider of client/server retail
banking software to financial institutions in the United States and abroad. He
has also been a director of The InterCept Group since 1997.
J. Stephen Turner has been a director of Towne Services since 1997. He has
been the Chairman of the Board of Directors and Chief Executive Officer of FNB
Financial Corp., a bank holding company, since 1990. Mr. Turner is also a
director of Farmers National Bank in Scottsville, Kentucky. He has also been the
President and Chief Executive Officer of Allen Realty Corporation in Nashville,
Tennessee since 1988.
Bahram Yusefzadeh has been a director of Towne Services since 1997. Mr.
Yusefzadeh has been Chairman of the Board of Directors and Chief Executive
Officer of Phoenix International Ltd. since its
35
<PAGE> 38
formation in 1993. Mr. Yusefzadeh has over 28 years of experience in the banking
software industry. He was a co-founder of Nu-Comp Systems, Inc., where he
developed the Liberty Banking System and served as Nu-Comp's President and Chief
Executive Officer from 1969 to 1986. Mr. Yusefzadeh also served as Chairman of
the Board of Directors of Broadway & Seymour, Inc. during 1986 and in various
executive capacities for The Kirchman Corporation from 1986 to 1992.
DIRECTOR COMPENSATION
Upon initial election to the board of directors, each non-employee director
receives options to acquire 30,000 shares of common stock, all of which vest
immediately. The Board of Directors recently approved a grant of 20,000 options
to all non-employee directors, all of which vest immediately. Directors may be
reimbursed for out-of-pocket expenses incurred in attending meetings of the
board of directors or its committees and for other expenses incurred in their
capacity as directors. Directors do not receive cash fees for their services as
directors.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued by the
Company for services rendered during the year ended December 31, 1997 by the
Company's Chief Executive Officer and President, who were the only executive
officers whose total salary and bonus exceeded $100,000 (together, the "Named
Executive Officers") during such year. The Company did not grant any stock
appreciation rights or make any long-term incentive plan payouts during the
year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------
OTHER
ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION
- --------------------------- ---- --------- -------- ------------
<S> <C> <C> <C> <C>
Drew W. Edwards..................................... 1997 100,000 100,000(1) $5,400(2)
Chief Executive Officer
Henry M. Baroco..................................... 1997 100,000 50,000 $5,400(2)
President and Chief
Operating Officer
</TABLE>
- ---------------
(1) Mr. Edwards has voluntarily deferred receipt of his 1997 bonus amount until
completion of this offering.
(2) Represents automobile lease payments made by the Company.
EMPLOYMENT AGREEMENTS
Edwards and Baroco. Mr. Edwards and the Company entered into an employment
agreement effective as of October 15, 1995, pursuant to which he serves as the
Company's Chairman and Chief Executive Officer and currently receives a base
salary of $150,000 per year. Mr. Baroco and the Company entered into an
employment agreement effective as of January 15, 1997, pursuant to which he
serves as the Company's President and Chief Operating Officer and currently
receives a base salary of $150,000 per year. In addition, each of Mr. Edwards
and Mr. Baroco are entitled to incentive compensation as determined by the Board
of Directors or a committee thereof based upon achievement of targeted levels of
performance and other criteria established by the Board of Directors. Each of
Mr. Edwards and Mr. Baroco may participate in the Company's stock option plan
and also receive health insurance, civic and social club dues, an automobile
allowance or use of an automobile owned or leased by the Company and other
benefits. Mr. Edwards' and Mr. Baroco's base salaries may be increased
periodically by the Board of Directors or its compensation committee. Mr.
Edwards' and Mr. Baroco's employment agreements have terms of three years and
two years, respectively, and the agreements renew daily until either party fixes
the remaining term at three years or two years, as the case may be, by giving
written notice. The Company can terminate each agreement upon the death or
disability of the executive or for cause, and each executive may terminate his
employment for any
36
<PAGE> 39
reason after any occurrence of a change in control. If either of Mr. Edwards' or
Mr. Baroco's employment is terminated after a change in control (i) by the
Company without cause or otherwise in breach of his agreement, or (ii) by Mr.
Edwards or Mr. Baroco for any reason, the Company must pay him all accrued
compensation and bonus amounts and one-twelfth of his annual base salary and
bonus amounts for each of the 36 consecutive 30-day periods following Mr.
Edward's termination and 24 consecutive 30-day periods in the case of Mr.
Baroco. In addition, the Company would be required to continue life, disability
and health insurance for the executive until his death, and the executive's
outstanding options to purchase common stock would vest and become immediately
exercisable. Pursuant to Mr. Edwards' employment agreement, the Company also
granted to him piggyback and, if his employment is terminated for any reason,
demand registration rights with respect to the shares of common stock then owned
by him. See "Shares Eligible for Future Sale."
Lowthers and Shultz. Mr. Lowthers and the Company entered into an
employment agreement effective as of October 15, 1997, as amended on May 18,
1998, pursuant to which he serves as the Company's Chief Financial Officer and
receives a base salary of not less than $125,000 per year. Mr. Shultz and the
Company entered into an employment agreement effective as of May 19, 1998,
pursuant to which he serves as the Company's Executive Vice President and
receives a base salary of not less than $90,000 per year. Each agreement has a
term of one year, and the agreements renew daily until either party fixes the
remaining term at one year by giving written notice. The Company can terminate
each agreement upon the death or disability of the executive or for cause. Each
executive may terminate his employment if the Company breaches his employment
agreement or, in the case of Mr. Lowthers, if he is relocated outside of
Atlanta, Georgia metropolitan area without his consent. If either Mr. Lowthers'
or Mr. Shultz's employment is terminated by the Company prior to a change in
control or prior to completion of its initial public offering for any reason
other than the Company's material breach of his employment agreement, the
Company may repurchase all of the shares of common stock and options owned by
him at the prices paid by him or their then current fair market value, whichever
is greater.
MANAGEMENT BONUS PLAN
Under the Company's 1998 Management Bonus Plan, a bonus pool of $550,000
will be created if the Company meets its 1998 revenue and income goals, as
adjusted from time to time by the Board of Directors. All non-commission
employees are eligible for a percentage of the pool based on their seniority
level, length of employment and overall performance. If the 1998 revenue goal is
exceeded, the bonus pool will increase by $0.078 for every $1.00 beyond the
budgeted revenue goal, provided that the corresponding margins are in line with
the budget. If the bonuses are paid, the Company's executive officers will
receive the following percentages of the total bonus pool: Mr. Edwards, 20%; Mr.
Baroco, 20%; Mr. Lowthers, 15%; and Mr. Shultz, 12%. Bonuses are payable as
follows: 12.5% of the pool is payable following the end of each quarter if the
Company meets its goals for that quarter and has met the goals for prior during
the year, and the remainder is payable following the end of the fiscal year if
the Company has met its goals for the entire year. No bonus will be paid if the
Company does not meet its goals during any quarter.
37
<PAGE> 40
OPTION GRANTS
The following table sets forth information concerning each grant of stock
options to the Named Executive Officers during the year ended December 31, 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
PERCENT ANNUAL RATES OF
NUMBER OF OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ---------- ------------ ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Drew W. Edwards................. 59,523 5.8% .60(2) 1/24/07 22,460 56,919
Henry M. Baroco................. 59,523 5.8% .60(2) 1/24/07 22,460 56,919
Bruce F. Lowthers, Jr........... 300,000 29.4% 1.00(3) 11/03/07 188,668 478,123
Cleve B. Shultz................. 59,523 5.8% .60(2) 1/24/07 22,460 56,919
</TABLE>
- ---------------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance that the actual stock price appreciation over the term will
be at the assumed 5% and 10% levels or at any other defined level. Unless
the market price of the common stock appreciates over the option term, no
value will be realized from the option grants made to the Named Executive
Officers.
(2) Options were granted at the fair market value of the common stock on the
date of grant as determined by the board of directors, and vested
immediately.
(3) Options were granted at the fair market value of the common stock on the
date of grant as determined by the board of directors, and vest ratably over
three years beginning with the date of the grant.
The following table sets forth certain information regarding the exercise
of options and the number of options held by the Named Executive Officers who
have granted stock options, as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING VALUE OF UNEXERCISED
OPTIONS(#) IN-THE-MONEY OPTIONS($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Drew W. Edwards................................. 230,923 100,000 2,187,816 950,000
Henry M. Baroco................................. 1,085,923 100,000 10,476,316 950,000
Bruce F. Lowthers, Jr........................... 75,000 225,000 675,000 2,025,000
Cleve B. Shultz................................. 330,923 100,000 2,309,230 950,000
</TABLE>
- ---------------
(1) Based upon the price of the common stock to be sold in this offering, which
is assumed to be $10.00 per share.
STOCK OPTION PLANS
1998 Stock Option Plan
The board of directors has approved the Company's 1998 Stock Option Plan,
effective as of May 19, 1998 (the "1998 Plan"). The purpose of the 1998 Plan is
to advance the interests of the Company, its subsidiaries and its shareholders
by affording certain employees and directors of the Company, as well as key
consultants and advisors to the Company or any subsidiary, an opportunity to
acquire or increase their proprietary interests in the Company. The objective of
the issuance of stock options and grants of restricted stock under the 1998 Plan
is to promote the growth and profitability of the Company and its subsidiaries
because the optionees and grantees will be provided with an additional incentive
to achieve the Company's objectives through participation in its success and
growth and by encouraging their continued association with or service to the
Company.
38
<PAGE> 41
Awards under the 1998 Plan are granted by the compensation committee of the
board of directors (the "Compensation Committee"), which at all times shall be
composed of at least two independent directors. Awards issued under the 1998
Plan may include incentive stock options ("ISOs") and/or non-qualified stock
options ("NQSOs") and/or grants of restricted stock. The Compensation Committee
will administer the 1998 Plan and generally has discretion to determine the
terms of an option grant, including the number of option shares, option price,
term, vesting schedule, the post-termination exercise period and whether the
grant will be an ISO or NQSO. Notwithstanding this discretion: (i) the number of
shares subject to options granted to any individual in any fiscal year may not
exceed 500,000 shares (subject to certain adjustments); (ii) if an option is
intended to be an ISO and is granted to a shareholder holding more than 10% of
the combined voting power of all classes of the Company's stock or the stock of
its parent or subsidiary on the date of the grant of the option, the option
price per share of common stock may not be less than 110% of the fair market
value of such share at the time of grant; and (iii) the term of an ISO may not
exceed 10 years, or 5 years if granted to a shareholder owning more than 10% of
the total combined voting power of all classes of stock on the date of the grant
of the option.
The maximum number of shares of common stock that currently may be subject
to outstanding options, determined immediately after the grant of any option, is
2,000,000 shares (subject to certain adjustments). The 1998 Plan provides that
the number of shares of common stock available for issuance thereunder shall be
automatically increased on the first trading day of each calendar year beginning
January 1, 1999 by the lesser of (i) three percent of the number of shares
outstanding on the preceding trading day or (ii) 500,000 shares (subject to
certain adjustments). Shares of common stock that are attributable to awards
which have expired, terminated or been canceled or forfeited during any calendar
year are available for issuance or use in connection with future awards during
such calendar year.
The 1998 Plan will remain in effect until terminated by the board of
directors. The 1998 Plan may be amended by the board of directors without the
consent of the shareholders of the Company, except that any amendment, although
effective when made, will be subject to shareholder approval within one year
after approval by the board of directors if the amendment increases the total
number of shares issuable pursuant to ISOs (other than the permitted annual
increase), changes the class of employees eligible to receive ISOs that may
participate in the 1998 Plan, or otherwise materially increases the benefits
accruing to recipients of ISOs.
The Omnibus Budget Reconciliation Act of 1993 added Section 162(m) to the
Internal Revenue Code of 1986, as amended. Section 162(m) generally disallows a
public company's tax deduction for compensation to the chief executive officer
and four other most highly compensated executive officers in excess of $1
million in any tax year beginning on or after January 1, 1994. Compensation that
qualifies as "performance-based compensation" is excluded from the $1 million
deductibility cap and therefore remains fully deductible by the company that
pays it. The Company intends that options granted with an exercise price at
least equal to 100% of fair market value of the underlying stock at the date of
grant will qualify as such "performance-based compensation," although other
awards under the Stock Option Plan may not so qualify.
1996 Stock Option Plan
In November 1996, the Company adopted its 1996 Stock Option Plan (the "1996
Plan"). As of May 19, 1998, options to acquire 2,090,000 shares had been issued
under the 1996 Plan, and options to acquire 1,656,900 shares were outstanding.
All of such options were issued at the fair market value of the common stock as
determined by the board of directors based on the Company's financial condition
and prospects at such time and recent sales of the securities of the Company.
Effective May 19, 1998, the board of directors determined that the Company will
not issue any additional options under the 1996 Plan.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established an Audit Committee, a Compensation
Committee and an Executive Committee. The Compensation Committee consists of
Messrs. Boggs, Brown, Speight, Turner and
39
<PAGE> 42
Yusefzadeh. The Audit Committee consists of Messrs. Baroco, Edwards, Speight and
Turner, and the Executive Committee consists of Messrs. Boggs, Brown, Collins,
Edwards, Sturm and Yusefzadeh.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Thomas A. Bryan, who served as the chairman of the Compensation Committee
during 1997, served without compensation as the Treasurer and Secretary of the
Company from its inception in October 1995 until 1996.
On December 11, 1996, the Company entered into a $250,000 line of credit
with Citizens Bank, Vienna, Georgia, to fund its working capital needs. J.
Daniel Speight, Jr., a director of the Company, is the president and chief
executive officer of Citizens Bank. The interest rate for any borrowings under
the line of credit was 9.25% per year, but no money was drawn on this line of
credit. The following directors and officers personally guaranteed this line of
credit: Drew W. Edwards, Henry M. Baroco, Cleve B. Shultz, Thomas M. Bryan, G.
Lynn Boggs, John W. Collins and Glenn W. Sturm. In consideration of their
guaranties, the Company issued each of these directors and officers options to
acquire 71,400 shares of common stock at an exercise price of $0.50 per share.
This loan matured in December 1997 and was not renewed. The Company has from
time to time obtained financing from Citizens Bank for the purchase of specific
furniture and equipment. The total amount borrowed under these term loans was
$90,000, and interest rates for these loans range from 9.25% to 12.0% per year.
As of March 31, 1998, $73,000 remained outstanding under these term loans.
On June 3, 1997, the Company entered into a $250,000 line of credit with
First Federal Savings Bank of LaGrange, Georgia, to fund its working capital
needs. Mr. Speight is the president and chief executive officer and a director
of FLAG Financial Corporation, the holding company for First Federal Savings
Bank of LaGrange. The interest rate for this loan was the lender's prime rate,
and there have been no borrowings under this line of credit. Messrs. Edwards,
Baroco, Shultz, Bryan, Boggs, Collins and Sturm personally guaranteed this loan.
In consideration of their guaranties, the Company issued each of these directors
and officers options to acquire 59,523 shares of common stock at an exercise
price of $0.60 per share. FLAG Financial Corporation is the bank holding company
for several customer banks of the Company. These bank customers have not
generated a material amount of revenues for the Company in prior periods but the
Company anticipates that these customer banks will generate revenues for the
Company in 1998 in excess of 5% of the Company's revenues for 1997.
On March 13, 1998, the Company entered into a Stock Purchase Agreement with
Capital Appreciation Partners, L.P. under which Capital Appreciation Partners
purchased 15,000 shares of the Series A Preferred Stock for $1.5 million. Frank
W. Brown is the Managing Member of Capital Appreciation Management Company,
L.L.C., the general partner of Capital Appreciation Partners, and became a
director of the Company as a result of the stock purchase. Pursuant to the Stock
Purchase Agreement, Messrs. Edwards, Baroco, Boggs, Bryan and Shultz agreed,
with certain exceptions, not to sell any of the shares of common stock in the
Company without first offering the right to sell stock on the same terms to
Capital Appreciation Partners. These co-sale rights terminate upon completion of
an underwritten initial public offering of the Company's common stock in which
gross proceeds to the Company exceed $20 million and the product obtained by
multiplying (x) the public offering price per share times (y) the number of
shares of common stock to be outstanding after the offering, including the
common stock issuable upon conversion of the Series A Preferred Stock but
excluding warrants and options, exceeds $80 million. Capital Appreciation
Partners also has certain registration rights with respect to the shares of
common stock issuable upon conversion of the Series A Preferred Stock. See
"Shares Eligible For Future Sale." In addition, Brown Burke Capital Partners, of
which Mr. Brown is a partner, purchased 100,000 shares of common stock from the
Company at a price of $1.00 per share in October 1997.
From November 1, 1995 through May 1, 1996, the Company borrowed $45,000
from each of Mr. Boggs, a director and principal shareholder, and Mr. Bryan, a
principal shareholder. The Company executed promissory notes and loan agreements
to evidence these loans. Each of these loans accrued interest at the rate of 7%
per year, and had principal payments due on October 31, 1998, 1999 and 2000.
Messrs. Boggs and Bryan
40
<PAGE> 43
agreed to subordinate the Company's obligations under these loans to its
obligations to other creditors of the Company. As of December 1997, these loans
have been paid in full.
On March 31, 1997, the Company loaned $450,000 to J. Stephen Turner, a
director, to fund the purchase of 450,000 shares of common stock. Interest
accrued at 6.0% per year until May 31, 1997 and 8.0% per year thereafter until
paid. Mr. Turner pledged the shares of common stock received upon this purchase
as collateral for the loan. Mr. Turner paid this note in full prior to May 31,
1997.
41
<PAGE> 44
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of May 1, 1998 and as adjusted to
reflect the sale of the common stock offered hereby with respect to: (i) each of
the Company's directors and executive officers; (ii) each person known by the
Company to own beneficially more than 5% of the common stock; (iii) each selling
shareholder; and (iv) all directors and executive officers of the Company as a
group. Unless otherwise indicated, each of the holders listed below has sole
voting power and investment power over the shares beneficially owned, and each
person known by the Company to beneficially own more than 5% of the common stock
has an address in care of the Company's principal office.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
OFFERING(1) NUMBER OF OWNED AFTER OFFERING(1)
---------------------- SHARES ------------------------
NAME NUMBER PERCENTAGE OFFERED(2) NUMBER PERCENTAGE
- ---- --------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Drew W. Edwards............................ 2,010,490 14.8% 100,000 1,910,490 10.0%
Henry M. Baroco............................ 1,426,133 10.1 87,000 1,339,133 6.7
Bruce F. Lowthers, Jr. .................... 279,033 2.1 279,033 1.5
Cleve B. Schultz........................... 627,935 4.7 40,000 587,935 3.1
G. Lynn Boggs.............................. 1,675,923 12.5 167,500 1,508,423 8.0
Frank W. Brown(3).......................... 1,350,000 9.4 1,350,000 7.1
John W. Collins(4)......................... 512,623 3.9 512,623 2.7
Joe M. Rodgers(5).......................... 271,648 2.1 271,648 1.5
J. Daniel Speight, Jr.(6).................. 431,700 3.3 40,000 391,700 2.1
Glenn W. Sturm............................. 360,923 2.7 360,923 1.9
J. Stephen Turner.......................... 552,500 4.2 552,500 2.9
Bahram Yusefzadeh.......................... 102,500 * 102,500 *
All directors and executive officers as a
group (12 persons)....................... 9,601,408 56.5 9,139,408 43.3
OTHER PRINCIPAL AND SELLING SHAREHOLDERS
Thomas A. Bryan(7)......................... 1,672,013 12.6 167,500 1,504,513 8.0
FLAG Financial Corporation(8).............. 361,700 2.7 40,000 321,700 1.7
Capital Appreciation Partners L.P.......... 1,200,000(9) 8.3 1,200,000 6.4
</TABLE>
- ---------------
* Less than 1%.
(1) The percentage of shares beneficially owned includes common stock of which
such person has the right to acquire beneficial ownership within 60 days of
May 1, 1998, including but not limited to by exercise of an option; however,
such common stock is not deemed outstanding for the purpose of computing the
percentage owned by any other person.
(2) Shares will be offered by selling shareholders in this offering only if and
to the extent that the underwriters exercise their over-allotment option.
See "Underwriting."
(3) Includes (i) 50,000 shares of common stock held by Mr. Brown, (ii) 100,000
shares of common stock held by Brown, Burke Capital Partners, Inc. of which
Mr. Brown is a principal, and (iii) 1,200,000 shares of common stock
issuable upon conversion of the Series A Preferred Stock held by Capital
Appreciation Partners, L.P. See "Description of Capital Stock."
(4) Includes (i) 331,700 shares of common stock held by Mr. Collins, (ii) 50,000
shares of common stock held by The InterCept Group, Inc., of which Mr.
Collins is Chief Executive Officer, Chairman of the Board and a significant
shareholder, and (iii) options to acquire 130,923 shares of common stock
held by Mr. Collins. Mr. Collins disclaims beneficial ownership with respect
to the shares held by The InterCept Group, Inc.
42
<PAGE> 45
(5) Includes (i) options to acquire 50,000 shares of common stock, (ii) 200,000
shares of common stock held by Rodgers Capital Group, L.P., of which Mr.
Rodgers is a partner, and (iii) warrants to acquire 21,648 shares of common
stock.
(6) Includes (i) 361,700 shares of common stock held by FLAG Financial
Corporation, of which Mr. Speight is Chief Executive Officer, President and
a director (40,000 of these shares are to be sold in this offering if the
underwriters' over-allotment option is exercised) and (ii) options to
acquire 70,000 shares of common stock.
(7) Mr. Bryan's address is 5615 Cross Gate Drive, Atlanta, Georgia 30327. Mr.
Bryan is a co-founder of the Company and served as a director of the Company
from 1995 to 1998.
(8) FLAG Financial Corporation's address is 101 North Greenwood Street, P.O. Box
3007, LaGrange, Georgia 30240.
(9) Represents shares issuable upon conversion of Series A Preferred Stock.
43
<PAGE> 46
CERTAIN TRANSACTIONS
LOAN FACILITIES
On December 18, 1997, the Company entered into the Sirrom Loan Facility and
issued a Stock Purchase Warrant (the "Sirrom Warrant") to Sirrom Investments,
Inc. Pursuant to the Sirrom Warrant, Messrs. Edwards, Baroco and Shultz agreed,
with certain exceptions, not to sell any of the shares of common stock in the
Company without first offering the right to sell stock on the same terms. These
co-sale rights terminate upon completion of an underwritten initial public
offering of the Company's common stock in which gross proceeds to the Company
are $15 million or more and the common stock is traded on a U.S. securities
exchange.
CERTAIN ISSUANCES OF STOCK AND WARRANTS
On October 21, 1997, the Company issued warrants to purchase a total of
75,000 shares of common stock at an exercise price of $1.00 per share to Joe M.
Rodgers, a director of the Company, and three other individuals who are
principals of Rodgers Capital Group, L.P. in consideration of professional
services provided by these individuals to the Company in connection with certain
marketing efforts. As part of such issuance, Mr. Rodgers received a warrant to
purchase 21,648 shares of common stock. Rodgers Capital Group also purchased
200,000 shares of common stock from the Company in October 1997 at a price of
$1.00 per share. In addition, the Company paid Rodgers Capital a total of
$220,000 as compensation for services provided by Rodgers Capital during 1997 in
connection with obtaining equity investments for the Company.
MANAGEMENT LOANS
On September 8, 1997, the Company loaned its President and Chief Operating
Officer, Henry M. Baroco, $78,990 pursuant to a full recourse promissory note to
fund the exercise of options to acquire 263,300 shares of its common stock. This
note accrues interest at the rate of 8.5% per year and matures on the earlier of
(i) September 8, 1998 or (ii) the date that Mr. Baroco sells the common stock
purchased with proceeds of the note. Mr. Baroco pledged the shares of common
stock received upon this exercise and other personal assets as collateral for
the loan.
On April 1, 1998, the Company loaned its Chief Financial Officer, Bruce F.
Lowthers, Jr., $75,000 pursuant to a full recourse promissory note to fund the
exercise of options to acquire 75,000 shares of its common stock. This note
accrues interest at the rate of 8.75% per year and matures on the earlier of (i)
December 31, 1999 or (ii) the date on which Mr. Lowthers sells the common stock
purchased with proceeds of the note. Mr. Lowthers pledged the shares of common
stock received upon this exercise and other personal assets as collateral for
the loan.
OTHER TRANSACTIONS AND RELATIONSHIPS
During the year ended December 31, 1997, the Company incurred costs of
$37,000 for rent on office space leased from ProVesa, Inc., a subsidiary of The
InterCept Group, Inc. Mr. Collins, a director of Towne Services, is the Chief
Executive Officer and Chairman of the Board of Directors of The InterCept Group.
The Company also paid approximately $25,000 for utilities and accounting
services provided by The InterCept Group.
Certain transactions between the Company and its officers, directors and
principal shareholders may be on terms more favorable to such persons than they
could obtain in a transaction with an unaffiliated party. The Company has
adopted a policy requiring that all material transactions between the Company
and its officers, directors and other affiliates be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties and must
be approved by both a majority of the board and a majority of the disinterested
directors.
44
<PAGE> 47
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company is only a
summary and is subject to the provisions of the Articles of Incorporation and
Bylaws, which are included as exhibits to the Registration Statement of which
this prospectus forms a part, and the provisions of applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Under its Articles of Incorporation, Towne Services is authorized to issue
50,000,000 shares of common stock without par value. Towne Services also has
authority, exercisable through its board of directors, to issue 20,000,000
shares of preferred stock without par value. The rights of the holders of the
common stock are subject to the rights of the Company's Series A Convertible
Preferred Stock (discussed below) and such other rights as the board of
directors may hereafter confer on the holders of preferred stock. Accordingly,
such rights conferred on holders of any additional preferred stock that may be
issued in the future may adversely affect the rights of holders of the common
stock. As of May 19, 1998, there were 13,182,740 shares of common stock
outstanding and 15,000 shares of Series A Preferred Stock outstanding. All of
the outstanding shares of Series A Preferred Stock automatically convert into
common stock upon the effective date of this offering. See "Use of Proceeds."
COMMON STOCK
Under the Articles of Incorporation, holders of common stock are entitled
to receive such dividends as may be legally declared by the board of directors.
Each shareholder is entitled to one vote per share on all matters to be voted
upon. Shareholders are not entitled to cumulate votes for the election of
directors. Holders of common stock do not have preemptive, redemption or
conversion rights and, upon liquidation, dissolution or winding up of the
Company, will be entitled to share ratably in the net assets of the Company
available for distribution to common shareholders. All outstanding shares prior
to this offering are, and all shares to be issued in this offering will be,
validly issued, fully paid and non-assessable.
PREFERRED STOCK
The Articles of Incorporation authorize the board of directors to issue,
without further action or vote by the holders of the common stock, shares of
Preferred Stock in one or more series and to fix any preferences, conversion and
other rights, voting powers, restrictions, limitations, qualifications and terms
and conditions of redemption as shall be set forth in resolutions adopted by the
board of directors. Articles of Amendment must be filed with the Georgia
Secretary of State prior to the issuance of any shares of Preferred Stock of the
applicable series. Any preferred stock so issued may rank senior to the common
stock with respect to the payment of dividends or amounts upon liquidation,
dissolution or winding-up, or both. In addition, any such shares of preferred
stock may have class or series voting rights. Issuances of preferred stock,
while providing the Company with flexibility in connection with general
corporate purposes, may have an adverse effect on the rights of holders of
common stock. In addition, the issuance of preferred stock could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company or the effect of decreasing the market
price of the common stock. The Company has no present plan to issue any
additional shares of preferred stock.
Series A Preferred Stock
On March 13, 1998, the Company filed Articles of Amendment to its Articles
of Incorporation for the designation of 25,000 shares of Series A Convertible
Preferred Stock and issued 15,000 shares of such stock. The stated value of the
Series A Preferred Stock is $100 per share.
45
<PAGE> 48
The holders of outstanding shares of Series A Preferred Stock are entitled
to receive cumulative cash dividends and cumulative dividends payable in kind in
the form of additional shares of Series A Preferred Stock ("PIK dividends") as
follows:
(i) For the period from the date of issuance through March 31,
1999, PIK dividends at a quarterly rate of $1.00 per share;
(ii) For the period April 1, 1999 through March 31, 2000, PIK
dividends at a quarterly rate of $2.00 per share;
(iii) For the period April 1, 2000 through March 31, 2002, cash
dividends at a quarterly rate of $4.00 per share; and
(iv) From and after April 1, 2002 (so long as the Series A Preferred
Stock remains outstanding), cash dividends at a quarterly rate of $6.00 per
share.
Dividends are payable quarterly, except that PIK dividends through March
31, 2000 accrue and will not be paid until conversion of the Series A Preferred
Stock or the liquidation, dissolution or winding up of Towne Services. Dividends
are cumulative from the date of issue. The Company may not declare or pay cash
dividends on any other series of Preferred Stock that is junior to the Series A
Preferred Stock, or on common stock, nor may it redeem, purchase or otherwise
acquire any of such stock, unless full cumulative dividends have been declared
and paid on the Series A Preferred Stock. In the event of any liquidation or
dissolution of the Company, the holders of shares of Series A Preferred Stock
are entitled to receive out of assets of the Company available for distribution
to shareholders, before any distributions are made to holders of common stock,
liquidating distributions in the amount of $100 per share, plus accrued and
unpaid dividends.
The holders of the Series A Preferred Stock are entitled to vote on all
matters upon which holders of common stock have the right to vote. They are
entitled to a number of votes equal to the largest number of full shares of
common stock into which such shares of Series A Preferred Stock could be
converted. The holders of Series A Preferred Stock and common stock vote
together as a single class on all matters, unless otherwise provided. The
holders of Series A Preferred Stock have the exclusive right, voting separately
as a class, to elect one director of the Company, for as long as 10% of the
authorized number of shares of Series A Preferred Stock are outstanding.
The Series A Preferred Stock is convertible into common stock at the option
of the holder at any time and automatically converts upon completion of an
initial public offering. The conversion price is $1.25 per share, subject to
adjustment in certain circumstances. If the Company has not completed an initial
public offering by December 31, 1998, the Conversion Price will be reduced by
$0.04 each month thereafter, until either the Conversion Price equals $1.00 or
the Company completes an initial public offering. All PIK dividends accrued and
unpaid on shares of Series A Preferred Stock surrendered for conversion shall be
paid in Series A Preferred Stock upon conversion or, at the holder's election,
may be converted into common stock. Cash dividends accrued and unpaid on shares
of Series A Preferred Stock surrendered for conversion shall be converted into
common stock.
The holders of Series A Preferred Stock must approve by majority vote (i)
the redemption, purchase or other acquisition for value of any shares of
preferred or common stock, or (ii) the authorization or issuance of any
additional shares of Series A Preferred Stock, except dividends, or any other
equity security senior to or on parity with the Series A Preferred Stock. The
holders of shares of Series A Preferred Stock have no preemptive or other rights
to subscribe for any other shares or securities, nor do they have any redemption
rights.
CLASSIFIED BOARD OF DIRECTORS
The Articles of Incorporation provide that the board of directors shall
consist of not less than 5 nor more than 15 members. The board of directors is
divided into three classes of directors serving staggered three-year terms. As a
result, approximately one-third of the board of directors is elected at each
annual meeting of shareholders. The classification of directors, together with
other provisions in the Articles of Incorporation and
46
<PAGE> 49
Bylaws that limit the removal of directors and permit the remaining directors to
fill any vacancies on the board of directors, has the effect of making it more
difficult for shareholders to change the composition of the board of directors.
As a result, at least two annual meetings of shareholders may be required for
the shareholders to change a majority of the directors, whether or not such
change in the board of directors would be beneficial to the Company and its
shareholders and whether or not a majority of the Company's shareholders
believes that such a change would be desirable. The Company believes, however,
that the longer time required to elect a majority of a classified board of
directors will help to ensure the continuity and stability of the Company's
management and policies. Currently, the terms of Class I directors expire in
1999, the terms of Class II directors expire in 2000 and the terms of Class III
directors expire in 2001.
REMOVAL OF DIRECTORS AND FILLING VACANCIES
The Bylaws provide that, unless the Board of Directors otherwise
determines, any vacancies, including vacancies resulting from an increase in the
number of directors, will be filled by the affirmative vote of holders of a
majority of the remaining directors, even if less than a quorum. A director may
be removed only with cause by the vote of the holders of 66 2/3% of the shares
entitled to vote for the election of directors at a meeting of shareholders
called for the purpose of removing such director.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND SHAREHOLDER PROPOSALS
The Bylaws provide that with respect to an annual meeting of shareholders,
nominations of persons for election to the board of directors and the proposal
of business to be considered by shareholders may be made only (i) by or at the
direction of the board of directors, the Chairman of the board of directors or
the President, or (ii) by a shareholder who has complied with the advance notice
procedures set forth in the Bylaws.
The purpose of requiring shareholders to give the Company advance notice of
nominations and other business is to afford the board of directors a meaningful
opportunity to consider the qualifications of the proposed nominees or the
advisability of the other proposed business and, to the extent deemed necessary
or desirable by the board of directors, to inform shareholders and make
recommendations about such qualifications or business, as well as to provide a
more orderly procedure for conducting meetings of shareholders. Although the
Bylaws do not give the board of directors any power to disapprove timely
shareholder nominations for the election of directors or proposals for action,
they may have the effect of precluding a contest for the election of directors
or the consideration of shareholder proposals if the proper procedures are not
followed and of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or to approve its
own proposal.
SPECIAL MEETINGS
Under the Bylaws, provided that the Company has more than 100 beneficial
owners (as defined by the Georgia Business Corporation Code (the "Georgia
Code")) of its shares, special meetings of the shareholders may be called by
shareholders only if such shareholders hold outstanding shares representing a
majority of all votes entitled to be cast on any issue proposed to be considered
at any such special meeting. If the Company has less than 100 beneficial owners,
the holders of shares representing 25% or more of the votes entitled to be cast
may call a special meeting.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Articles of Incorporation eliminate, subject to certain exceptions, the
personal liability of a director to the Company or its shareholders for monetary
damage for breaches of such director's duty of care or other duties as a
director. The Articles do not provide for the elimination of or any limitation
on the personal liability of a director for (i) any appropriation, in violation
of the director's duties, of any business opportunity of the Company, (ii) acts
or omissions that involve intentional misconduct or a knowing violation of law,
(iii) unlawful corporate distributions, or (iv) any transactions from which the
director derived an improper personal benefit. The Articles of Incorporation of
the Company further provide that if the Georgia Code is
47
<PAGE> 50
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the Company
shall be eliminated or limited to the fullest extent permitted by the Georgia
Code, as amended, without further action by the shareholders. These provisions
of the Articles of Incorporation will limit the remedies available to a
shareholder in the event of breaches of any director's duties to such
shareholder or the Company.
The Bylaws require the Company to indemnify and hold harmless any director
who was or is a party, or is threatened to be made a party, to any threatened,
pending or completed action, suit or proceeding whether civil, criminal,
administrative or investigative (including any action or suit by or in the right
of the Company) because he or she is or was a director, officer, employee or
agent of the Company, against expenses (including, but not limited to,
attorney's fees and disbursements, court costs and expert witness fees),
judgments, fines, penalties, and amounts paid in settlement incurred by him or
her in connection with the action, suit or proceeding. Indemnification would be
disallowed under any circumstances where indemnification may not be authorized
by action of the board of directors, the shareholders, or otherwise.
The Company has entered into separate indemnification agreements with each
of its directors and executive officers whereby the Company agreed, among other
things, to provide for indemnification and advancement of expenses in a manner
and subject to terms and conditions similar to those set forth in the Bylaws.
These agreements also provide that the Company shall purchase and maintain
liability insurance for the benefit of its directors and executive officers.
These agreements may not be abrogated by action of the shareholders. There is no
pending litigation or proceeding involving a director, officer, employee or
other agent of the Company as to which indemnification is being sought, nor is
the Company aware of any pending or threatened litigation that may result in
claims for indemnification by any director, officer, employee or other agent.
ANTI-TAKEOVER PROVISIONS AND GEORGIA LAW
Board and Shareholder Action Required for Certain Transactions. The
Articles of Incorporation require the affirmative vote of at least 66 2/3% of
the directors for the following actions by the Company to be submitted to a vote
of the shareholders: (i) a sale of all or substantially all of the assets of the
Company; (ii) a liquidation or dissolution of the Company; (iii) the merger,
consolidation or reorganization of the Company, unless the shareholders of the
Company immediately prior to such transaction will own at least a majority of
the combined voting power of the Company resulting from such merger,
consolidation or reorganization; or (iv) any increase in the number of directors
above 12 directors. In addition, the affirmative vote of 66 2/3% of the holders
of the common stock is required for shareholder approval of any such actions.
Issuance of Preferred Stock. The board of directors has the power to issue
an additional 19,985,000 shares of Preferred Stock, in one or more classes or
series and with such rights and preferences as determined by the board of
directors, all without shareholder approval. Because the board of directors has
the power to establish the preferences and rights of each class or series of
Preferred Stock, it may afford the holders of any series of Preferred Stock
preferences, powers and rights, voting or otherwise, senior to the rights of
holders of common stock. The board of directors has no present plans to issue
any additional shares of Preferred Stock.
Georgia Anti-Takeover Statutes. The Georgia Code generally restricts a
company from entering into certain business combinations with an interested
shareholder (which is defined as any person or entity that is the beneficial
owner of at least 10% of the company's voting stock) or its affiliates for a
period of five years after the date on which such shareholder became an
interested shareholder, unless (i) the transaction is approved by the board of
directors of the company prior to the date such person became an interested
shareholder, (ii) the interested shareholder acquires 90% of the company's
voting stock in the same transaction in which it exceeds 10%, or (iii)
subsequent to becoming an interested shareholder, such shareholder acquires 90%
of the company's voting stock and the business combination is approved by the
holders of a majority of the voting stock entitled to vote thereon (the
"Business Combination Statute"). The Georgia Code provides that the Business
Combination Statute will not apply unless the bylaws of the corporation
specifically provide that the Business Combination Statute is applicable to the
corporation. The
48
<PAGE> 51
Company has not elected to be covered by such statute, but it could do so by
action of the board of directors at any time.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is .
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
18,691,722 shares of common stock and immediately exercisable options and
warrants to purchase [ ] additional shares of common stock. The
4,000,000 shares sold in this offering (4,600,000 shares if the underwriters'
over-allotment option is exercised in full) will be freely tradable without
restriction by persons other than outstanding affiliates of the Company, as
defined in Rule 144. The remaining 14,691,722 outstanding shares of common stock
will be "restricted" securities within the meaning of Rule 144 and may not be
sold in the absence of registration under the Securities Act of 1933 unless an
exemption from registration is available, such as the exemptions contained in
Rule 144 and Rule 701. Upon the completion of this offering, of these
restricted shares will be eligible for immediate sale in the public market
without restriction pursuant to Rule 144(k) and an additional shares will
become eligible for sale, subject to the provisions of Rule 144 or Rule 701,
commencing 90 days after the date of this prospectus. Beginning 180 days after
the date of this prospectus (or earlier with the written consent of Wheat First
Securities, Inc.), of the restricted shares will become eligible for
immediate sale in the public market, subject to the provisions of Rule 144 or
701, upon the expiration of certain lock-up agreements between the underwriters
and the directors, executive officers and certain shareholders of the Company,
and the remaining restricted shares will become available for public
sale, subject to the provisions of Rule 144 or 701, at various times through
2000. The lock-up agreements provide that the directors, executive
officers and certain shareholders of the Company will not offer, sell or
contract to sell or otherwise dispose of, directly or indirectly, any common
stock of the Company, with certain exceptions, for a period of 180 days after
the date of this prospectus without the written consent of Wheat First
Securities, Inc. on behalf of the underwriters.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned his or her shares of
common stock for at least one year (including the prior holding period of any
prior owner other than an affiliate) is entitled to sell within any three-month
period that number of shares which does not exceed the greater of 1% of the
outstanding shares of common stock and the average weekly trading volume during
the four calendar weeks preceding each such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who has not been an affiliate of the
Company for at least three months and who has beneficially owned shares for at
least two years (including the holding period of any prior owner other than an
affiliate) would be entitled to sell such shares under Rule 144 without regard
to the limitations described above. Rule 144 defines "affiliate" of a company as
a person that directly, or indirectly through one or more intermediaries,
controls, is controlled by or is under common control with such company.
Affiliates of a company generally include its directors, executive officers and
principal shareholders.
Under Rule 701, subject to certain limitations, securities issued to
employees, directors, officers, consultants and advisors pursuant to a written
compensatory benefit plan by an issuer that is not subject to the reporting
requirements of the Securities Exchange Act of 1934 may be resold pursuant to
Rule 144 by persons other than affiliates without compliance with the provisions
of Rule 144 other than the manner of sale provisions. Affiliates may sell
securities issued pursuant to Rule 701 subject to all of the provisions of Rule
144 except the holding period requirement.
The Company intends to register all of the 3,656,900 shares of common stock
issuable upon the exercise of options granted or to be granted under its stock
option plans. Upon such registration, such shares will be eligible for resale in
the public market without restriction by persons who are not affiliates of the
Company
49
<PAGE> 52
and, to the extent they are held by affiliates, pursuant to Rule 144 without
observance of the holding period requirement.
Towne Services has granted its chief executive officer, Drew W. Edwards,
piggyback registration rights and, after termination of his employment for any
reason, demand registration rights with regard to all shares of common stock
then owned by him. Towne Services also has granted piggyback and demand
registration rights to Capital Appreciation Partners, L.P. with regard to
1,200,000 shares of common stock that are issuable upon the conversion of Series
A Preferred Stock purchased by it in March 1998. In connection with a $1.5
million loan to Towne Services by Sirrom Investments, Inc. in 1997, Towne
Services granted piggyback registration rights to Sirrom Investments with regard
to 308,982 shares of common stock issuable upon the exercise of a warrant
granted by the Company to Sirrom Investments. In general, the demand
registration rights require Towne Services to register the shares of common
stock subject to the registration rights upon request of the holder if the
Company has completed an initial public offering. The piggyback registration
rights held by Mr. Edwards and Capital Appreciation Partners permit them to sell
the shares of common stock subject to the registration rights in any
registration by Towne Services of any shares of its common stock, subject to
certain exceptions. The piggyback registration rights held by Sirrom Investments
allow the holder to sell shares of common stock in any registration by Towne
Services using a registration statement on Form S-3 or similar form. Generally,
the registration rights held by Capital Appreciation Partners and Sirrom
Investments are terminated when the shares of common stock subject to those
rights are eligible to be resold pursuant to Rule 144 with no volume
restriction. The Company generally is required to bear the expenses relating to
the sale of the shareholders' shares of common stock under these registration
rights, except for underwriting discounts and commissions and in certain cases
the fees and expenses of the shareholders' counsel and filing fees related to
the registration statement. The Company also is obligated to indemnify the
shareholders whose shares are included in any of the Company's registrations
against certain losses and liabilities, including liabilities under the
Securities Act of 1933 and state securities laws.
Prior to this offering, there has been no public market for the common
stock, and no prediction can be made as to the effect, if any, that the sale of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
common stock in the public market, or the perception that substantial amounts of
common stock are available for sale, could adversely affect prevailing market
prices and the ability of the Company to raise equity capital in the future.
50
<PAGE> 53
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company, the selling shareholders and Wheat First Union, a division of Wheat
First Securities, Inc., J.C. Bradford & Co. and Stephens Inc., as
representatives of the underwriters (the "Representatives"), the underwriters
have severally agreed to purchase from the Company, and the Company has agreed
to sell to each of the underwriters, the respective number of shares of common
stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Wheat First Securities, Inc. ...............................
J.C. Bradford & Co. ........................................
Stephens Inc................................................
-------
Total.............................................
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the
underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the underwriters'
obligations is such that they are committed to purchase and pay for all the
above shares of common stock if any are purchased.
The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and to selected dealers at such price less a concession not in excess
of $ per share of common stock. The underwriters may allow, and such
selected dealers may reallow, a concession not in excess of $ per share
of common stock to certain brokers and dealers. After the initial offering to
the public, the price to public, concessions and reallowances to dealers may be
changed by the Representatives.
The selling shareholders have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to an additional 600,000 shares of common stock to cover
over-allotments, if any, at the public offering price, less the underwriting
discount, as set forth on the cover page of this prospectus. To the extent that
the underwriters exercise this option, each of the underwriters will be
committed, subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
underwriters may purchase such shares only to cover over-allotments made in
connection with this offering.
The executive officers, directors and certain shareholders of the Company
have agreed not to offer, sell or contract to sell or otherwise dispose of,
directly or indirectly, or announce an offering of, any common stock of the
Company, with certain exceptions, for a period of 180 days after the date hereof
without the written consent of Wheat First Securities, Inc.
The Company and the selling shareholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments that the underwriters may
be required to make in respect thereof.
The Representatives have informed the Company and the selling shareholders
that the underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price was determined through
negotiations between the Company and the Representatives. Among the factors that
were considered in making such determination were prevailing market conditions,
the Company's financial and operating history and condition, its prospects and
prospects for the industry in general, the management of the Company and the
market prices of securities for companies in business similar to that of the
Company.
Upon purchase by the underwriters of the shares of common stock being
offered pursuant to this prospectus, Towne Services has agreed to issue warrants
to purchase up to the following number of shares of common stock at an exercise
price equal to 110% of the initial public offering price to the following
51
<PAGE> 54
underwriters: Wheat First Securities, Inc. -- 30,000 shares; J.C. Bradford &
Co. -- 20,000 shares. The warrant exercise price has been determined by
negotiation between the Company and Wheat First Securities, Inc. and J.C.
Bradford & Co. These warrants may not be exercised for one year from the date of
issuance and expire, if not sooner exercised, on the fifth anniversary of the
date of issuance. In addition, these warrants may not be sold, transferred,
assigned, hypothecated or otherwise disposed of for a period of at least two
years from the date of issuance of such warrants without the prior written,
consent of the Company. If these warrants are issued Wheat First Securities,
Inc. and J.C. Bradford & Co. will have, at nominal cost, the opportunity to
profit from an increase in the market price of the common stock. To the extent
these warrants are exercised, the value of the Company's shareholders common
stock may be diluted.
In connection with this offering, certain underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the common stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M of the Securities and Exchange Commission (the
"Commission"), pursuant to which such persons may bid for or purchase common
stock for the purpose of stabilizing its market price. The underwriters also may
create a short position for the account of the underwriters by selling more
common stock in connection with this offering than they are committed to
purchase from the Company and in such case may purchase common stock in the open
market following completion of this offering to cover all or a portion of such
short position. The underwriters may also cover all or a portion of such short
position, up to 600,000 shares of common stock, by exercising the underwriters
over-allotment option. In addition, Wheat First Securities, Inc., on behalf of
the underwriters, may impose penalty bids under contractual arrangements with
the underwriters whereby it may reclaim from an underwriter (or dealer
participating in this offering), for the account of the other underwriters, the
selling concession with respect to the common stock that is distributed in this
offering but subsequently purchased for the account of the underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the common stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph is required, and if any is undertaken, it may be discontinued
at any time.
LEGAL MATTERS
The validity of shares of common stock offered hereby is being passed upon
for the Company by Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia.
At May 1, 1998, members of Nelson Mullins Riley & Scarborough, L.L.P.
beneficially owned an aggregate of 467,723 shares of common stock. Certain legal
matters related to this offering will be passed upon for the underwriters by
Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The financial statements included in this prospectus, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving such reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission through the Electronic Data
Gathering and Retrieval ("EDGAR") system a registration statement on Form S-1
(together with all amendments, exhibits and schedules thereto, the "Registration
Statement") under the Securities Act of 1933 with respect to the securities
offered by this prospectus. This prospectus does not contain all of the
information set forth in such Registration Statement, certain parts of which
have been omitted in accordance with the rules and regulations of the
Commission. Statements contained in this prospectus as to the contents of any
contract or other document referred to are necessarily summaries, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement of which this prospectus forms a
52
<PAGE> 55
part. For further information, reference is made to such registration statement,
including the exhibits thereto, which may be inspected without charge at the
Commission's principal office at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549; and at the following Regional Offices of the Commission, except that
copies of the exhibits may not be available at certain of the Regional Offices:
Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and New York Regional Office, 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of all or any part of such material may be obtained from
the Commission at 450 Fifth Street, N.W. Room 1024, Washington, D.C. 20549, upon
payment of certain fees prescribed by the Commission. The Commission maintains a
World Wide Web site on the Internet at http://www.sec.gov that contains reports,
proxies, information statements, and registration statements and other
information filed with the Commission through the EDGAR system.
The Company is not presently a reporting company and does not file reports
or other information with the Commission. On the effective date of the
Registration Statement, however, the Company will become subject to the
additional reporting requirements of the Securities Exchange Act of 1934 and in
accordance therewith will file reports, proxy statements and other information
with the Commission. In addition, after the completion of this offering, the
Company intends to furnish its shareholders with annual reports containing
audited financial statements and with quarterly reports containing unaudited
summary financial information for each of the first three quarters of each
fiscal year.
53
<PAGE> 56
TOWNE SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-3
Statements of Operations for the Period from Inception
(October 23, 1995) to December 31, 1995, for the Years
Ended December 31, 1996 and 1997 and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-4
Statements of Shareholders' Equity for the Period from
Inception (October 23, 1995) to December 31, 1995, for the
Years Ended December 31, 1996 and 1997 and for the three
months ended March 31, 1998 (unaudited)................... F-5
Statements of Cash Flows for the Period from Inception
(October 23, 1995) to December 31, 1995, for the Years
Ended December 31, 1996 and 1997 and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Towne Services, Inc.:
We have audited the accompanying balance sheets of TOWNE SERVICES, INC. (a
Georgia corporation) as of December 31, 1996 and 1997 and the related statements
of operations, shareholders' equity, and cash flows for the period from
inception (October 23, 1995) to December 31, 1995 and for each of the two years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Towne Services, Inc. as of
December 31, 1996 and 1997 and the results of its operations and its cash flows
for the period from inception (October 23, 1995) to December 31, 1995 and for
each of the two years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
May 21, 1998
F-2
<PAGE> 58
TOWNE SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998
<TABLE>
<CAPTION>
MARCH 31,
1996 1997 1998
--------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 151,082 $ 2,536,439 $ 3,452,510
Accounts receivable, net of allowance for
uncollectible accounts of $0, $25,000, and $70,000
in 1996, 1997, and 1998, respectively.............. 1,596 121,566 359,007
Note receivable....................................... 0 78,990 78,990
Stock subscriptions receivable........................ 0 0 427,500
Other................................................. 6,713 68,273 163,770
--------- ----------- ------------
Total current assets.......................... 159,391 2,805,268 4,481,777
PROPERTY AND EQUIPMENT, net............................. 138,916 489,849 687,363
DEBT ISSUANCE COSTS, net................................ 64,124 288,815 304,361
OTHER ASSETS, net....................................... 4,375 2,500 2,500
--------- ----------- ------------
$ 366,806 $ 3,586,432 $ 5,476,001
========= =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $ 40,101 $ 297,937 $ 125,505
Accrued liabilities................................... 14,187 215,109 296,469
Accrued compensation.................................. 80,323 220,300 906,297
Current portion of long-term debt..................... 0 46,757 41,967
Deferred revenue...................................... 23,103 0 0
--------- ----------- ------------
Total current liabilities..................... 157,714 780,103 1,370,238
--------- ----------- ------------
LONG-TERM DEBT, net of discount of $0, $249,500, and
$239,397 in 1996, 1997, and 1998, respectively........ 90,000 1,289,666 1,289,162
--------- ----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
WARRANTS WITH REDEMPTION FEATURE (NOTE 5)............... 0 255,000 353,000
--------- ----------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $0 par value; 20,000,000 shares
authorized, 0, 0, and 15,000 shares issued and
outstanding in 1996, 1997, and 1998, respectively
(Note 9)........................................... 0 0 1,508,000
Common stock, $0 par value; 50,000,000 shares
authorized, 7,905,700, 11,706,766, and 13,181,740
shares issued and outstanding in 1996, 1997, and
1998, respectively................................. 800,024 4,417,696 10,670,872
Warrants outstanding.................................. 0 20,000 20,000
Accumulated deficit................................... (680,932) (3,176,033) (9,735,271)
--------- ----------- ------------
Total shareholders' equity.................... 119,092 1,261,663 2,463,601
--------- ----------- ------------
$ 366,806 $ 3,586,432 $ 5,476,001
========= =========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 59
TOWNE SERVICES, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO DECEMBER 31, 1995,
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
INCEPTION FOR THE THREE
(OCTOBER 23, FOR THE YEARS ENDED MONTHS ENDED
1995) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------ ------------------------
1995 1996 1997 1997 1998
-------------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES.......................... $ 6,000 $ 105,285 $ 722,364 $ 96,663 $ 547,954
---------- ---------- ----------- ---------- -----------
COSTS AND EXPENSES:
Costs of processing, servicing,
and support.................. 2,250 219,621 832,102 102,684 374,128
Research and development........ 0 51,871 332,470 11,231 74,024
Sales and marketing............. 3,739 118,163 839,323 94,337 485,562
Stock compensation expense...... 0 10,020 0 0 2,450,907
General and administrative...... 18,410 358,606 1,118,642 170,416 1,347,282
---------- ---------- ----------- ---------- -----------
Total costs and
expenses.............. 24,399 758,281 3,122,537 378,668 4,731,903
---------- ---------- ----------- ---------- -----------
OPERATING LOSS.................... (18,399) (652,996) (2,400,173) (282,005) (4,183,949)
---------- ---------- ----------- ---------- -----------
OTHER EXPENSES:
Interest (income) expense,
net.......................... (131) 5,802 95,946 19,063 64,289
Other expense (income).......... 357 3,509 (1,018) (648) 0
Financing costs for stock issued
to nonemployees.............. 0 0 0 0 2,205,000
---------- ---------- ----------- ---------- -----------
Total other expenses.... 226 9,311 94,928 18,415 2,269,289
---------- ---------- ----------- ---------- -----------
NET LOSS.......................... $ (18,625) $ (662,307) $(2,495,101) $ (300,420) $(6,453,238)
========== ========== =========== ========== ===========
NET LOSS PER COMMON SHARE:
Basic........................... $ (0.0) $ (0.10) $ (0.26) $ (0.04) $ (0.53)
========== ========== =========== ========== ===========
Diluted......................... $ (0.0) $ (0.10) $ (0.26) $ (0.04) $ (0.53)
========== ========== =========== ========== ===========
Weighted average common shares
outstanding.................. 5,000,000 6,337,356 9,600,592 8,006,626 12,072,425
========== ========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 60
TOWNE SERVICES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO DECEMBER 31, 1995,
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TOTAL
------------------- ------------------------ WARRANTS ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT OUTSTANDING DEFICIT EQUITY
------ ---------- ---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, October 23, 1995......... 0 0 0 $ 0 $ 0 $ 0 $ 0
Issuance of common stock.......... 0 0 5,000,000 15,750 0 0 15,750
Net loss.......................... 0 0 0 0 0 (18,625) (18,625)
------ ---------- ---------- ----------- ------- ----------- -----------
BALANCE, December 31, 1995........ 0 0 5,000,000 15,750 0 (18,625) (2,875)
Issuance of common stock.......... 0 0 2,905,700 720,150 0 0 720,150
Fair value of stock options
granted (Note 3)................ 0 0 0 64,124 0 0 64,124
Net loss.......................... 0 0 0 0 0 (662,307) (662,307)
------ ---------- ---------- ----------- ------- ----------- -----------
BALANCE, December 31, 1996........ 0 0 7,905,700 800,024 0 (680,932) 119,092
Issuance of common stock.......... 0 0 3,537,766 3,471,099 0 0 3,471,099
Issuance of warrants.............. 0 0 0 0 20,000 0 20,000
Exercise of stock options......... 0 0 263,300 78,990 0 0 78,990
Fair value of stock options
granted (Note 3)................ 0 0 0 67,583 0 0 67,583
Net loss.......................... 0 0 0 0 0 (2,495,101) (2,495,101)
------ ---------- ---------- ----------- ------- ----------- -----------
BALANCE, December 31, 1997........ 0 0 11,706,766 4,417,696 20,000 (3,176,033) 1,261,663
Issuance of preferred stock (Note
9).............................. 15,000 1,500,000 0 2,100,000 0 0 3,600,000
Issuance of common stock.......... 0 0 979,974 2,801,926 0 0 2,801,926
Exercise of stock options for
note............................ 0 0 495,000 427,500 0 0 427,500
Fair value of stock options
granted (Note 9)................ 0 0 0 923,750 0 0 923,750
Accretion of preferred stock with
discounted conversion feature... 0 8,000 0 0 0 (8,000) 0
Accretion of warrants with
redemption feature.............. 0 0 0 0 0 (98,000) (98,000)
Net loss.......................... 0 0 0 0 0 (6,453,238) (6,453,238)
------ ---------- ---------- ----------- ------- ----------- -----------
BALANCE, March 31, 1998
(unaudited)..................... 15,000 $1,508,000 13,181,740 $10,670,872 $20,000 $(9,735,271) $ 2,463,601
====== ========== ========== =========== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 61
TOWNE SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO DECEMBER 31, 1995,
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE MONTHS
FROM INCEPTION FOR THE YEARS ENDED ENDED
(OCTOBER 23, 1995) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ----------------------- -----------------------
1995 1996 1997 1997 1998
------------------ --------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(18,625) $(662,307) $(2,495,101) $(300,420) $(6,453,238)
-------- --------- ----------- --------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation expense recognized for stock
option grants................................ 0 10,020 0 0 2,450,907
Financing costs for stock issued to
nonemployees................................. 0 0 0 0 2,205,000
Issuance of warrants........................... 0 0 20,000 0 0
Loss on disposal of property and equipment..... 0 7,234 0 0 0
Depreciation and amortization.................. 393 12,895 103,629 6,555 39,980
Amortization of deferred financing fees........ 0 0 39,423 17,488 20,896
Amortization of debt discount.................. 0 0 5,500 0 10,103
Changes in operating assets and liabilities:
Accounts receivable.......................... 0 (1,596) (119,970) (480,209) (237,441)
Prepaid expenses............................. 0 (6,713) (64,553) 2,464 (95,497)
Other assets................................. (2,500) (2,000) (194,656) 4,375 (50,842)
Accounts payable............................. 615 39,487 257,836 116,997 (172,432)
Accrued liabilities.......................... 487 94,022 340,899 (57,010) 767,357
Deferred revenue............................. 0 23,103 (23,103) (8,942) 0
-------- --------- ----------- --------- -----------
Total adjustments.......................... (1,005) 176,452 365,005 (398,282) 4,938,031
-------- --------- ----------- --------- -----------
Net cash used in operating activities...... (19,630) (485,855) (2,130,096) (698,702) (1,515,207)
-------- --------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable due from shareholder............. 0 0 (78,990) 0 0
Purchases of property and equipment, net......... (7,500) (151,813) (451,569) (72,427) (223,094)
-------- --------- ----------- --------- -----------
Net cash used in investing activities...... (7,500) (151,813) (530,559) (72,427) (223,094)
-------- --------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options.......... 0 0 78,990 0 0
Repayment of debt................................ 0 0 (318,702) 0 (15,397)
Proceeds from Sirrom Capital..................... 0 0 1,500,000 0 0
Proceeds from long-term borrowings............... 30,000 60,000 314,625 76,287 0
Proceeds from issuance of preferred stock........ 0 0 0 0 1,500,000
Proceeds from issuance of common stock........... 15,750 710,130 3,471,099 947,027 1,169,769
-------- --------- ----------- --------- -----------
Net cash provided by financing
activities............................... 45,750 770,130 5,046,012 1,023,314 2,654,372
-------- --------- ----------- --------- -----------
NET INCREASE IN CASH............................... 18,620 132,462 2,385,357 252,185 916,071
CASH AND CASH EQUIVALENTS, beginning of year....... 0 18,620 151,082 151,082 2,536,439
-------- --------- ----------- --------- -----------
CASH AND CASH EQUIVALENTS, end of year............. $ 18,620 $ 151,082 $ 2,536,439 $ 403,627 $ 3,452,510
======== ========= =========== ========= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes......................... $ 0 $ 0 $ 0 $ 0 $ 0
======== ========= =========== ========= ===========
Cash paid for interest............................. $ 0 $ 0 $ 15,900 $ 5,430 $ 42,083
======== ========= =========== ========= ===========
Fair value of stock options granted (Note 3)....... $ 0 $ 64,124 $ 67,583 $ 0 $ 0
======== ========= =========== ========= ===========
Stock options exercised in exchange for note (Note
9)............................................... $ 0 $ 0 $ 0 $ 0 $ 427,500
======== ========= =========== ========= ===========
</TABLE>
The accompanying notes are and integral part of these statements.
F-6
<PAGE> 62
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BACKGROUND
Towne Services, Inc. ("Towne Services" or the "Company") designs, develops
and markets products and services that convert the in-house credit transactions
of small businesses into automated "virtual credit card" accounts which are
maintained and processed electronically. In-house credit transactions are
completed without a credit card or cash, and ordinarily are recorded and
processed manually and are billed to the customer at a later date. Towne
Services provides its products and services to small and medium size retail
merchants and small commercial businesses that extend in-house credit to their
customers. The banks that service these businesses provide them with accounts
receivable financing, and Towne Services supplies the banks with the
complementing products and services needed to maintain and monitor the accounts
receivable and generate reports.
Towne Services offers two main automated processing systems, TOWNE CREDIT
and TOWNE FINANCE, which process small business' in-house credit transactions in
much the same way as credit card transactions are processed. The TOWNE CREDIT
system electronically processes consumer in-house credit transactions of small
and medium size retail merchants. The TOWNE FINANCE system, a commercial version
of TOWNE CREDIT, is an automated asset management and financing system that
processes "business-to-business" credit transactions for small commercial
businesses. Through the use of Towne Services' products and services, small
businesses can automate their operations, accelerate cash flow, provide better
customer service, reduce paperwork and shift many other administrative burdens
to Towne Services. Towne Services' systems allow the banks that service these
businesses to provide accounts receivable financing products and services that
may attract new business customers and generate interest-bearing revolving
credit accounts.
Incorporated on October 23, 1995, Towne Services had no significant
operations until it released its TOWNE CREDIT product and related services in
June 1997. Accordingly, the Company has only a limited operating history. The
Company has incurred significant losses in each quarter since it commenced
operations. Towne Services had net losses of $18,625, $662,307 and $2,495,101
for its inception period and for the subsequent years ended December 31, 1996
and 1997, respectively. For the three months ended March 31, 1998, the Company
had a net loss of $6,453,238. The Company expects that it will continue to incur
net losses until it is able to attain sufficient revenues to support its
business. The Company can provide no assurances as to when, if ever, this may
occur.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements and footnote data as of March 31,
1998 and for the three months ended March 31, 1997 and 1998 are unaudited. In
the opinion of the management of the Company, these financial statements reflect
all adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of the financial statements. The results of operations for the
three months ended March 31, 1998 are not necessarily indicative of the results
that may be expected for the full year.
F-7
<PAGE> 63
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
The Company functions as a service bureau whereby customers process
transactions utilizing the Company's software on an outsourced basis. The
Company's revenues are generated primarily through initial set-up fees and
recurring monthly transaction processing fees. Revenues related to the initial
set-up fee are recognized upon execution of the related contract or, if
appropriate, upon settlement of any contract contingencies. Transaction fees are
recognized on a monthly basis as earned. The Company also leases point of sale
terminal equipment to certain customers under month-to-month operating leases.
Such operating lease revenues are recognized on a monthly basis as earned.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed as incurred.
Depreciation is provided using the straight-line method for financial reporting.
The detail of property and equipment at December 31, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
USEFUL
1996 1997 LIVES
-------- --------- -----------
<S> <C> <C> <C>
Furniture and fixtures.......................... $ 20,335 $ 114,841 Seven years
Computers and equipment......................... 103,220 237,734 Five years
Point-of-sale equipment......................... 25,879 193,843 Three years
Leasehold improvements.......................... 1,752 9,337 Five years
Software development costs...................... 0 47,000 Three years
-------- ---------
151,186 602,755
Less accumulated depreciation................... (12,270) (112,906)
-------- ---------
$138,916 $ 489,849
======== =========
</TABLE>
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment, to determine whether any impairments are other
than temporary. Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
OFFICERS' LIFE INSURANCE
The Company carries life insurance policies on four key executives. The
aggregate face value of these policies is $1,250,000, and the Company is
entitled to receive any proceeds as the beneficiary. The Company had no cash
surrender value in these policies at December 31, 1996 and 1997.
DEFERRED REVENUE
Deferred revenue on the accompanying balance sheets represents initial
set-up fees related to certain contracts entered into during 1996 which included
clauses to guarantee reimbursement to the customer if the revenues earned by the
customer under the contract during the first 12 months of the contract term do
not exceed the initial set-up fee. Set-up fees related to such contracts were
recognized at the end of the 12-month
F-8
<PAGE> 64
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
guarantee period. The Company discontinued offering this guarantee during 1996
and has no such clauses in contracts entered into subsequent to 1996.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of salary related personnel
costs, including costs for employee benefits, computer equipment and support
services used in products necessary to deliver the Company's services. The
Company's policy is to capitalize research and development costs upon
establishing technological feasibility, subject to a periodic assessment of
recoverability based on expected future revenues. The Company had capitalized
approximately $0, $47,000 and $59,500 of software development costs at December
31, 1996 and 1997 and March 31, 1998, respectively.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," effective
for fiscal years ending after December 15, 1997. The Company adopted the new
guidelines for the calculation and presentation of earnings per share, and all
prior periods have been restated. Basic loss per share is based on the weighted
average number of shares outstanding. Diluted loss per share is based on the
weighted average number of shares outstanding and the dilutive effect of common
stock equivalent shares issuable upon the exercise of stock options and warrants
(using the treasury stock method). All common stock equivalents have been
excluded as their effect would be anti-dilutive. Therefore, the weighted average
shares used for basic and diluted earnings per share are the same.
INCOME TAXES
The Company is a C corporation for income tax reporting purposes, and
accounts for income taxes under the provisions of SFAS No. 109, "Accounting for
Income Taxes," which requires the use of an asset and liability method of
accounting for deferred income taxes. Under SFAS No. 109, deferred tax assets or
liabilities at the end of each period are determined using the tax rate expected
to apply to taxable income in the period in which the deferred tax asset or
liability is expected to be settled or realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash, trade accounts receivable, trade accounts payable,
and other financial instruments approximate their fair values principally
because of the short-term maturities of these instruments. The fair value of the
Company's long-term debt is estimated based on the current rates offered to the
Company for debt of similar terms and maturities.
RISK OF POSSIBLE SYSTEM FAILURE
The Company's operations depend on its ability to protect its network
infrastructure and equipment against damages from human error, natural
disasters, power and telecommunications failures, intentional acts of vandalism
and similar events. Despite precautions taken by the Company, the occurrence of
human error, a natural disaster or other unanticipated problems could halt the
Company's services, damage network equipment and result in substantial expense
for the Company to repair or replace damaged equipment. In addition, the failure
of the Company's telecommunications providers to supply the necessary services
could also interrupt the Company's services. The inability of the Company to
supply services to its customers could negatively affect the Company's business
and financial results and may also harm the Company's reputation.
F-9
<PAGE> 65
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LOSS OF CUSTOMERS
Customer attrition is a normal part of the electronic processing business.
The Company has and will experience losses of small business customers due to
attrition. Towne Services' written agreements with its customers generally
provide that either party may terminate the agreement upon 30 to 60 days' notice
for any reason. Consolidation in the financial services industry in the United
States may result in fewer potential bank customers. In addition, the Company
may elect not to process or continue processing for customers that experience
financial difficulties or other problems.
PRODUCT RISKS
Towne Services may be liable if the use of any of its products causes
damage to its customers' businesses. Towne Services also may be required to
recall certain of its products if they become damaged or unable to perform their
intended functions. Towne Services has not experienced any product recalls or
product liability judgments or claims. however, a product recall or product
liability judgment against Towne Services could negatively affect its business
and financial results.
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
Towne Services believes that its technologies, trademarks and other
proprietary rights are important to its success. The Company attempts to protect
itself through a combination of copyright law, trademark and trade secret laws,
employee and third party confidentiality agreements and other methods. However,
unauthorized parties may attempt to copy aspects of the Company's technology,
products and services or to otherwise obtain and use information that the
Company regards as proprietary, despite the Company's efforts to protect them.
Third parties may claim that the Company's current or future products and
services infringe the patent, copyright or trademark rights of such third
parties. No assurance can be given that, if such actions or claims are brought,
the Company will ultimately prevail. Any such claims, whether with or without
merit, could be costly and time consuming, cause delays in introducing new or
improved products and services, require Towne Services to enter royalty or
licensing agreements or discontinue using the challenged technology and
otherwise could have a material adverse effect on the Company's business and
financial results.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of general purpose financial statements. This statement is effective for
periods beginning after December 15, 1997. The Company adopted SFAS No. 130
effective March 31, 1998. The adoption of SFAS 130 did not have a material
impact on the Company's financial statements as comprehensive income did not
differ from the reported net loss.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major
F-10
<PAGE> 66
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
customers. This statement is effective for financial statements for periods
beginning after December 15, 1997. The adoption of SFAS No. 131 will not have a
material impact on the Company's financial statements.
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
------- ----------
<S> <C> <C>
Promissory notes to two shareholders, interest at 7%, repaid
in December 1997.......................................... $90,000 $ 0
Note payable to Sirrom Investments, Inc. ("Sirrom") (the
"Sirrom Note"), interest at 14%, $1,500,000 due December
2002, secured by certain assets of the Company and all
shares of the Company's principal shareholders............ 0 1,500,000
Notes payable to Citizens Bank, interest ranging from 9.25%
to 12%, payable monthly through 2000, secured by
equipment................................................. 0 85,923
------- ----------
90,000 1,585,923
Less current portion...................................... 0 (46,757)
------- ----------
90,000 1,539,166
Less original issue discount.............................. 0 (249,500)
------- ----------
$90,000 $1,289,666
======= ==========
</TABLE>
At December 31, 1997, aggregate maturities of long-term debt are as
follows:
<TABLE>
<S> <C>
1998........................................................ $ 46,757
1999........................................................ 24,880
2000........................................................ 14,286
2001........................................................ 1,500,000
----------
$1,585,923
==========
</TABLE>
The Sirrom Note was issued in December 1997 for $1,500,000. As discussed in
Note 5, warrants to purchase up to 1,052,522 shares at $.01 per share were
issued with the Sirrom Note. The value of these warrants was determined to be
approximately $255,000 based on the relative fair value of the warrants to the
note. A corresponding amount of the loan proceeds has been allocated to the
warrants and has been accounted for as debt discount and warrants with
redemption feature on the accompanying balance sheet.
LINES OF CREDIT
The Company has a line of credit agreement with Georgia Bank & Trust which
allows the Company to borrow up to $500,000. This line of credit bears interest
at prime plus 1/2% (9.0% at December 31, 1997) and is secured by certain of the
Company's assets. Interest is payable monthly, and the line of credit matures in
July 2000. At December 31, 1997, $0 was outstanding and $500,000 was available
under this line of credit.
The Company has another $250,000 line of credit with First Federal Savings
Bank of LaGrange. This line of credit matures in June 1998, bears interest at a
variable rate based on prime rate, as defined (8.5% at December 31, 1997), and
is payable monthly. At December 31, 1997, $0 was outstanding and $250,000 was
available under this line of credit. This agreement is guaranteed by seven of
the Company's shareholders. In return for their guarantees, these shareholders
were each granted options to purchase 59,523 shares of common stock outside the
stock option plan with immediate vesting and an exercise price of $.60 per
share. In relation to these options, the Company recorded debt issuance costs of
$67,583, which are included in other
F-11
<PAGE> 67
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
assets on the accompanying balance sheet. This amount is being amortized to
interest expense over the life of the credit agreement. As of December 31, 1997,
none of these options had been exercised.
During 1996, the Company entered into a line of credit agreement with
Citizens Bank, a company related through common ownership which allowed the
Company to borrow up to $250,000. The agreement was guaranteed by seven of the
Company's shareholders. In return for their guarantees, the seven shareholders
were each granted options to purchase 71,400 shares of common stock outside the
stock option plan with immediate vesting and an exercise price of $.50 per
share. In relation to these options, the Company recorded debt issuance costs of
$64,124 at December 31, 1996, which are included in other assets on the
accompanying balance sheet. The line of credit expired on December 11, 1997. As
of December 31, 1997, none of these options had been exercised.
4. INCOME TAXES
The following is a reconciliation of income taxes at the federal statutory
rate with income taxes recorded by the Company for the period from inception
(October 23, 1995) to December 31, 1995 and for the years ended December 31,
1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- ---------
<S> <C> <C> <C>
Income tax benefit computed at the federal statutory
rate................................................. $ 2,794 $225,184 $ 843,568
State income tax benefit, net of federal income tax
benefit.............................................. 931 30,220 96,136
Other, net........................................... (123) (2,784) (16,193)
Change in valuation allowance........................ (3,602) (252,620) (923,511)
------- -------- ---------
$ 0 $ 0 $ 0
======= ======== =========
</TABLE>
Deferred income tax assets and liabilities for 1996 and 1997 reflect the
impact of temporary differences between the amounts of assets and liabilities
for financial reporting and income tax reporting purposes. Temporary differences
that give rise to deferred tax assets and liabilities at December 31, 1996 and
1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
-------- -----------
<S> <C> <C>
Deferred tax assets:
Deferred compensation..................................... $ 30,523 $ 38,000
Accounts receivable reserves.............................. 0 7,980
Other..................................................... 10,837 16,068
Net operating loss carryforwards.......................... 211,129 1,134,584
-------- -----------
Deferred tax assets............................... 252,489 1,196,632
Deferred tax liability:
Depreciation.............................................. (131) (20,501)
-------- -----------
252,358 1,176,131
Valuation allowance......................................... (252,358) (1,176,131)
-------- -----------
Net deferred tax asset................................. $ 0 $ 0
======== ===========
</TABLE>
Due to the Company's current year operating loss position and projected
losses for the fiscal year ending December 31, 1998, no benefit for income taxes
for the year ended December 31, 1997 has been provided in the accompanying
financial statements.
The Company has net operating loss carryforwards ("NOLs") of approximately
$4.2 million which will expire if not utilized by 2011 and 2012. Due to changes
in the Company's ownership structure, the Company's use of its NOLs as of
October 1, 1997 of approximately $2.5 million will be limited to approximately
$550,000
F-12
<PAGE> 68
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
in any given year to offset future taxes. If the Company does not realize
taxable income in excess of the limitation in future years, certain NOLs will be
unrealizable. NOLs generated after October 1, 1997 may be further limited as a
result of any future sales of stock by the Company.
At March 31, 1998, the Company had available net operating loss
carry-forwards of approximately $4.2 million. Once these net operating loss
carry forwards are utilized or expire, the Company's projected effective tax
rate will increase which will adversely affect the Company's operating results
and financial condition.
5. WARRANTS WITH REDEMPTION FEATURE
In connection with the issuance of the Sirrom Note (Note 3), the Company
issued warrants to purchase 308,982 shares of common stock at a price of $0.01
per share. In the event that the Sirrom Note remains outstanding on January 1,
2000, Sirrom will receive an additional 240,142 shares of common stock; if the
Sirrom Note remains outstanding on January 1, 2001, Sirrom will receive an
additional 247,725 shares of common stock, and if the Sirrom Note remains
outstanding on January 1, 2002, Sirrom will receive an additional 255,673 shares
of common stock, all at an exercise price of $0.01 per share. As discussed in
Note 3, the value assigned to these warrants was $255,000.
Sirrom has the option to require the Company to redeem the warrants for a
period of 30 days after maturity of the Sirrom Note in December 2002, at a
purchase price equal to fair market value, as defined. Upon completion of an
initial public offering by the Company, the redemption right terminates.
Accordingly, in periods prior to an initial public offering, the Company has
accounted for the warrants as temporary equity under EITF 88-9, "Put Warrants."
The excess of the redemption value over the carrying value is being accrued by
periodic charges to retained earnings over the redemption period. This accrual
amounted to $98,000 for the three months ended March 31, 1998.
6. SHAREHOLDERS' EQUITY
COMMON STOCK
During 1996 the Company issued 2,872,300 shares of common stock at prices
ranging from approximately $.04 to $.30 per share. In addition, the Company
granted 33,400 shares to an employee in the form of a bonus. The Company
recorded compensation expense related to these shares at $.30 per share which
represented management's estimate of the fair value of the common stock on the
date of issuance.
In January 1997, the Company effected a 100-for-1 stock split. All
references in the accompanying financial statements to number of shares and per
share amounts of the Company's common stock have been retroactively restated to
reflect the increased number of shares outstanding of common stock.
In an attempt to raise a minimum of $500,000 to serve as bridge financing
for the Company, the Company offered to sell shares of common stock for $1.00
per share to accredited investors as defined by Rule 501(a) under the federal
Securities Act of 1933. The private placement began in late March 1997 and ended
October 17, 1997. Through this private placement and certain other issuances of
common stock, the Company raised $3,371,000.
The Company and its shareholders entered into an Amended and Restated
Shareholders' Agreement dated April 28, 1997. Pursuant to this agreement,
shareholders are significantly restricted from transferring their shares.
Shareholders are allowed to transfer shares only in accordance with the
agreement and to a limited class of permitted transferees and the board of
directors has sole discretion to determine whether a proposed recipient is
permitted. Furthermore, no party shareholder may transfer common stock prior to
an initial public offering of the Company's common stock without first offering
the Company a right to purchase their shares and obtaining the agreement of the
purchasing party to abide by the terms of the Shareholders'
F-13
<PAGE> 69
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Agreement. If the Company elects not to purchase the shares offered, the selling
shareholder must offer all other party shareholders the right to purchase these
shares.
OPTIONS
The Company has a stock option plan for key employees of the Company (the
"Plan") which provides for the issuance of options to purchase up to 2,090,000
shares of the Company's common stock. Options are granted at an exercise price
which is not less than fair value as determined by a committee appointed by the
board of directors and generally vest over a period not to exceed five years.
Options granted under the Plan generally expire ten years from the date of
grant. At December 31, 1997, options to purchase 603,100 shares of common stock
were available for future grant under the Plan.
In September 1996, the board of directors granted options to purchase
1,118,300 shares of common stock outside the Plan to the president of the
Company. These options vested immediately and have an exercise price of $.30 per
share. No compensation expense was recorded for these options, as the option
price was made at the estimated fair market value of the common stock at the
date of grant.
In September 1997, the board of directors granted options to purchase
100,000 shares of common stock outside the Plan to a member of the board of
directors. These options vested immediately and have an exercise price of $1.00
per share. No compensation expense was recorded for these options, as the option
price was established at the estimated fair market value of the common stock at
the date of grant.
Stock option activity for the years ended December 31, 1996 and 1997 and
for the three months ended March 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE
SUBJECT TO PRICE
OPTIONS PER SHARE
---------- ---------
<S> <C> <C>
Options outstanding at December 31, 1995.................... 0 $0.00
Granted................................................... 2,601,500 0.42
Canceled.................................................. 0 0.00
Exercised................................................. 0 0.00
---------
Options outstanding at December 31, 1996.................... 2,601,500 0.42
Granted................................................... 1,020,161 0.83
Canceled.................................................. 0 0.00
Exercised................................................. (263,300) 0.30
---------
Options outstanding at December 31, 1997.................... 3,358,361 0.55
Granted................................................... 381,000 1.25
Canceled.................................................. 0 0.00
Exercised................................................. (495,000) 0.86
---------
Options Outstanding at March 31, 1998....................... 3,244,361 0.58
=========
Exercisable at December 31, 1997.......................... 2,367,361
---------
Exercisable at March 31, 1998............................. 2,118,611
=========
</TABLE>
F-14
<PAGE> 70
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the range of exercise prices, number of
shares, weighted average exercise price, and remaining contractual lives by
groups of similar price and grant date at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------
WEIGHTED
AVERAGE
WEIGHTED REMAINING WEIGHTED
RANGE OF NUMBER AVERAGE CONTRACTUAL NUMBER AVERAGE
EXERCISE PRICES OF SHARES PRICE LIFE OF SHARES PRICE
--------------- --------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.30-$0.55.......................... 2,138,200 $0.42 6.77 1,515,700 $0.42
$0.60................................ 436,661 0.60 9.02 421,661 0.60
$1.00-$1.25.......................... 669,500 1.14 9.66 181,250 1.18
--------- ---------
Total................................ 3,244,361 0.58 7.70 2,118,611 0.52
========= =========
</TABLE>
During 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which defines a fair value-based method of accounting for an
employee stock option plan or similar equity instrument. However, it also allows
an entity to continue to measure compensation cost for those plans using the
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain
with the accounting in APB No. 25 must make pro forma disclosures of net income
and, if presented, earnings per share as if the fair value-based method of
accounting defined in the statement had been applied.
The Company has elected to account for its stock-based compensation plan
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1996 and 1997 using the minimum
value option pricing model as prescribed by SFAS No. 123 using the following
weighted average assumptions for grants in 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------------ --------
<S> <C> <C>
Risk-free interest rate..................................... 5.9%-6.7% 6.3%-6.7%
Expected dividend yield..................................... 0.0% 0.0%
Expected lives.............................................. 5 years 5 years
Expected volatility......................................... 0.0% 0.0%
</TABLE>
The total value of the options granted during the years ended December 31,
1996, and 1997 were computed as approximately $199,000 and $356,000,
respectively, which would be amortized over the vesting period of the options.
If the Company had accounted for these options in accordance with SFAS No. 123,
the Company's reported pro forma net loss and pro forma net loss per share for
the years ended December 31, 1996 and 1997 would have increased to the following
pro forma amounts:
<TABLE>
<CAPTION>
1996 1997
--------- -----------
<S> <C> <C>
Net loss:
As reported.............................................. $(662,307) $(2,495,101)
Pro forma................................................ (669,307) (2,527,527)
Basic:
As reported.............................................. $ (.10) $ (.26)
Pro forma................................................ (.11) (.26)
Diluted:
As reported.............................................. (.10) (.26)
Pro forma.................................................. (.11) (.26)
</TABLE>
F-15
<PAGE> 71
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
WARRANTS
In October 1997, the Company issued warrants to certain principals of
Rodgers Capital Corporation in connection with services performed by Rodgers
Capital Corporation to assist the Company in securing a marketing agreement with
a third party. These warrants allow the holders to purchase 75,000 shares of
common stock for $1.00 per share. The warrants vest immediately and expire in
2002. The Company has recorded $20,000, the estimated fair value of these
warrants at the date of issuance using the minimum value method under SFAS No.
123, as warrants outstanding on the accompanying balance sheet.
7. COMMITMENTS AND CONTINGENCIES
LEASES
During the period from inception (October 23, 1995) to December 31, 1995
and for the years ended December 31, 1996 and 1997, the Company incurred
approximately $0, $10,000, and $37,000, respectively, in rent expense for leased
office space from ProVesa, Inc., a subsidiary of The InterCept Group, Inc.
("InterCept"), a company related to the Company through common ownership. The
Company was also allocated costs for utilities and accounting services from
ProVesa, Inc. based on usage by the Company. In February 1998, the Company began
leasing office space under a noncancelable operating lease agreement with a
nonrelated third party expiring in January 2003. Future minimum rental payments
for this noncancelable lease are as follows:
<TABLE>
<S> <C>
1998........................................................ $168,885
1999........................................................ 184,205
2000........................................................ 184,205
2001........................................................ 184,205
2002........................................................ 184,205
Thereafter.................................................. 15,350
--------
$921,055
========
</TABLE>
EMPLOYEE LEASING
Effective March 1998, the Company began leasing all personnel from an
independent personnel leasing company. Under the lease agreement, the Company
pays a percentage of compensation per leased employee (in addition to
compensation costs) to the employee leasing company to cover payroll processing,
unemployment insurance and workers' compensation.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain executive
officers of the Company. The agreements, which are substantially similar,
provide for compensation to the officers in the form of annual base salaries and
bonuses based on earnings of the Company. The employment agreements also provide
for severance benefits upon the occurrence of certain events, including a change
in control, as defined.
8. RELATED-PARTY TRANSACTIONS
In September 1997, the Company loaned the president of the Company $78,990
to exercise stock options. The full recourse loan is secured by the underlying
common stock and personal assets of the president, bears interest at 8.5% per
annum, and is due in full in September 1998.
During the years ended December 31, 1996 and 1997, the Company incurred
fees of approximately $37,000 and $55,000, respectively, for legal services to a
law firm in which a director and shareholder of the
F-16
<PAGE> 72
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company is a partner. As of December 31, 1996 and 1997, approximately $18,000
and $42,000, respectively, of such fees are included in accounts payable in the
accompanying balance sheets.
During the years ended December 31, 1996 and 1997, the Company incurred
costs of approximately $4,000, and $15,000, respectively, for communication
services from InterCept Communications Technologies, L.L.C., a subsidiary of
InterCept.
9. SUBSEQUENT EVENTS
PREFERRED STOCK
In January 1998, the Company authorized 1,000,000 shares of Series A
Preferred Stock ("Preferred Stock") with a stated value of $100 per share. The
board of directors has the authority to issue these shares and to establish
dividends, voting and conversion rights, redemption provisions, liquidation
preferences, and other rights and restrictions. In March 1998, the Company sold
15,000 shares of Preferred Stock to Capital Appreciation Partners, L.P. for
$1,500,000. The shares are convertible into common stock at a price of $1.25 per
share and automatically convert into common stock upon the completion of an
initial public offering. The Company recorded $2.1 million of expense for these
shares for the difference between the estimated fair market value of the common
stock at the date of issuance and the conversion price as discussed below.
The holders of the preferred shares receive quarterly paid in kind
dividends of $1 per share for the year ending March 31, 1999 and quarterly paid
in kind dividends of $2 per share for the year ending March 31, 2000. For the
two years ending March 31, 2002, the holders receive quarterly cash dividends of
$4 per share, and beginning April 1, 2002, the holders receive quarterly cash
dividends of $6 per share. The difference between the fair value of the
preferred stock at the date of issuance and the fair value if the ultimate
dividend rate was in effect for all periods will be accrued to preferred stock
using the effective interest method over the period preceding the perpetual
dividend.
COMMON STOCK TRANSACTIONS
During the three months ended March 31, 1998, the Company sold shares of
common stock and issued options to acquire common stock at what management
believed to be the fair market value of the common stock at that time. The
Company retained an independent appraiser who subsequently valued the common
stock at a higher price. The Company recorded a one time non-cash charge for the
difference between the two values.
In February 1998, the Company sold 60,000 shares of common stock to third
parties at $1.25 per share. STOCK SALE TO EMPLOYEES
In February 1998, the board of directors authorized the sale of the
Company's common stock to all employees of the Company for approximately $1.19
per share. The stock sale was available through March 6, 1997, and 919,974
shares were purchased by employees.
STOCK OPTIONS
The Company granted options to purchase 111,000 and 60,000 shares of common
stock under the Plan at $1.25 per share to key employees in January 1998 and
February 1998, respectively. These options vest 20% per year beginning upon the
first anniversary of the date of grant.
In February 1998, the board of directors approved an amendment to the
vesting period for options to purchase 50,000 shares of common stock granted
during 1996 to each nonemployee director from a five year vesting period to
immediate vesting. As this change in vesting period created a new measurement
date, the
F-17
<PAGE> 73
TOWNE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company recorded compensation expense of $521,250 for the difference between the
original exercise price and the estimated fair market value on the date the
options were amended.
In February 1998, the board of directors granted options to purchase 20,000
shares of common stock to each nonemployee director, and options to purchase
30,000 shares of common stock to a new nonemployee director. These options vest
immediately and have an exercise price of $1.25.
In May 1998, the board of directors granted options to certain board
members and key employees to purchase 595,000 shares of common stock. These
options vest immediately and have an option price of $7.20 per share. Options to
purchase 170,000 shares expire in May 2003 and the remaining options to purchase
425,000 shares expire in May 2008. All of these options vest immediately. The
Company did not record any compensation expense related to these grants as the
option price represented the estimated fair value of the Company's common stock
at the date of grant.
STOCK SUBSCRIPTIONS RECEIVABLE
In March 1998, options for the purchase of 495,000 shares of common stock
were exercised for $427,500 by various option holders. As the cash was not
received until April 1998, the amount has been recorded as subscriptions
receivable on the accompanying balance sheet at March 31, 1998.
INITIAL PUBLIC OFFERING
In the second quarter of 1998, the Company plans to sell approximately
4,000,000 shares of common stock at an estimated initial public offering price
of $9 -- $11 per share in an initial public offering. There can be no assurance,
however, that the initial public offering will be completed at a per share price
within the estimated range or completed at all.
F-18
<PAGE> 74
======================================================
PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS. NEITHER TOWNE SERVICES, INC., THE SELLING SHAREHOLDERS NOR ANY
UNDERWRITER HAS AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH
INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS
NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED
IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS
OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND
THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE IN THAT JURISDICTION.
UNTIL , 1998, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 12
Dividend Policy....................... 12
Dilution.............................. 13
Capitalization........................ 14
Selected Financial Data............... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 24
Management............................ 34
Principal and Selling Shareholders.... 42
Certain Transactions.................. 44
Description of Capital Stock.......... 45
Shares Eligible for Future Sale....... 49
Underwriting.......................... 51
Legal Matters......................... 52
Experts............................... 52
Additional Information................ 52
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
4,000,000 SHARES
TOWNE SERVICES, INC.
[LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
WHEAT FIRST UNION
J.C. BRADFORD&CO.
STEPHENS INC.
======================================================
<PAGE> 75
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with
this offering, other than the underwriting discount:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 14,927
NASD Fees................................................... 5,560
Nasdaq Fees................................................. 95,000
Blue Sky Fees and Expenses.................................. 3,000
Printing and Engraving...................................... 150,000
Legal Fees and Expenses..................................... 550,000
Accounting Fees and Expenses................................ 200,000
Transfer Agent Fees......................................... 20,000
Miscellaneous Expenses...................................... 161,513
----------
Total............................................. $1,200,000
==========
</TABLE>
- ---------------
* To be provided.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation eliminate, subject to certain
limited exceptions, the personal liability of a director to the Company or its
shareholders for monetary damage for any breach of duty as a director. There is
no elimination of liability for (i) a breach of duty involving appropriation of
a business opportunity of the Company; (ii) an act or omission which involves
intentional misconduct or a knowing violation of law; (iii) any transaction from
which the director derives an improper personal benefit; or (iv) as to any
payments of a dividend or any other type of distribution that is illegal under
Section 14-2-832 of the Georgia Business Corporation Code (the "Georgia Code").
In addition, if at any time the Code is amended to authorize further elimination
or limitation of the personal liability of a director, then the liability of
each director of the Company shall be eliminated or limited to the fullest
extent permitted by such provisions, as so amended, without further action by
the shareholders, unless the provisions of the Code require such action. The
provision does not limit the right of the Company or its shareholders to seek
injunctive or other equitable relief not involving payments in the nature of
monetary damages.
The Company's Bylaws contain certain provisions which provide
indemnification to directors of the Company that is broader than the protection
expressly mandated in Sections 14-2-852 and 14-2-857 of the Code. To the extent
that a director or officer of the Company has been successful, on the merits or
otherwise, in the defense of any action or proceeding brought by reason of the
fact that such person was a director or officer of the Company, Sections
14-2-852 and 14-2-857 of the Code would require the Company to indemnify such
persons against expenses (including attorney's fees) actually and reasonably
incurred in connection therewith. The Code expressly allows the Company to
provide for greater indemnification rights to its officers and directors,
subject to shareholder approval.
The indemnification provisions in the Company's Bylaws require the Company
to indemnify and hold harmless any director who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding whether civil, criminal, administrative or investigative
(including any action or suit by or in the right of the Company) because he or
she is or was a director of the Company, against expenses (including, but not
limited to, attorney's fees and disbursements, court costs and in settlement
incurred by him or her in connection with the action, suit or proceeding.
Indemnification would be disallowed under any circumstances where
indemnification may not be authorized by action of the board of directors, the
shareholders or otherwise. The board of directors of the Company also has the
authority to extend to officers, employees and agents the same indemnification
rights held by directors, subject to all the
II-1
<PAGE> 76
accompanying conditions and obligations. Indemnified persons would also be
entitled to have the Company advance expenses prior to the final disposition of
the proceeding. If it is ultimately determined that they are not entitled to
indemnification, however, such amounts would be repaid. Insofar as
indemnification for liability arising under the Securities Act of 1933 may be
permitted to officers and directors of the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
The Company has entered into separate indemnification agreements with each
of its directors and executive officers whereby the Company agreed, among other
things, to provide for indemnification and advancement of expenses in a manner
and subject to terms and conditions similar to those set forth in the Bylaws.
These agreements also provide that the Company shall purchase and maintain
liability insurance for the benefit of its directors and executive officers.
These agreements may not be abrogated by action of the shareholders. There is no
pending litigation or proceeding involving a director, officer, employee or
other agent of the Company as to which indemnification is being sought, nor is
the Company aware of any pending or threatened litigation that may result in
claims for indemnification by any director, officer, employee or other agent.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities which were not registered under the Securities Act of 1933
have been sold by the Company within the past three years except for those
indicated below. Share numbers reflect the 100-for-1 stock split with respect to
the Company's common stock effected in January 1997.
(i) In connection with its formation in October 1995, the Company
issued a total of 5,000,000 shares of common stock to its four initial
shareholders in exchange for $16,000 in the aggregate.
(ii) From August to October 1996, the Company issued 2,258,700 shares
of common stock at a price of $0.30 per share to certain officers,
directors and other investors. The Company also issued 647,000 shares of
common stock and options to purchase 983,400 shares of common stock to
certain executive officers, directors, employees, consultants and advisors
of the Company at prices ranging from $0.03 to $0.30 per share during 1996.
(iii) In connection with his employment, the Company granted its
President and Chief Operating Officer options to purchase 1,118,300 shares
of common stock at an exercise price of $0.30 per share in September 1996.
In addition, in consideration of their guaranties of a $250,000 line of
credit, in December 1996 the Company granted options to purchase 71,400
shares of common stock at an exercise price of $0.50 per share to seven of
its directors and executive officers.
(iv) In January and February 1997, the Company sold 166,666 shares of
common stock at a price of $0.60 per share to a director and a related
party investor. In January 1997, the Company granted seven directors
options to acquire 59,523 shares of common stock at $0.60 per share each in
exchange for their personal guaranty of a new $250,000 credit facility for
the Company.
(v) The Company issued 350,500 shares of common stock and granted
options to acquire 206,000 shares of common stock to certain employees and
advisors of the Company at prices of either $0.60 or $1.00 per share during
1997. In connection with his employment, the Company granted options to
acquire 300,000 shares of common stock to its Chief Financial Officer,
effective as of November 1997, at $1.00 per share. In addition, the Company
granted options to acquire 32,500 shares of common stock to each of its
three new directors in September 1997 at a price of $1.00 per share.
(vi) Between the end of March and the middle of October 1997, the
Company issued 3,020,600 shares of common stock at a price of $1.00 per
share to certain officers, directors, accredited investors and a limited
number of other investors
II-2
<PAGE> 77
(v) Between February and March 1998, the Company issued 979,974 shares
of common stock to officers, directors, employees, advisors and consultants
for either $1.19 per share or $1.25 per share (employees received a 5%
discount off the fair market value price).
(vi) On March 13, 1998, the Company sold 15,000 shares of its Series A
Convertible Preferred Stock for $15,000,000 to an accredited investor. The
terms of the stock purchase agreement provide for conversion of the
preferred stock into common stock at conversion price of $1.25 per share,
subject to adjustment.
The issuances of securities described above were made in reliance on one or
more of the exemptions from registration, including those provided for by
Section 4(2), Regulation D and Rule 701 of the Securities Act of 1933. The
recipients of the securities in the above transactions represented their
intention to acquire the securities for investment purposes only and not with a
view to or for the sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates issued in such
transactions. The recipients of these securities had adequate access, through
their relationship with the Company, to information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement*
3.1 -- Amended and Restated Articles of Incorporation
3.2 -- Amended and Restated Bylaws
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Articles of
Incorporation and Bylaws defining the rights of the holders
of common stock of the Registrant
4.2 -- Specimen Common Stock Certificate*
5.1 -- Opinion of Nelson Mullins Riley & Scarborough, L.L.P.*
10.1 -- 1996 Stock Option Plan (including Form of Stock Option
Agreement)
10.2 -- 1998 Stock Option Plan (including Form of Stock Option
Agreement)
10.3 -- Form of Non-Qualified Stock Option Agreement
10.4 -- Lease by and among River Exchange Associates Limited
Partnership and Towne Services, Inc. dated January 12, 1998
10.5 -- Employment Agreement by and between Towne Services, Inc. and
Drew W. Edwards dated as of October 15, 1995
10.6 -- Employment Agreement by and between Towne Services, Inc. and
Henry M. Baroco dated as of January 15, 1997
10.7 -- Amended and Restated Employment Agreement by and between
Towne Services, Inc. and Bruce Lowthers dated as of May 18,
1998
10.8 -- Employment Agreement by and between Towne Services, Inc. and
Cleve Schultz dated as of May 19, 1998
10.9 -- Form of Towne Credit Bank Marketing Agreement
10.10 -- Form of TOWNE FINANCE Bank Marketing Agreement
10.11 -- Form of TOWNE CREDIT Merchant Processing Agreement
10.12 -- Form of TOWNE FINANCE Client Processing Agreement
10.13 -- Stock Purchase Warrant issued December 18, 1997 by Towne
Services, Inc. to Sirrom Investments, Inc.
</TABLE>
II-3
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.14 -- Stock Purchase Agreement by and between Towne Services, Inc.
and Capital Appreciation Partners, L.P. dated March 13,
1998**
10.15 -- Registration Rights Agreement dated as of March 13, 1998 by
and between Towne Services, Inc. and Capital Appreciation
Partners, L.P.
10.16 -- Form of Indemnification Agreement entered into between Towne
Services, Inc. and its directors and officers
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Nelson Mullins Riley & Scarborough, L.L.P. (filed
as part of Exhibit 5.1)*
24.1 -- Power of Attorney (contained on the signature page hereof)
27.1 -- Financial Data Schedule for period ended March 31, 1998 (for
SEC use only)
</TABLE>
- ---------------
* To be filed by amendment.
** The Registrant agrees to furnish supplementally a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission upon request,
as provided in Item 601(b)(2) of Regulation S-K.
(b) Financial Statement Schedules
Schedule II: Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
The Company hereby undertakes to provide to the underwriter at the closing
specified in the underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on May 21, 1998.
TOWNE SERVICES, INC.
By: /s/ DREW W. EDWARDS
------------------------------------
Drew W. Edwards
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned officers and
directors of Towne Services, Inc. (the "Company"), a Georgia corporation, for
himself and not for one another, does hereby constitute and appoint Drew W.
Edwards and Bruce F. Lowthers, Jr., and each of them, a true and lawful attorney
in his name, place and stead, in any and all capacities, to sign his name to any
and all amendments, including post-effective amendments, to this Registration
Statement, and to sign a Registration Statement pursuant to Section 462(b) of
the Securities Act of 1933, and to cause the same (together with all exhibits
thereto) to be filed with the Securities and Exchange Commission, granting unto
said attorneys and each of them full power and authority to do and perform any
act and thing necessary and proper to be done in the premises, as fully to all
intents and purposes as the undersigned could do if personally present, and each
of the undersigned for himself hereby ratifies and confirms all that said
attorneys or any one of them shall lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities listed and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DREW W. EDWARDS Chief Executive Officer and May 21, 1998
- ----------------------------------------------------- Chairman of the board of
Drew W. Edwards directors (Principal Executive
Officer)
/s/ HENRY M. BAROCO President, Chief Operating May 21, 1998
- ----------------------------------------------------- Officer and Director
Henry M. Baroco
/s/ BRUCE F. LOWTHERS, JR. Chief Financial Officer May 21, 1998
- ----------------------------------------------------- (Principal Financial and
Bruce F. Lowthers, Jr. Accounting Officer)
/s/ GREGORY L. BOGGS Director May 21, 1998
- -----------------------------------------------------
G. Lynn Boggs
/s/ FRANK W. BROWN Director May 21, 1998
- -----------------------------------------------------
Frank W. Brown
/s/ JOHN W. COLLINS Director May 21, 1998
- -----------------------------------------------------
John W. Collins
/s/ JOE M. RODGERS Director May 21, 1998
- -----------------------------------------------------
Joe M. Rodgers
</TABLE>
II-5
<PAGE> 80
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. DANIEL SPEIGHT, JR. Director May 21, 1998
- -----------------------------------------------------
J. Daniel Speight, Jr.
/s/ GLENN W. STURM Director May 21, 1998
- -----------------------------------------------------
Glenn W. Sturm
/s/ J. STEPHEN TURNER Director May 21, 1998
- -----------------------------------------------------
J. Stephen Turner
/s/ BAHRAM YUSEFZADEH Director May 21, 1998
- -----------------------------------------------------
Bahram Yusefzadeh
</TABLE>
II-6
<PAGE> 81
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II
To: Towne Services, Inc.
We have audited in accordance with generally accepted auditing standards,
the financial statements of Towne Services, Inc. included in this Registration
Statement and have issued our report thereon dated May 21, 1998. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in Item 16(b) of the Registration
Statement is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subject to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
May 21, 1998
Atlanta, GA
S-1
<PAGE> 82
TOWNE SERVICES, INC.
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BEGINNING CHARGED TO ENDING
BALANCE EXPENSE DEDUCTIONS BALANCE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1995 Allowance for Doubtful Accounts...... 0 0 0 0
December 31, 1996 Allowance for Doubtful Accounts...... 0 25,000 0 25,000
December 31, 1997 Allowance for Doubtful Accounts...... 25,000 45,000 0 70,000
</TABLE>
S-2
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement*
3.1 -- Amended and Restated Articles of Incorporation
3.2 -- Amended and Restated Bylaws
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Articles of
Incorporation and Bylaws defining the rights of the holders
of common stock of the Registrant
4.2 -- Specimen Common Stock Certificate*
5.1 -- Opinion of Nelson Mullins Riley & Scarborough, L.L.P.*
10.1 -- 1996 Stock Option Plan (including Form of Stock Option
Agreement)
10.2 -- 1998 Stock Option Plan (including Form of Stock Option
Agreement)
10.3 -- Form of Non-Qualified Stock Option Agreement
10.4 -- Lease by and among River Exchange Associates Limited
Partnership and Towne Services, Inc. dated January 12, 1998.
10.5 -- Employment Agreement by and between Towne Services, Inc. and
Drew W. Edwards dated as of October 15, 1995
10.6 -- Employment Agreement by and between Towne Services, Inc. and
Henry M. Baroco dated as of January 15, 1997
10.7 -- Amended and Restated Employment Agreement by and between
Towne Services, Inc. and Bruce Lowthers dated as of May 18,
1998
10.8 -- Employment Agreement by and between Towne Services, Inc. and
Cleve Schultz dated as of May 19, 1998
10.9 -- Form of Towne Credit Bank Marketing Agreement
10.10 -- Form of TOWNE FINANCE Bank Marketing Agreement
10.11 -- Form of Towne Credit Merchant Processing Agreement
10.12 -- Form of Towne Finance Client Processing Agreement
10.13 -- Stock Purchase Warrant issued December 18, 1997 by Towne
Services, Inc. to Sirrom Investments, Inc.
10.14 -- Stock Purchase Agreement by and between Towne Services, Inc.
and Capital Appreciation Partners, L.P. dated March 13,
1998**
10.15 -- Registration Rights Agreement dated as of March 13, 1998 by
and between Towne Services, Inc. and Capital Appreciation
Partners, L.P.
10.16 -- Form of Indemnification Agreement entered into between Towne
Services, Inc. and its directors and officers
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Nelson Mullins Riley & Scarborough, L.L.P. (filed
as part of Exhibit 5.1)*
24.1 -- Power of Attorney (contained on the signature page hereof)
27.1 -- Financial Data Schedule for period ended March 31, 1998 (for
SEC use only)
</TABLE>
- ---------------
* To be filed by amendment.
** The Registrant agrees to furnish supplementally a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission upon request,
as provided in Item 601(b)(2) of Regulation S-K.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
TOWNE SERVICES, INC.
ARTICLE ONE
NAME
The name of the corporation is Towne Services, Inc.
ARTICLE TWO
CAPITALIZATION
The total number of shares of all classes which the Corporation has
authority to issue is seventy million (70,000,000), of which fifty million
(50,000,000) shares shall be designated as "Common Stock," and twenty million
(20,000,000) shares shall be designated as "Preferred Stock." The designations
and the preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption of the shares of each class of stock are as follows:
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more series. The description of shares of each
series of Preferred Stock, including any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption shall be as set forth in
resolutions adopted by the Board of Directors, and articles of amendment shall
be filed with the Georgia Secretary of State as required by law to be filed with
respect to issuance of such Preferred Stock, prior to the issuance of any shares
of such series.
The Board of Directors is expressly authorized, at any time, by
adopting resolutions providing for the issuance of, or providing for a change in
the number of, shares of any particular series of Preferred Stock and, if and to
the extent from time to time required by law, by filing articles of amendment
which are effective without shareholder action to increase or decrease the
number of shares included in each series of Preferred Stock, but not below the
number of shares then issued, and to set or change in any one or more respects
the designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms and
conditions of redemption relating to the shares of each such series.
Notwithstanding the foregoing, the Board of Directors shall not be authorized to
change the right of holders of the Common Stock of the Corporation to vote one
vote per share on all matters submitted for shareholder action. The authority of
the Board of Directors with respect to each series of Preferred Stock shall
include, but not be limited to, setting or changing the following:
<PAGE> 2
(a) the annual dividend rate, if any, on shares of such series, the
times of payment and the date from which dividends shall be accumulated, if
dividends are to be cumulative;
(b) whether the shares of such series shall be redeemable and, if so,
the redemption price and the terms and conditions of such redemption;
(c) the obligation, if any, of the Corporation to redeem shares of such
series pursuant to a sinking fund;
(d) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes, and, if so, the
terms and conditions of such conversion or exchange, including the price or
prices or the rate or rates of conversion or exchange and the terms of
adjustment, if any;
(e) whether the shares of such series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the extent of such
voting rights;
(f) the rights of the shares of such series in the event of voluntary
or involuntary liquidation, dissolution or winding-up of the Corporation; and
(g) any other relative rights, powers, preferences, qualifications,
limitations or restrictions thereof relating to such series.
The shares of Preferred Stock of any one series shall be identical with
each other in all respects except as to the dates from and after which dividends
thereon shall accumulate, if cumulative.
SERIES A CONVERTIBLE PREFERRED STOCK
A. Designation. There is hereby established a series of
preferred shares designated as Series A Convertible Preferred Stock,
consisting of 25,000 shares (the "Series A Preferred Stock").
B. Terms. The following are the terms of the Series A
Preferred Stock:
1. Definitions.
For purposes of this Certificate, the following definitions
shall apply:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Common Stock" shall mean the common shares of the
Company.
(c) "Company" shall mean Towne Services, Inc.
2
<PAGE> 3
(d) "Junior Stock" shall mean shares of any class ranking
junior to the Series A Preferred Stock.
(e) "Original Issue Date" for the Series A Preferred Stock
shall mean the date on which the first share of the Series A Preferred Stock was
originally issued.
(f) "PIK dividends" shall mean cumulative dividends payable
with respect to the Series A Preferred Stock in the form of additional shares of
Series A Preferred Stock.
(g) "Qualifying Public Offering" shall mean an underwritten
public offering of Common Stock in which (i) the public offering price per share
(before deducting any underwriting fees or selling commissions) when multiplied
by the number of shares of Common Stock outstanding immediately after the
consummation of such offering (assuming conversion of the Series A Preferred
Stock and any other convertible securities then outstanding, but assuming no
exercise of any outstanding and unexercised options, warrants and similar
rights, including warrants issued pursuant to that certain Stock Purchase
Warrant, dated December 18, 1997 (the "Stock Purchase Warrant") issued by the
Company to Sirrom Investments, Inc.) exceeds $80 million, and (ii) the gross
proceeds to the Company from the underwritten public offering exceed $20
million.
(h) "Subsidiary" shall mean any corporation at least 50% of
whose outstanding voting stock shall at the time be owned directly or indirectly
by the Company or by one or more Subsidiaries.
2. Stated Value. The stated value of the Series A Stock
shall be $100.00 per share (the "Stated Value").
3. Dividends.
(a) The holders of the then outstanding shares of Series A
Preferred Stock shall be entitled to receive cumulative cash dividends when, as
and if declared by the Board out of any funds legally available therefor, and
shall be entitled to receive PIK dividends when, as and if declared by the
Board, as follows:
(i) For the period from the date of issuance through March
31, 1999, the holders shall be entitled to receive PIK dividends at a
quarterly rate of $1.00 per share;
(ii) For the period April 1, 1999 through March 31, 2000, the
holders shall be entitled to receive PIK dividends at a quarterly rate
of $2.00 per share;
(iii) For the period April 1, 2000 through March 31, 2002, the
holders shall be entitled to receive cash dividends at a quarterly rate
of $4.00 per share; and
(iv) From and after April 1, 2002 (so long as the Series A
Preferred Stock remains outstanding), the holders shall be entitled to
receive cash dividends at a quarterly rate of $6.00 per share.
Dividends will be payable quarterly on March 31,
3
<PAGE> 4
June 30, September 30 and December 31 in each year, provided dividends
payable for the period from the Original Issue Date through March 31,
2000 shall accrue but shall not be paid until conversion of the Series
A Preferred Stock or the liquidation, dissolution or winding up of the
Company. The per share value of the Series A Preferred that comprises
any PIK dividend shall be equal to the Stated Value thereof. Dividends
shall accrue on each share of Series A Preferred Stock from the
Original Issue Date, and shall accrue from day to day, whether or not
earned or declared and whether or not there shall be funds legally
available for the payment of such dividends. Such dividends shall be
cumulative so that, if such dividends in respect of any previous or
current quarterly dividend period, at the quarterly rate specified
above, shall not have been paid or declared and a sum sufficient for
the payment thereof set apart, the deficiency shall first be fully paid
before any dividend or other distribution shall be paid on or declared
and set apart for the Common Stock or any Junior Stock. Any
accumulation of dividends on the Series A Preferred Stock shall not
bear interest.
(b) Unless full dividends on the Series A Preferred Stock for
all past dividend periods and the then current dividend period shall have been
paid or declared and a sum sufficient for the payment above set apart: (i) no
dividend whatever (other than a dividend payable solely in Common Stock or any
Junior Stock) shall be paid or declared, and no distribution shall be made, on
any Common Stock or any Junior Stock, and (ii) no shares of Common Stock or any
Junior Stock shall be purchased, redeemed or otherwise acquired by the Company
and no funds shall be paid into or set aside or made available for a sinking
fund for the purchase, redemption or other acquisition thereof without the
approval of the holders of at least a majority of the then outstanding shares of
Series A Preferred Stock.
(c) Each dividend shall be paid to the holders of record of
the Series A Preferred Stock as they shall appear on the stock register of the
Company on such record date, not exceeding 45 days nor less than 10 days
preceding a dividend payment date, as shall be fixed by the Board or a duly
authorized committee thereof.
(d) For the purpose of the dividends payable pursuant to
paragraph 3(a)(i)-(iv), shares of Series A Preferred Stock payable in respect of
accrued and unpaid PIK dividends shall be deemed to have been paid and to be
outstanding as of the respective quarterly payment date set forth in paragraph
3(a).
4. Liquidation Rights.
(a) In the event of any liquidation, dissolution or winding up
of the affairs of the Company, whether voluntary or involuntary, after payment
or provision for payment of the debts and other liabilities and obligations of
the Company, the holders of each share of Series A Preferred Stock then
outstanding shall be entitled to be paid out of the net assets of the Company
available for distribution to its shareholders, before any payment or
declaration and setting apart for payment of any amount shall be made in respect
of the Common Stock, an amount equal to the Stated Value per share of Series A
Preferred Stock outstanding, plus an amount equal to all accrued and unpaid cash
dividends thereon, whether or not earned or declared, to and including the date
full payment shall be tendered to the holders of the Series A
4
<PAGE> 5
Preferred Stock with respect to such liquidation, dissolution or winding up (the
"Series A Liquidation Preference").
(b) A consolidation, merger or statutory share exchange of the
Company or a sale of all or substantially all the assets of the Company shall be
regarded as a liquidation, dissolution or winding up of the affairs of the
Company within the meaning of this Certificate, unless (1) a majority of the
board of directors of the surviving or acquiring corporation in such transaction
is comprised of persons who were members of the Board immediately prior to such
transaction and (2) the holders of the Company's Common Stock and any preferred
shares or other capital stock of the Company, including but not limited to the
Series A Preferred Stock, immediately prior to the transaction will own,
immediately after the transaction, more than 50% of the capital stock of the
surviving or acquiring corporation. In such event, the holders of a majority of
the shares of Series A Preferred Stock then outstanding shall have the right to
elect on behalf of all of the holders of Series A Preferred Stock the benefits
of the provisions of paragraph 6(h) hereof in lieu of receiving payment of the
Series A Liquidation Preference (but without prejudice to the right of the
holders to receive accrued PIK dividends that are payable in accordance with
paragraph 3(a)).
5. Voting Rights.
(a) Except as otherwise expressly provided herein or as
required by law, the holders of each share of Series A Preferred Stock shall be
entitled to vote on all matters upon which holders of Common Stock have the
right to vote and with respect to such vote, shall be entitled to notice of any
shareholders' meeting in accordance with the Bylaws of the Company, and shall be
entitled to a number of votes equal to the largest number of full shares of
Common Stock into which such shares of Series A Preferred Stock could be
converted, pursuant to the provisions of paragraph 6 hereof, at the record date
for the determination of shareholders entitled to vote on such matters or, if no
such record date is established, at the date such vote is taken or any written
consent of shareholders is solicited. Except as otherwise expressly provided
herein or to the extent class or series voting is otherwise required by law or
agreement, the holders of shares of Series A Preferred Stock and Common Stock
shall vote together as a single class and not as separate classes on all
matters.
With respect to any vote required as a result of the
Company's performance under that certain Stock Purchase Warrant dated December
18, 1997 with Sirrom Investment, Inc. ("Sirrom"), the Loan Agreement of even
date therewith or the other agreements and documents executed by the Company and
Sirrom of even date therewith (the "Sirrom Agreements"), the right of the
holders of Series A Preferred Stock to vote on any matter shall be limited in
the same manner and to the same extent as the voting rights of the holders of
Common Stock.
(b) In addition to the voting rights set forth above, for as
long as 10% of the authorized number of shares of Series A Preferred Stock are
outstanding, the holders of the Series A Preferred Stock shall have the
exclusive right, voting separately as a class, to elect one director of the
Company. Any vacancy caused by the death, resignation or removal of any director
who shall have been elected in accordance with this paragraph shall be filled by
a vote
5
<PAGE> 6
of the holders of a majority of the shares of the Series A Preferred Stock
present and voting, in person or by proxy, at a meeting called for such purpose,
or by unanimous written consent without a meeting of the holders of record of
the outstanding shares of the Series A Preferred Stock.
6. Conversion.
The holders of the Series A Preferred Stock shall have the
following conversion rights (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such shares, at the office of the Company or any transfer
agent for the Series A Preferred Stock or Common Stock, into fully paid and
nonassessable shares of Common Stock, at the Conversion Price (as hereafter
defined) in effect at the time of conversion determined as provided herein.
(b) Conversion Price. Shares of Series A Preferred Stock shall
be convertible into the number of shares of Common Stock that results from
dividing the Stated Value per share of Series A Preferred Stock by the
Conversion Price per share in effect at the time of conversion for each share of
Series A Preferred Stock being converted. The conversion price per share for the
Series A Preferred Stock at the Original Issue Date shall be $1.25 (the
"Conversion Price"); provided, however, that in the event the Company has not
completed a Qualifying Public Offering by December 31, 1998, the Conversion
Price shall be reduced automatically by $0.04 on the first calendar day of each
month thereafter, beginning on January 1, 1999, until the earlier to occur of
(i) such time as the Conversion Price equals $1.00 as a result of the provisions
of this paragraph or (ii) the date the Company completes a Qualifying Public
Offering. The Conversion Price, including the Conversion Price adjustments set
forth in the preceding sentence, shall be subject to further adjustment as
provided in paragraph 6.
(c) Mechanics of Conversion; Unpaid Dividends. Before any
holder of Series A Preferred Stock shall be entitled to convert the same into
shares of Common Stock, he shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Company or of any transfer agent
for the Series A Preferred Stock or Common Stock, and shall give written notice
by mail, postage prepaid, or by personal delivery to the Company at such office
that he elects to convert the same and shall state therein the number of shares
of Series A Preferred Stock being converted and the name or names in which the
certificate or certificates for shares of Common Stock are to be issued.
Thereupon the Company shall promptly issue and deliver (or instruct its transfer
agent to promptly issue and deliver) at such office to such holder of Series A
Preferred Stock or to the nominee or nominees of such holder a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled.
Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the shares of
Series A Preferred Stock to be converted, and the person or persons entitled to
receive the shares of Common Stock issuable
6
<PAGE> 7
upon such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date. All PIK dividends accrued
and unpaid on shares of Series A Preferred Stock surrendered for conversion
shall be paid upon conversion in accordance with paragraph 3(a), and, at the
holder's election and upon written notice to the Company in accordance with this
paragraph 6(c), may be converted into Common Stock (without any requirement for
the issuance or surrender of certificates representing the Series A Preferred
Stock comprising such PIK dividends) simultaneously with the conversion of the
Series A Preferred Stock to which such PIK dividends related. Cash dividends
accrued and unpaid on shares of Series A Preferred Stock surrendered for
conversion shall be converted into shares of Common Stock at the Conversion
Price then in effect.
(d) Adjustment for Stock Splits and Combinations. If the
Company shall at any time or from time to time after the Original Issue Date
effect a subdivision of the outstanding Common Stock, the Conversion Price then
in effect immediately before that subdivision shall be proportionately
decreased; conversely, if the Company shall at any time or from time to time
after the Original Issue Date reduce the outstanding shares of Common Stock by
combination or otherwise, the Conversion Price then in effect immediately before
the combination shall be proportionately increased. Any adjustment under this
paragraph 6(d) shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(e) Adjustment for Certain Dividends and Distributions. In
the event the Company at any time or from time to time after the Original Issue
Date shall make or issue, or fix a record date for the determination of holders
of Common Stock entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock, then and in each such event the Conversion
Price for the Series A Preferred Stock then in effect shall be decreased as of
the time of such issuance or, in the event such a record date shall have been
fixed, as of the close of business on such record date, by multiplying the
Conversion Price for the Series A Preferred Stock then in effect by fraction:
(i) the numerator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date, and
(ii) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date,
plus the number of shares of Common Stock issuable in payment of such
dividend or distribution; provided, however, if such record date shall
have been fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the
Conversion Price for the Series A Preferred Stock shall be recomputed
accordingly as of the close of business on such record date and
thereafter the Conversion Price for the Series A Preferred Stock shall
be adjusted pursuant to this paragraph 6(e) as of the time of actual
payment of such dividends or distributions.
7
<PAGE> 8
(f) Adjustments for Other Dividends and Distributions. In the
event the Company if at any time or from time to time after the Original Issue
Date shall make or issue, or fix a record date for the determination of holders
of Common Stock entitled to receive, a dividend or other distribution payable in
securities of the Company other than shares of Common Stock, then and in each
such event provision shall be made so that the holders of Series A Preferred
Stock shall receive upon conversion of the Series A Preferred Stock into Common
Stock, in addition to the number of shares of Common Stock receivable thereupon,
the amount of securities of the Company that they would have received had their
Series A Preferred Stock been converted into Common Stock on the date of such
event and had thereafter, during the period from the date of such event to and
including the conversion date, retained such securities receivable by them as
aforesaid during such period giving application to all adjustments called for
during such period under this paragraph 6 with respect to the rights of the
holders of the Series A Preferred Stock.
(g) Adjustment for Reclassification, Exchange or Substitution.
If the Common Stock issuable upon the conversion of the Series A Preferred Stock
shall be changed into the same or different number of shares of any class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares or stock dividend
provided for above, or a reorganization, merger, consolidation or sale of assets
provided for elsewhere in this paragraph 6), then and in each such event the
holder of each share of Series A Preferred Stock shall have the right thereafter
to convert such share into the kind and amounts of shares of stock and other
securities and property receivable upon such reorganization, reclassification or
other change, by holders of the numbers of shares of Common Stock into which
such shares of Series A Preferred Stock might have been converted immediately
prior to such reorganization, reclassification or change, all subject to further
adjustment as provided herein.
(h) Reorganization, Mergers, Consolidations or Sales of
Assets. If at any time or from time to time after the Original Issue Date there
shall be a capital reorganization of the Common Stock (other than a subdivision,
combination, reclassification or exchange of shares provided for elsewhere in
this paragraph 6) or a merger, consolidation or statutory share exchange of the
Company with or into another corporation, or the sale of all or substantially
all the Company's properties and assets to any other person, then, as a part of
such reorganization, merger, consolidation, share exchange or sale, provision
shall be made so that the holders of the Series A Preferred Stock shall
thereafter be entitled to receive upon conversion of the Series A Preferred
Stock the number of shares of stock or other securities or property of the
Company, or of the successor corporation resulting from such merger,
consolidation, exchange or sale, to which a holder of that number of shares of
Common Stock deliverable upon conversion of the Series A Preferred Stock would
have been entitled on such capital reorganization, merger, consolidation,
exchange or sale. In any such case, appropriate adjustment shall be made in the
application of the provisions of this paragraph 6 with respect to the rights of
the holders of the Series A Preferred Stock after the reorganization, merger,
consolidation, exchange or sale to the end that the provisions of this paragraph
6 (including adjustment of the Conversion Prices then in effect and the number
of shares purchasable upon conversion of the Series A Preferred Stock) shall be
applicable after that event as nearly equivalent as may be practicable. The
holders of a majority of the Series A Preferred Stock
8
<PAGE> 9
upon the occurrence of a capital reorganization, merger or consolidation of the
Company or the sale of all or substantially all its assets and properties as
such events are more fully set forth in this paragraph 6(h) shall have the
option of electing on behalf of all of the holders of Series A Preferred Stock
treatment of all shares of Series A Preferred Stock under either this paragraph
6(h) or paragraph 4 hereof, notice of which election shall be submitted in
writing to the Company at its principal office no later than ten days before the
effective date of such event.
(i) Sale of Shares Below Conversion Price.
(1) If at any time or from time to time after the Original
Issue Date, the Company shall issue or sell Additional Shares of Common
Stock (as hereinafter defined), other than as a dividend as provided in
paragraph 6(e) above, and other than upon a subdivision or combination
of shares of Common Stock as provided in paragraph 6(d) above, for a
consideration per share less than the then existing Conversion Price
for the Series A Preferred Stock, then and in each case the then
Conversion Price for the Series A Preferred Stock shall be reduced, as
of the opening of business on the date of such issue or sale, to a
price equal to the consideration per share received by the Company for
such Additional Shares of Common Stock.
(2) For the purpose of making any adjustment in the Conversion
Price or number of shares of Common Stock purchasable on conversion of
Series A Preferred Stock as provided above, the consideration received
by the Company for any issue or sale of securities shall:
(A) to the extent it consists of cash, be computed at
the net amount of cash received by the Company after deduction
of any underwriting or similar commissions, concessions or
compensation paid or allowed by the Company in connection with
such issue or sale;
(B) to the extent it consists of services or property
other than cash, be computed at the fair value of such
services or property as determined in good faith by the Board;
and
(C) if Additional Shares of Common Stock, Convertible
Securities (as hereinafter defined), or rights or options to
purchase either Additional Shares of Common Stock or
Convertible Securities are issued or sold together with other
stock or securities or other assets of the Company for a
consideration that covers both, be computed as the portion of
the consideration so received that may be reasonably
determined in good faith by the Board to be allocable to such
Additional Shares of Common Stock, Convertible Securities or
rights or options.
9
<PAGE> 10
(3) For the purpose of the adjustment provided in subsection
(1) of this paragraph 6(i), if at any time or from time to time after
the Original Issue Date the Company shall issue any rights or options
for the purchase of, or stock or other securities convertible into,
Additional Shares of Common Stock (such convertible stock or securities
being hereinafter referred to as "Convertible Securities"), then, in
each case, if the Effective Price (as hereinafter defined) of such
rights, options or Convertible Securities shall be less than the then
existing Conversion Price, the Company shall be deemed to have issued
at the time of the issuance of such rights or options or Convertible
Securities the maximum number of Additional Shares of Common Stock
issuable upon exercise or conversion thereof and to have received as
consideration for the issuance of such shares an amount equal to the
total amount of the consideration, if any, received by the Company for
the issuance of such rights or options or Convertible Securities, plus,
in the case of such options or rights, the minimum amounts of
consideration, if any, payable to the Company upon exercise or
conversion of such options or rights. For purposes of the foregoing,
"Effective Price" shall mean the quotient determined by dividing the
total of all such consideration by such maximum number of Additional
Shares of Common Stock. No further adjustment of the Conversion Price
adjusted upon the issuance of such rights, options or Convertible
Securities shall be made as a result of the actual issuance of
Additional Shares of Common stock on the exercise of any such rights or
options or the conversion of any such Convertible Securities.
If any such rights or options or the conversion privilege
represented by any such Convertible Securities shall expire without
having been exercised, the Conversion Price adjusted upon the issuance
of such rights, options or Convertible Securities shall be readjusted
to the Conversion Price that would have been in effect had an
adjustment been made on the basis that (a) the only Additional Shares
of Common Stock so issued were the Additional Shares of Common Stock,
if any, actually issued or sold on the exercise of such rights or
options, or rights of conversion of such Convertible Securities, and
(b) such Additional Shares of Common Stock, if any, were issued or sold
for the consideration actually received by the Company upon such
exercise, plus the consideration, if any, actually received by the
Company for the granting of all such rights and options, whether or not
exercised, plus the consideration received for issuing or selling the
Convertible Securities actually converted plus the consideration, if
any, actually received by the Company on the conversion of such
Convertible Securities.
(4) For the purpose of the adjustment provided for in
subsection (1) of this paragraph 6(i), if at any time or from time to
time after the Original Issue Date the Company shall issue any rights
or options for the purchase of Convertible Securities, then in each
such case, if the Effective Price thereof shall be less than the then
existing Conversion Price, the Company shall be deemed to have issued
at the time of the issuance of such rights or options the maximum
number of Additional Shares of Common Stock issuable upon
10
<PAGE> 11
conversion of the total amount of Convertible Securities covered by
such rights or options and to have received as consideration for the
issuance of such Additional Shares of Common Stock an amount equal to
the amount of consideration, if any, received by the Company for the
issuance of such rights or options, plus the minimum amounts of
consideration, if any, payable to the Company upon the conversion of
such Convertible Securities. For the purposes of the foregoing,
"Effective Price" shall mean the quotient determined by dividing the
total amount of such consideration by such maximum number of Additional
Shares of Common Stock. No further adjustment of such Conversion Price
adjusted upon the issuance of such rights or options shall be made as a
result of the actual issuance of the Convertible Securities upon the
exercise of such rights or options or upon the actual issuance of
Additional Shares of Common Stock upon the conversion of such
Convertible Securities. The provisions of subsection (3) above for the
readjustment of such Conversion Price upon the expiration of rights or
options or the rights of conversion of Convertible Securities shall
apply equally to the rights, options and Convertible Securities
referred to in this subsection (4).
(5) For the purpose of the adjustment provided for in
subsection (1) of this paragraph 6(i), the issuance of stock pursuant
to the Sirrom Stock Purchase Warrant shall not deemed to be a sale of
Additional Shares of Common Stock below the Conversion Price.
(j) Definition. The term "Additional Shares of Common Stock"
as used herein shall mean all shares of Common Stock issued or deemed issued by
the Company after the Original Issue Date, whether or not subsequently
reacquired or retired by the Company, other than (1) shares of Common Stock
issued upon conversion of the Series A Preferred Stock and (2) up to 5,121,647
shares of Common Stock (as adjusted for all stock dividends, stock splits,
subdivisions and combinations) issued to Sirrom in accordance with the Sirrom
Agreements or issued to employees, officers, directors, consultants or other
persons performing services for the Company (if so issued solely because of any
such person's status as an officer, director, employee, consultant or other
person performing services for the Company and not as part of any offering of
the Company's securities) pursuant to any stock option plan, stock purchase plan
or management incentive plan, agreement or arrangement approved by the Board and
in existence on the Original Issue Date (including but not limited to a plan to
issue, for compensatory purposes, approximately 850,000 shares of Common Stock
to employees at a price of approximately $1.19 per share).
(k) Certificate of Adjustment. In each case of an adjustment
or readjustment of the Conversion Price for the number of shares of Common Stock
or other securities issuable upon conversion of the Series A Preferred Stock,
the Company's chief financial officer shall compute such adjustment or
readjustment in accordance herewith and prepare a certificate showing such
adjustment or readjustment, and the Company shall mail such certificate, by
first class mail, postage prepaid, to each registered holder of the Series A
Preferred Stock at the holder's address as shown in the Company's books. The
certificate shall set forth such adjustment or readjustment, showing in detail
the facts upon which adjustment or readjustment
11
<PAGE> 12
is based including a statement of (1) the consideration received or to be
received by the Company for any Additional Shares of Common Stock issued or sold
or deemed to have been issued or sold, (2) the Conversion Price at the time in
effect for each series of the Series A Preferred Stock, and (3) the number of
Additional Shares of Common Stock and the type and amount, if any, of other
property which at the time would be received upon conversion of the Series A
Preferred Stock.
(l) Notices of Record Date. In the event of (1) any taking by
the Company of a record of the holders of any class or series of securities for
the purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution or (2) any reclassification or recapitalization
of the capital stock of the Company, any merger, consolidation or statutory
share exchange of the Company, or any transfer of all or substantially all the
assets of the Company to any other corporation, entity or person, or any
voluntary or involuntary dissolution, liquidation or winding up of the affairs
of the Company, the Company shall mail to each holder of Series A Preferred
Stock at least 30 days prior to the record date specified therein, a notice
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend or distribution, (ii) the date on which any such
reorganization, reclassification, transfer, consolidation, merger, share
exchange, dissolution, liquidation or winding up is expected to become
effective, and (iii) the time, if any is to be fixed, as to when the holders of
record of Common Stock (or other securities) shall be entitled to exchange their
shares of Common Stock (or other securities) for securities or other property
deliverable upon such reorganization, reclassification, transfer, consolidation,
merger, share exchange, dissolution, liquidation or winding up.
(m) Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of shares of Series A Preferred Stock. In lieu
of any fractional shares to which the holder would otherwise be entitled, the
Company shall pay cash equal to the product of such fraction multiplied by the
fair market value of one share of the Company's Common Stock on the date of
conversion, as determined in good faith by the Board. Whether or not fractional
shares are issuable upon such conversion shall be determined on the basis of the
total number of shares of Series A Preferred Stock the holder is at the time
converting into Common Stock and the number of shares of Common Stock issuable
upon such aggregate conversion.
(n) Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock. As a condition precedent to
the taking of any action which would cause an adjustment to the Conversion
Price, the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient in order that it may
validly and legally issue the shares of its Common Stock issuable based upon
such adjusted Conversion Price.
12
<PAGE> 13
(o) Notices. Any notice required by the provisions of this
paragraph 6 to be given to the holder of shares of the Series A Preferred Stock
shall be deemed given when received by such holder after the same has been sent
by means of certified or registered mail, return receipt requested, postage
prepaid, by a reputable overnight courier or messenger for hand delivery and
addressed to each holder of record at his address appearing on the books of the
Company.
(p) Payment of Taxes. The Company will pay all taxes and other
governmental charges (other than taxes measured by the revenue or income of the
holders of the Series A Preferred Stock) that may be imposed in respect of the
issue or delivery of shares of Common Stock upon conversion of the shares of the
Series A Preferred Stock.
(q) No Dilution or Impairment. The Company shall not amend its
Articles of Incorporation or participate in any reorganization,
recapitalization, transfer of assets, consolidation, merger, statutory share
exchange, dissolution, issue or sale of securities or any other voluntary
action, for the purpose of avoiding or seeking to avoid the observance or
performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in carrying out all such
action as may be reasonably necessary or appropriate in order to protect the
conversion rights of the holders of the Series A Preferred Stock against
dilution or other impairment.
(r) Automatic Conversion. Each share of Series A Preferred
Stock which remains outstanding on the closing date for a Qualifying Public
Offering (the "Registration Date"), including shares of Series A Preferred Stock
issuable in respect of any accrued and unpaid PIK dividends, shall
automatically, and without any action on the part of the holder thereof or the
Company except as provided in clause (1) below, be converted on the same basis
and at the same Conversion Price as if each holder thereof had properly
exercised his right to convert on the day next preceding the Registration Date;
provided that (1) each holder of Series A Preferred Stock shall have received
written notice of the proposed Qualifying Public Offering at least 30 days prior
to the date the registration statement relating to the Qualifying Public
Offering becomes effective, (2) such conversion shall be effective at the close
of business on the Registration Date and (3) the Company shall have no
obligation to issue and deliver to any such holder of Series A Preferred Stock
on such date a certificate for the number of shares of Common Stock to which he
shall be entitled until such time as such holder has surrendered his certificate
or certificates for his Series A Preferred Stock (except for shares of Series A
Preferred Stock issuable in respect of any accrued and unpaid PIK dividends),
duly endorsed, at the office of the Company or any transfer agent for the Common
Stock or the holder notifies the Company that such certificates have been lost,
stolen or destroyed and executes an agreement satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection therewith. All
rights with respect to shares of Series A Preferred Stock outstanding on the
Registration Date, including shares of Series A Preferred Stock issuable in
respect of any accrued and unpaid PIK dividends, shall terminate upon conversion
as provided for in this paragraph 6(r), except only the right of the holders of
such shares to receive Common Stock upon surrender of their certificates for the
Series A Preferred Stock.
13
<PAGE> 14
7. Restrictions and Limitations.
So long as any shares of Series A Preferred Stock remain
outstanding, the Company shall not, and, shall not permit any Subsidiary to,
without the vote or written consent of at least a majority of the then
outstanding shares of Series A Preferred Stock:
(a) Redeem, purchase or otherwise acquire for value any
preferred shares, including any share or shares of Series A Preferred Stock,
otherwise than permitted herein;
(b) Purchase, redeem or otherwise acquire (or pay into or set
aside for a sinking fund for such purpose), any of the Common Stock or Junior
Stock or any warrants, rights or options to purchase Common Stock or Junior
Stock; provided, however, that this restriction shall not apply to the
repurchase of shares of Common Stock or Junior Stock from employees, officers,
directors, consultants or other persons performing services for the Company or
any Subsidiary pursuant to agreements under which the Company has the option to
repurchase such shares upon the occurrence of certain events, such as the
termination of employment; and provided further, however, that without the
approval, by vote or written consent, of the holders of a majority of the
outstanding shares of Series A Preferred Stock, the total amount applied to the
repurchase of shares of Common Stock shall not exceed $25,000 per employee,
officer, director, consultant or other person during any 12-month period;
(c) Authorize or issue, or obligate itself to issue, any
additional shares of Series A Preferred Stock except in respect of PIK dividends
paid in accordance with this Certificate, or any other equity security
(including any security convertible into or exercisable for any equity security)
senior to or on a parity with the Series A Preferred Stock as to dividend
rights, conversion rights, redemption rights or liquidation preferences;
(d) Permit any Subsidiary to issue or sell, or obligate itself
to issue or sell, except to the Company or any other wholly owned Subsidiary,
any stock of such Subsidiary; or
(e) Take any other action as to which the holders of Series A
Preferred Stock would be entitled to vote as a voting group under the Georgia
Business Corporation Code.
8. No Reissuance of Preferred Stock.
No share or shares of Series A Preferred Stock acquired by the
Company by reason of redemption, purchase, conversion or otherwise shall be
reissued, and all such shares shall be canceled, retired and eliminated from the
shares which the Company shall be authorized to issue.
14
<PAGE> 15
COMMON STOCK
Subject to all of the rights of the Preferred Stock as expressly
provided herein, by law or by the Board of Directors pursuant to this Article
Two, the Common Stock of the Corporation shall possess all such rights and
privileges as are afforded to capital stock by applicable law in the absence of
any express grant of rights or privileges in the Corporation's Articles of
Incorporation, including, but not limited to, the following rights and
privileges:
(a) dividends may be declared and paid or set apart for payment upon
the Common Stock out of any assets or funds of the Corporation legally available
for the payment of dividends;
(b) the holders of Common Stock shall have the right to vote for the
election of directors and on all other matters requiring stockholder action,
each share being entitled to one vote; and
(c) upon the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation, the net assets of the Corporation available for
distribution shall be distributed pro rata to the holders of the Common Stock in
accordance with their respective rights and interests.
ARTICLE THREE
REGISTERED OFFICE AND AGENT
The registered agent of the Corporation shall be Drew W. Edwards at the
Company's principal office indicated below.
ARTICLE FOUR
MAILING ADDRESS OF PRINCIPAL OFFICE
The mailing address of the principal office of the Corporation is 3295
River Exchange Drive, Suite 350, Norcross, Georgia 30092.
ARTICLE FIVE
LIMITATION ON DIRECTOR LIABILITY
No director of the corporation shall be personally liable to the
corporation or its shareholders for monetary damages for breach of the duty of
care or any other duty as a director, except that such liability shall not be
eliminated for:
(a) any appropriation, in violation of the director's duties, of any
business opportunity of the corporation;
15
<PAGE> 16
(b) acts or omissions that involve intentional misconduct or a knowing
violation of law;
(c) liability under Section 14-2-832 (or any successor provision or
redesignation thereof) of the Georgia Business Corporation Code (the "Code");
and
(d) any transaction from which the director derived an improper
personal benefit.
If at any time the Code shall have been amended to authorize the
further elimination or limitation of the liability of a director, then the
liability of each director of the corporation shall be eliminated or limited to
the fullest extent permitted by the Code, as so amended, without further action
by the shareholders, unless the provisions of the Code, as amended, require
further action by the shareholders.
Any repeal or modification of the foregoing provisions of this Article
Five shall not adversely affect the elimination or limitation of liability or
alleged liability pursuant hereto of any director of the corporation for or with
respect to any alleged act or omission of the director occurring prior to such a
repeal or modification.
ARTICLE SIX
BOARD AND SHAREHOLDER ACTION
REQUIRED FOR CERTAIN TRANSACTIONS
The affirmative vote of at least 66 2/3% of the directors is required
for the following actions by the Corporation to be submitted to a vote of the
shareholders:
(a) a sale of all or substantially all of the assets of the
Corporation;
(b) a liquidation or dissolution of the Corporation;
(c) the merger, consolidation or reorganization of the Corporation,
unless the shareholders of the Corporation immediately prior to
such transaction own at least a majority of the combined voting
power of the Corporation resulting from such merger, consolidation
or reorganization; or
(d) any increase in the number of directors above 12 directors;
provided, further, that the affirmative vote of 66 2/3% of the holders of the
Common Stock is required for shareholder approval of any action outlined in the
clauses above.
ARTICLE SEVEN
DIRECTORS
The Corporation shall have not less than five nor more than 12
directors, and the number of directors shall be set by the Board of Directors as
provided in the Company's bylaws. The Board of Directors shall be divided into
three classes to be known as Class I,
16
<PAGE> 17
Class II, and Class III, which shall be as nearly equal in number as possible.
Except in the case of death, resignation, disqualification, or removal for
cause, each director shall serve for a term ending on the date of the third
annual meeting of shareholders following the annual meeting at which the
director was elected; provided, however, that each initial director in Class I
shall hold office until the first annual meeting of shareholders after his
election; each initial director in Class II shall hold office until the second
annual meeting of shareholders after his election; and each initial director in
Class III shall hold office until the third annual meeting of shareholders after
his election. Despite the expiration of a director's term, such director shall
continue to serve until his or her successor, if there is to be any, has been
elected and has qualified. In the event of any increase or decrease in the
authorized number of directors, the newly created or eliminated directorships
resulting from such an increase or decrease shall be apportioned among the three
classes of directors so that the three classes remain as nearly equal in size as
possible; provided, however, that there shall be no classification of additional
directors elected by the Board of Directors until the next meeting of
shareholders called for the purposes of electing directors, at which meeting the
terms of all such additional directors shall expire, and such additional
directors positions, if they are to be continued, shall be apportioned among the
classes of directors and nominees therefor shall be submitted to the
shareholders for their vote.
In discharging the duties of their respective positions and in
determining what is believed to be in the best interests of the Corporation, the
Board of Directors, committees of the Board of Directors, and individual
directors, in addition to considering the effects of any action on the
Corporation or its shareholders, may consider the interests of the employees,
customers, suppliers and creditors of the Corporation and its subsidiaries, the
communities in which offices or other establishments of the Corporation and its
subsidiaries are located, and all other factors such directors consider
pertinent. This provision solely grants discretionary authority to the directors
and shall not be deemed to provide to any other constituency any right to be
considered.
These Amended and Restated Articles of Incorporation were duly approved
by the Board of Directors, on May 19, 1998 and by the shareholders in accordance
with Section 14-2-1003 of the Georgia Business Corporation Code.
IN WITNESS WHEREOF, the Corporation has caused these Amended and
Restated Articles of Incorporation to be executed and attested by its duly
authorized officer on May 19, 1998.
/s/ Drew Edwards
---------------------------------
Drew W. Edwards
Chief Executive Officer
17
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
TOWNE SERVICES, INC
ADOPTED MAY 19, 1998
<PAGE> 2
AMENDED AND RESTATED BYLAWS
OF
TOWNE SERVICES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE ONE .............................................................. 1
1.1 REGISTERED OFFICE AND AGENT ...................................... 1
1.2 PRINCIPAL OFFICE ................................................. 1
1.3 OTHER OFFICES .................................................... 1
ARTICLE TWO ............................................................... 1
2.1 PLACE OF MEETINGS ................................................ 1
2.2 ANNUAL MEETINGS .................................................. 2
2.3 SPECIAL MEETINGS ................................................. 2
2.4 NOTICE OF MEETINGS ............................................... 2
2.5 WAIVER OF NOTICE ................................................. 2
2.6 VOTING GROUP; QUORUM; VOTE REQUIRED TO ACT ....................... 2
2.7 VOTING OF SHARES ................................................. 3
2.8 PROXIES .......................................................... 3
2.9 PRESIDING OFFICER ................................................ 3
2.10 ADJOURNMENTS ..................................................... 4
2.11 CONDUCT OF THE MEETING ........................................... 4
2.12 ACTION OF SHAREHOLDERS WITHOUT A MEETING ......................... 4
2.13 MATTERS CONSIDERED AT ANNUAL MEETINGS ............................ 4
ARTICLE THREE ............................................................ 5
3.1 GENERAL POWERS ................................................... 5
3.2 NUMBER, ELECTION AND TERM OF OFFICE .............................. 5
3.3 REMOVAL OF DIRECTORS ............................................. 6
3.4 VACANCIES ........................................................ 6
3.5 COMPENSATION ..................................................... 6
3.6 COMMITTEES OF THE BOARD OF DIRECTORS ............................. 6
3.7 QUALIFICATION OF DIRECTORS ....................................... 7
3.8 CERTAIN NOMINATION REQUIREMENTS .................................. 7
ARTICLE FOUR ............................................................. 8
4.1 REGULAR MEETINGS ................................................ 8
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
4.2 SPECIAL MEETINGS ................................................. 8
4.3 PLACE OF MEETINGS ................................................ 8
4.4 NOTICE OF MEETINGS ............................................... 8
4.5 QUORUM ........................................................... 8
4.6 VOTE REQUIRED FOR ACTION ......................................... 8
4.7 PARTICIPATION BY CONFERENCE TELEPHONE ............................ 8
4.8 ACTION BY DIRECTORS WITHOUT A MEETING ............................ 8
4.9 ADJOURNMENTS ..................................................... 9
4.10 WAIVER OF NOTICE ................................................. 9
ARTICLE FIVE
5.1 OFFICES .......................................................... 9
5.2 TERM ............................................................. 9
5.3 COMPENSATION ..................................................... 9
5.4 REMOVAL .......................................................... 10
5.5 CHAIRMAN OF THE BOARD ............................................ 10
5.6 PRESIDENT ........................................................ 10
5.7 VICE PRESIDENTS .................................................. 10
5.8 SECRETARY ........................................................ 10
5.9 TREASURER ........................................................ 11
ARTICLE SIX ............................................................... 11
ARTICLE SEVEN ............................................................. 11
7.1 SHARE CERTIFICATES ............................................... 11
7.2 RIGHTS OF CORPORATION WITH RESPECT TO REGISTERED OWNERS .......... 11
7.3 TRANSFERS OF SHARES .............................................. 12
7.4 DUTY OF CORPORATION TO REGISTER TRANSFER ......................... 12
7.5 LOST, STOLEN, OR DESTROYED CERTIFICATES .......................... 12
7.6 FIXING OF RECORD DATE ............................................ 12
7.7 RECORD DATE IF NONE FIXED ........................................ 12
ARTICLE EIGHT ............................................................ 13
8.1 INDEMNIFICATION OF DIRECTORS ..................................... 13
8.2 INDEMNIFICATION OF OTHERS ........................................ 13
8.3 OTHER ORGANIZATIONS .............................................. 13
8.4 DETERMINATION .................................................... 13
8.5 ADVANCES ......................................................... 14
8.6 NON-EXCLUSIVITY .................................................. 14
8.7 INSURANCE ........................................................ 14
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.8 NOTICE ........................................................... 15
8.9 SECURIT .......................................................... 15
8.10 AMENDMENT ........................................................ 15
8.11 AGREEMENTS ....................................................... 15
8.12 CONTINUING BENEFITS .............................................. 15
8.13 SUCCESSORS ....................................................... 15
8.14 SEVERABILITY ..................................................... 16
8.15 ADDITIONAL INDEMNIFICATION ....................................... 16
ARTICLE NINE
9.1 INSPECTION OF BOOKS AND RECORDS .................................. 16
9.2 FISCAL YEAR ..................................................... 16
9.3 CORPORATE SEAL .................................................. 16
9.4 ANNUAL STATEMENTS ............................................... 16
9.5 NOTICE .......................................................... 17
ARTICLE TEN ............................................................... 17
</TABLE>
iii
<PAGE> 5
AMENDED AND RESTATED BYLAWS
OF
TOWNE SERVICES, INC.
References in these Amended and Restated Bylaws (the Bylaws) to
"Articles of Incorporation" are to the Amended and Restated Articles of
Incorporation of Towne Services, Inc., a Georgia corporation (the
"Corporation"), as amended and restated from time to time (the "Articles of
Incorporation").
All of these Bylaws are subject to contrary provisions, if any, of the
Articles of Incorporation (including provisions designating the preferences,
limitations, and relative rights of any class or series of shares), the Georgia
Business Corporation Code (the "Code"), and other applicable law, as in effect
on and after the effective date of these Bylaws. References in these Bylaws to
"Sections" shall refer to sections of the Bylaws, unless otherwise indicated.
ARTICLE ONE
OFFICE
1.1 REGISTERED OFFICE AND AGENT. The Corporation shall maintain a
registered office and shall have a registered agent whose business office is the
same as the registered office.
1.2 PRINCIPAL OFFICE. The principal office of the Corporation shall be
at the place designated in the Corporation's annual registration with the
Georgia Secretary of State.
1.3 OTHER OFFICES. In addition to its registered office and principal
office, the Corporation may have offices at other locations either in or outside
the State of Georgia.
ARTICLE TWO
SHAREHOLDERS' MEETINGS
2.1 Place of Meetings. Meetings of the Corporation's shareholders may
be held at any location inside or outside the State of Georgia designated by the
Board of Directors or any other person or persons who properly call the meeting,
or if the Board of Directors or such other person or persons do not specify a
location, at the Corporation's principal office.
<PAGE> 6
2.2 ANNUAL MEETINGS. The Corporation shall hold an annual meeting of
shareholders, at a time determined by the Board of Directors, to elect directors
and to transact any business that properly may come before the meeting. The
annual meeting may be combined with any other meeting of shareholders, whether
annual or special.
2.3 SPECIAL MEETINGS. Special meetings of shareholders of one or more
classes or series of the Corporation's shares may be called at any time by the
Board of Directors, the Chairman of the Board, or the President, and shall be
called by the Corporation upon the written request (in compliance with
applicable requirements of the Code) of the holders of shares representing
twenty-five percent (25%) or more of the votes entitled to be cast on each issue
proposed to be considered at the special meeting; provided, however, that at any
time the Corporation has more than 100 beneficial owners (as defined in Section
14-2-1110 of the Code) of its shares, such written request must be made by the
holders of a majority of such votes. The business that may be transacted at any
special meeting of shareholders shall be limited to that proposed in the notice
of the special meeting given in accordance with Section 2.4 (including related
or incidental matters that may be necessary or appropriate to effectuate the
proposed business).
2.4 NOTICE OF MEETINGS. In accordance with Section 9.5 and subject to
waiver by a shareholder pursuant to Section 2.5, the Corporation shall give
written notice of the date, time, and place of each annual and special
shareholders meeting no fewer than 10 days nor more than 60 days before the
meeting date to each shareholder of record entitled to vote at the meeting. The
notice of an annual meeting need not state the purpose of the meeting unless
these Bylaws require otherwise. The notice of a special meeting shall state the
purpose for which the meeting is called. If an annual or special shareholders
meeting is adjourned to a different date, time, or location, the Corporation
shall give shareholders notice of the new date, time, or location of the
adjourned meeting, unless a quorum of shareholders was present at the meeting
and information regarding the adjournment was announced before the meeting was
adjourned; provided, however, that if a new record date is or must be fixed in
accordance with Section 7.6, the Corporation must give notice of the adjourned
meeting to all shareholders of record as of the new record date who are entitled
to vote at the adjourned meeting.
2.5 WAIVER OF NOTICE. A shareholder may waive any notice required by
the Code, the Articles of Incorporation, or these Bylaws, before or after the
date and time of the matter to which the notice relates, by delivering to the
Corporation a written waiver of notice signed by the shareholder entitled to the
notice. In addition, a shareholder's attendance at a meeting shall be (a) a
waiver of objection to lack of notice or defective notice of the meeting unless
the shareholder at the beginning of the meeting objects to holding the meeting
or transacting business at the meeting, and (b) a waiver of objection to
consideration of a particular matter at the meeting that is not within the
purpose stated in the meeting notice, unless the shareholder objects to
considering the matter when it is presented. Except as otherwise required by the
Code, neither the purpose of nor the business transacted at the meeting need be
specified in any waiver.
2.6 VOTING GROUP; QUORUM; VOTE REQUIRED TO ACT. (a) Unless otherwise
required by the Code or the Articles of Incorporation, all classes or series of
the Corporation's shares
2
<PAGE> 7
entitled to vote generally on a matter shall for that purpose be considered a
single voting group (a "Voting Group"). If either the Articles of Incorporation
or the Code requires separate voting by two or more Voting Groups on a matter,
action on that matter is taken only when voted upon by each such Voting Group
separately. At all meetings of shareholders, any Voting Group entitled to vote
on a matter may take action on the matter only if a quorum of that Voting Group
exists at the meeting, and if a quorum exists, the Voting Group may take action
on the matter notwithstanding the absence of a quorum of any other Voting Group
that may be entitled to vote separately on the matter. Unless the Articles of
Incorporation, these Bylaws, or the Code provides otherwise, the presence (in
person or by proxy) of shares representing a majority of votes entitled to be
cast on a matter by a Voting Group shall constitute a quorum of that Voting
Group with regard to that matter. Once a shareholder is present at any meeting
other than solely to object to holding the meeting or transacting business at
the meeting, the shareholder shall be deemed present for quorum purposes for the
remainder of the meeting and for any adjournments of that meeting, unless a new
record date for the adjourned meeting is or must be set pursuant to Section 7.6
of these Bylaws.
(b) Except as provided in Section 3.4, if a quorum exists, action on a
matter by a Voting Group is approved by that Voting Group if the votes cast
within the Voting Group favoring the action exceed the votes cast opposing the
action, unless the Articles of Incorporation, a provision of these Bylaws that
has been adopted pursuant to Section 14-2-1021 of the Code (or any successor
provision), or the Code requires a greater number of affirmative votes.
2.7 VOTING OF SHARES. Unless otherwise required by the Code or the
Articles of Incorporation, each outstanding share of any class or series having
voting rights shall be entitled to one vote on each matter that is submitted to
a vote of shareholders.
2.8 PROXIES. A shareholder entitled to vote on a matter may vote in
person or by proxy pursuant to an appointment executed in writing by the
shareholder or by his or her attorney-in-fact. An appointment of a proxy shall
be valid for 11 months from the date of its execution, unless a longer or
shorter period is expressly stated in the proxy.
2.9 PRESIDING OFFICER. Except as otherwise provided in this Section
2.9, the Chairman of the Board, and in his or her absence or disability the
President shall preside at every shareholders' meeting (and any adjournment
thereof) as its chairman, if either of them is present and willing to serve. If
neither the Chairman of the Board nor the President is present and willing to
serve as chairman of the meeting, and if the Chairman of the Board has not
designated another person who is present and willing to serve, then a majority
of the Corporation's directors present at the meeting shall be entitled to
designate a person to serve as chairman. If no director of the Corporation is
present at the meeting or if a majority of the directors who are present cannot
be established, then a chairman of the meeting shall be selected by a majority
vote of (a) the shares present at the meeting that would be entitled to vote in
an election of directors, or (b) if no such shares are present at the meeting,
then the shares present at the meeting comprising the Voting Group with the
largest number of shares present at the meeting and entitled to vote on a matter
properly proposed to be considered at the meeting. The chairman of the meeting
may designate other persons to assist with the meeting.
3
<PAGE> 8
2.10 ADJOURNMENTS. At any meeting of shareholders (including an
adjourned meeting), a majority of shares of any Voting Group present and
entitled to vote at the meeting (whether or not those shares constitute a
quorum) may adjourn the meeting, but only with respect to that Voting Group, to
reconvene at a specific time and place. If more than one Voting Group is present
and entitled to vote on a matter at the meeting, then the meeting may be
continued with respect to any such Voting Group that does not vote to adjourn as
provided above, and such Voting Group may proceed to vote on any matter to which
it is otherwise entitled to do so; provided, however, that if (a) more than one
Voting Group is required to take action on a matter at the meeting and (b) any
one of those Voting Groups votes to adjourn the meeting (in accordance with the
preceding sentence), then the action shall not be deemed to have been taken
until the requisite vote of any adjourned Voting Group is obtained at its
reconvened meeting. The only business that may be transacted at any reconvened
meeting is business that could have been transacted at the meeting that was
adjourned, unless further notice of the adjourned meeting has been given in
compliance with the requirements for a special meeting that specifies the
additional purpose or purposes for which the meeting is called. Nothing
contained in this Section 2.10 shall be deemed or otherwise construed to limit
any lawful authority of the chairman of a meeting to adjourn the meeting.
2.11 CONDUCT OF THE MEETING. At any meeting of shareholders, the
chairman of the meeting shall be entitled to establish the rules of order
governing the conduct of business at the meeting.
2.12 ACTION OF SHAREHOLDERS WITHOUT A MEETING. Action required or
permitted to be taken at a meeting of shareholders may be taken without a
meeting if the action is taken by all shareholders entitled to vote on the
action or, if permitted by the Articles of Incorporation, by persons who would
be entitled to vote at a meeting shares having voting power to cast the
requisite number of votes (or numbers, in the case of voting by groups) that
would be necessary to authorize or take the action at a meeting at which all
shareholders entitled to vote were present and voted. The action must be
evidenced by one or more written consents describing the action taken, signed by
shareholders entitled to take action without a meeting, and delivered to the
Corporation for inclusion in the minutes or filing with the corporate records.
Where required by Section 14-2-704 or other applicable provision of the Code,
the Corporation shall provide shareholders with written notice of actions taken
without a meeting.
2.13 MATTERS CONSIDERED AT ANNUAL MEETINGS. Notwithstanding anything to
the contrary in these Bylaws, the only business that may be conducted at an
annual meeting of shareholders shall be business brought before the meeting (a)
by or at the direction of the Board of Directors prior to the meeting, (b) by or
at the direction of the Chairman of the Board or the President, or (c) by a
shareholder of the Corporation who is entitled to vote with respect to the
business and who complies with the notice procedures set forth in this Section
2.13. For business to be brought properly before an annual meeting by a
shareholder, the shareholder must have given timely notice of the business in
writing to the Secretary of the Corporation. To be timely, a shareholder's
notice must be delivered or mailed to and received at the principal office of
the Corporation not less than sixty (60) nor more than ninety (90) days prior to
the first anniversary
4
<PAGE> 9
of the previous year's annual meeting. A shareholder's notice to the Secretary
shall set forth a brief description of each matter of business the shareholder
proposes to bring before the meeting and the reasons for conducting that
business at the meeting; the name, as it appears on the Corporation's books, and
address of the shareholder proposing the business; the series or class and
number of shares of the Corporation's capital stock that are beneficially owned
by the shareholder; and any material interest of the shareholder in the proposed
business. The chairman of the meeting shall have the discretion to declare to
the meeting that any business proposed by a shareholder to be considered at the
meeting is out of order and that such business shall not be transacted at the
meeting if (i) the chairman concludes that the matter has been proposed in a
manner inconsistent with this Section 2.13 or (ii) the chairman concludes that
the subject matter of the proposed business is inappropriate for consideration
by the shareholders at the meeting.
ARTICLE THREE
BOARD OF DIRECTORS
3.1 GENERAL POWERS. All corporate powers shall be exercised by or under
the authority of, and the business and affairs of the Corporation shall be
managed by, the Board of Directors, subject to any limitation set forth in the
Articles of Incorporation, in bylaws approved by the shareholders, or in
agreements among all the shareholders that are otherwise lawful.
3.2 NUMBER, ELECTION AND TERM OF OFFICE. Except as otherwise provided
in the Articles of Incorporation, the Board of Directors shall consist of a
maximum of twelve members. The Board of Directors shall have the authority to
change the number of directors from time to time by resolution so long as the
number of directors does not exceed twelve; provided, however, that no decrease
in the number of directors (if more than one director is elected by a resolution
of the Board of Directors or the shareholders) shall have the effect of
shortening the term of an incumbent director. The Board of Directors shall be
divided into three classes to be known as Class I, Class II, and Class III,
which shall be as nearly equal in number as possible. Except in the case of
death, resignation, disqualification, or removal for cause, each director shall
serve for a term ending on the date of the third annual meeting of shareholders
following the annual meeting at which the director was elected; provided,
however, that each initial director in Class I shall hold office until the first
annual meeting of shareholders after his election; each initial director in
Class II shall hold office until the second annual meeting of shareholders after
his election; and each initial director in Class III shall hold office until the
third annual meeting of shareholders after his election. Despite the expiration
of a director's term, such director shall continue to serve until his or her
successor, if there is to be any, has been elected and has qualified. In the
event of any increase or decrease in the authorized number of directors, the
newly created or eliminated directorships resulting from such an increase or
decrease shall be apportioned among the three classes of directors so that the
three classes remain as nearly equal in size as possible; provided, however,
that there shall be no classification of additional directors elected by the
Board of Directors until the next meeting of shareholders called for the
purposes of electing directors, at which meeting the terms of all such
additional directors shall expire, and
5
<PAGE> 10
such additional directors positions, if they are to be continued, shall be
apportioned among the classes of directors and nominees therefor shall be
submitted to the shareholders for their vote.
3.3 REMOVAL OF DIRECTORS. The entire Board of Directors or any
individual director may be removed with cause by the shareholders, provided that
directors elected by a particular Voting Group may be removed only by the
shareholders in that Voting Group. Removal action may be taken only at a
shareholders' meeting for which notice of the removal action has been given, and
a director may be removed only by the holders of 66 2/3% of the votes entitled
to be cast. If any removed director is a member of any committee of the Board of
Directors, he shall cease to be a member of that committee when he ceases to be
a director. A removed director's successor, if any, may be elected at the same
meeting to serve the unexpired term. Directors may not be removed without cause.
3.4 VACANCIES. A vacancy or vacancies in the Board of Directors may
result from the death, resignation, disqualification, or removal of any
director, or from an increase in the number of directors. Any vacancy occurring
on the Board of Directors, including a vacancy resulting from an increase in the
number of directors, may only be filled by the affirmative vote of the remaining
directors, even if the remaining directors constitute less than a quorum of the
Board of Directors; provided, however, that if the vacant office was held by a
director elected by a particular Voting Group, only the holders of shares of
that Voting Group or the remaining directors elected by that Voting Group shall
be entitled to fill the vacancy; provided further, however, that if the vacant
office was held by a director elected by a particular Voting Group and there is
no remaining director elected by that Voting Group, the other remaining
directors or director (elected by another Voting Group or Groups) may fill the
vacancy during an interim period before the shareholders of the vacated
director's Voting Group act to fill the vacancy. A director elected to fill a
vacancy shall hold office only until the next election of directors by the
shareholders.
3.5 COMPENSATION. Directors may receive such compensation for their
services as directors as may be fixed by the Board of Directors from time to
time. A director may also serve the Corporation in one or more capacities other
than that of director and receive compensation for services rendered in those
other capacities.
3.6 COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors may
designate from among its members an executive committee or one or more other
standing or ad hoc committees, each consisting of one or more directors, who
serve at the pleasure of the Board of Directors. Subject to the limitations
imposed by the Code, each committee shall have the authority set forth in the
resolution establishing the committee or in any other resolution of the Board of
Directors specifying, enlarging, or limiting the authority of the committee. Any
such committee, to the extent provided in the resolution, shall have and may
exercise all of the authority of the Board of Directors in the management of the
business and affairs of the Corporation, except that it shall have no authority
with respect to (1) amending the Articles of Incorporation or these Bylaws; (2)
adopting a plan of merger or consolidation; (3) the sale, lease, exchange or
other disposition of all or substantially all of the property and assets of the
Corporation; and (4) a voluntary dissolution of the Corporation or a revocation
thereof. Such
6
<PAGE> 11
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the Board of Directors. A majority of each
committee may determine its action and may fix the time and places of its
meetings, unless otherwise provided by the Board of Directors. Each committee
shall keep regular minutes of its meetings and report the same to the Board of
Directors when required.
3.7 QUALIFICATION OF DIRECTORS. No person elected to serve as a
director of the Corporation shall assume office and begin serving unless and
until duly qualified to serve, as determined by reference to the Code, the
Articles of Incorporation, and any further eligibility requirements established
in these Bylaws.
3.8 CERTAIN NOMINATION REQUIREMENTS. No person may be nominated for
election as a director at any annual or special meeting of shareholders unless
(a) the nomination has been or is being made pursuant to a recommendation or
approval of the Board of Directors of the Corporation or a properly constituted
committee of the Board of Directors previously delegated authority to recommend
or approve nominees for director; (b) the person is nominated by a shareholder
of the Corporation who is entitled to vote for the election of the nominee at
the subject meeting, and the nominating shareholder has furnished written notice
to the Secretary of the Corporation, at the Corporation's principal office,
provided, however, that if at any time the number of beneficial owners (as
defined in Section 14-2-1110 of the Code) of the shares of the Corporation
exceeds 100, then such notice shall be delivered to the Secretary of the
Corporation at the Corporation's principal office not less than sixty (60) nor
more than ninety (90) days prior to the first anniversary of the previous year's
annual meeting, and such notice shall (i) set forth with respect to the person
to be nominated his or her name, age, business and residence addresses,
principal business or occupation during the past five years, any affiliation
with or material interest in the Corporation or any transaction involving the
Corporation, and any affiliation with or material interest in any person or
entity having an interest materially adverse to the Corporation, and (ii) shall
be accompanied by the sworn or certified statement of the shareholder that the
nominee has consented to being nominated and that the shareholder believes the
nominee will stand for election and will serve if elected; or (c) (i) the person
is nominated to replace a person previously identified as a proposed nominee (in
accordance with the provisions of subpart (b) of this Section 3.8) who has since
become unable or unwilling to be nominated or to serve if elected, (ii) the
shareholder who furnished such previous identification makes the replacement
nomination and delivers to the Secretary of the Corporation (at the time of or
prior to making the replacement nomination) an affidavit or other sworn
statement affirming that the shareholder had no reason to believe the original
nominee would be so unable or unwilling, and (iii) such shareholder also
furnishes in writing to the Secretary of the Corporation (at the time of or
prior to making the replacement nomination) the same type of information about
the replacement nominee as required by subpart (b) of this Section 3.8 to have
been furnished about the original nominee. The chairman of any meeting of
shareholders at which one or more directors are to be elected, for good cause
shown and with proper regard for the orderly conduct of business at the meeting,
may waive in whole or in part the operation of this Section 3.8.
7
<PAGE> 12
ARTICLE FOUR
MEETINGS OF THE BOARD OF DIRECTORS
4.1 REGULAR MEETINGS. A regular meeting of the Board of Directors shall
be held in conjunction with each annual meeting of shareholders. In addition,
the Board of Directors may, by prior resolution, hold regular meetings at other
times.
4.2 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by or at the request of the Chairman of the Board, the President, or the
majority of directors in office at that time.
4.3 PLACE OF MEETINGS. Directors may hold their meetings at any place
in or outside the State of Georgia that the Board of Directors may establish
from time to time.
4.4 NOTICE OF MEETINGS. Directors need not be provided with notice of
any regular meeting of the Board of Directors. Unless waived in accordance with
Section 4.10, the Corporation shall give at least two days' notice to each
director of the date, time, and place of each special meeting. Notice of a
meeting shall be deemed to have been given to any director in attendance at any
prior meeting at which the date, time, and place of the subsequent meeting was
announced.
4.5 QUORUM. At meetings of the Board of Directors, a majority of the
directors then in office shall constitute a quorum for the transaction of
business.
4.6 VOTE REQUIRED FOR ACTION. If a quorum is present when a vote is
taken, the vote of a majority of the directors present at the time of the vote
will be the act of the Board of Directors, unless the vote of a greater number
is required by the Code, the Articles of Incorporation, or these Bylaws. A
director who is present at a meeting of the Board of Directors when corporate
action is taken is deemed to have assented to the action taken unless (a) he or
she objects at the beginning of the meeting (or promptly upon his or her
arrival) to holding the meeting or transacting business at such meeting; (b) his
or her dissent or abstention from the action taken is entered in the minutes of
the meeting; or (c) he or she delivers written notice of dissent or abstention
to the presiding officer of the meeting before its adjournment or to the
Corporation immediately after adjournment of the meeting. The right of dissent
or abstention is not available to a director who votes in favor of the action
taken.
4.7 PARTICIPATION BY CONFERENCE TELEPHONE. Members of the Board of
Directors may participate in a meeting of the Board by means of conference
telephone or similar communications equipment through which all persons
participating may hear and speak to each other. Participation in a meeting
pursuant to this Section 4.7 shall constitute presence in person at the meeting.
4.8 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if a written
8
<PAGE> 13
consent, describing the action taken, is signed by each director and delivered
to the Corporation for inclusion in the minutes or filing with the corporate
records. The consent may be executed in counterpart, and shall have the same
force and effect as a unanimous vote of the Board of Directors at a duly
convened meeting.
4.9 ADJOURNMENTS. A meeting of the Board of Directors, whether or not
a quorum is present, may be adjourned by a majority of the directors present to
reconvene at a specific time and place. It shall not be necessary to give notice
to the directors of the reconvened meeting or of the business to be transacted,
other than by announcement at the meeting that was adjourned, unless a quorum
was not present at the meeting that was adjourned, in which case notice shall be
given to directors in the same manner as for a special meeting. At any such
reconvened meeting at which a quorum is present, any business may be transacted
that could have been transacted at the meeting that was adjourned.
4.10 WAIVER OF NOTICE. A director may waive any notice required by the
Code, the Articles of Incorporation, or these Bylaws before or after the date
and time of the matter to which the notice relates, by a written waiver signed
by the director and delivered to the Corporation for inclusion in the minutes or
filing with the corporate records. Attendance by a director at a meeting shall
constitute waiver of notice of the meeting, except where a director at the
beginning of the meeting (or promptly upon his or her arrival) objects to
holding the meeting or to transacting business at the meeting and does not
thereafter vote for or assent to action taken at the meeting.
ARTICLE FIVE
OFFICERS
5.1 OFFICES. The officers of the Corporation shall consist of a
Chairman of the Board, a President, a Secretary, and a Treasurer, each of whom
shall be elected or appointed by the Board of Directors. The Chairman of the
Board shall be elected by the Board of Directors from among its members. The
Board of Directors from time to time may create and establish the duties of
other offices and may elect or appoint, or authorize specific senior officers to
appoint, the persons who shall hold such other offices, including one or more
Vice Presidents (including Executive Vice Presidents, Senior Vice Presidents,
Assistant Vice Presidents, and the like), one or more Assistant Secretaries, and
one or more Assistant Treasurers. Whether or not so provided by the Board of
Directors, the Chairman of the Board may appoint one or more Assistant
Secretaries and one or more Assistant Treasurers. Any two or more offices may be
held by the same person.
5.2 TERM. Each officer shall serve at the pleasure of the Board of
Directors (or, if appointed by a senior officer pursuant to this Article Five,
at the pleasure of the Board of Directors or any senior officer authorized to
have appointed the officer) until his or her death, resignation, or removal, or
until his or her replacement is elected or appointed in accordance with this
Article Five.
9
<PAGE> 14
5.3 COMPENSATION. The compensation of all officers of the Corporation
shall be fixed by the Board of Directors or by a committee or officer appointed
by the Board of Directors. Officers may serve without compensation.
5.4 REMOVAL. All officers (regardless of how elected or appointed) may
be removed, with or without cause, by the Board of Directors, and any officer
appointed by another officer may also be removed, with or without cause, by any
senior officer authorized to have appointed the officer to be removed. Removal
will be without prejudice to the contract rights, if any, of the person removed,
but shall be effective notwithstanding any damage claim that may result from
infringement of such contract rights.
5.5 CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at
and serve as chairman of meetings of the shareholders and of the Board of
Directors (unless another person is selected under Section 2.9 to act as
chairman). Unless otherwise provided in these Bylaws or by the Board of
Directors, the Chairman of the Board shall be the Chief Executive Officer of the
Corporation, shall be charged with the general and active management of the
business of the Corporation, shall see that all orders and resolutions of the
Board of Directors are carried into effect, and shall have the authority to
select and appoint employees and agents of the Corporation. The Chairman of the
Board shall perform other duties and have other authority as may from time to
time be delegated by the Board of Directors.
5.6 PRESIDENT. Unless otherwise provided in these Bylaws or by the
Board of Directors, the President shall be the Chief Operating Officer of the
Corporation, and shall, in the absence or disability of the Chairman of the
Board, perform the duties and exercise the powers of the Chairman of the Board.
The President shall perform any other duties and have any other authority as may
be delegated from time to time by the Board of Directors, and shall be subject
to the limitations fixed from time to time by the Board of Directors.
5.7 VICE PRESIDENTS. The Vice President (if there be one) shall, in the
absence or disability of the President, or at the direction of the President,
perform the duties and exercise the powers of the President, whether the duties
and powers are specified in these Bylaws or otherwise. If the Corporation has
more than one Vice President, the one designated by the Board of Directors or
the President (in that order of precedence) shall act in the event of the
absence or disability of the President. Vice Presidents shall perform any other
duties and have any other authority as from time to time may be delegated by the
Board of Directors or the President.
5.8 SECRETARY. The Secretary shall be responsible for preparing minutes
of the meetings of shareholders, directors, and committees of directors and for
authenticating records of the Corporation. The Secretary or any Assistant
Secretary shall have authority to give all notices required by law or these
Bylaws. The Secretary shall be responsible for the custody of the corporate
books, records, contracts, and other documents. The Secretary or any Assistant
Secretary may affix the corporate seal to any lawfully executed documents
requiring it, may attest to the signature of any officer of the Corporation, and
shall sign any instrument that requires the Secretary's signature. The Secretary
or any Assistant Secretary shall perform any other duties
10
<PAGE> 15
and have any other authority as from time to time may be delegated by the Board
of Directors or the President.
5.9 TREASURER. Unless otherwise provided by the Board of Directors, the
Treasurer shall be the Chief Financial Officer and shall be responsible for the
custody of all funds and securities belonging to the Corporation and for the
receipt, deposit, or disbursement of these funds and securities under the
direction of the Board of Directors. The Treasurer shall cause full and true
accounts of all receipts and disbursements to be maintained and shall make
reports of these receipts and disbursements to the Board of Directors and
President upon request. The Treasurer or Assistant Treasurer shall perform any
other duties and have any other authority as from time to time may be delegated
by the Board of Directors or the President.
ARTICLE SIX
DISTRIBUTIONS AND DIVIDENDS
Unless the Articles of Incorporation provide otherwise, the Board of
Directors, from time to time in its discretion, may authorize or declare
distributions or share dividends in accordance with the Code.
ARTICLE SEVEN
SHARES
7.1 SHARE CERTIFICATES. The interest of each shareholder in the
Corporation shall be evidenced by a certificate or certificates representing
shares of the Corporation, which shall be in such form as the Board of Directors
from time to time may adopt in accordance with the Code. Share certificates
shall be in registered form and shall indicate the date of issue, the name of
the Corporation, that the Corporation is organized under the laws of the State
of Georgia, the name of the shareholder, and the number and class of shares and
designation of the series, if any, represented by the certificate. Each
certificate shall be signed by the President or a Vice President (or in lieu
thereof, by the Chairman of the Board or Chief Executive Officer, if there be
one) and may be signed by the Secretary or an Assistant Secretary; provided,
however, that where the certificate is signed (either manually or by facsimile)
by a transfer agent, or registered by a registrar, the signatures of those
officers may be facsimiles.
7.2 RIGHTS OF CORPORATION WITH RESPECT TO REGISTERED OWNERS. Prior to
due presentation for transfer of registration of its shares, the Corporation may
treat the registered owner of the shares (or the beneficial owner of the shares
to the extent of any rights granted by a nominee certificate on file with the
Corporation pursuant to any procedure that may be established by the Corporation
in accordance with the Code) as the person exclusively entitled to vote the
shares, to receive any dividend or other distribution with respect to the
shares, and for all other purposes; and the Corporation shall not be bound to
recognize any equitable or other claim to or
11
<PAGE> 16
interest in the shares on the part of any other person, whether or not it has
express or other notice of such a claim or interest, except as otherwise
provided by law.
7.3 TRANSFERS OF SHARES. Transfers of shares shall be made upon the
books of the Corporation kept by the Corporation or by the transfer agent
designated to transfer the shares, only upon direction of the person named in
the certificate or by an attorney lawfully constituted in writing. Before a new
certificate is issued, the old certificate shall be surrendered for cancellation
or, in the case of a certificate alleged to have been lost, stolen, or
destroyed, the provisions of Section 7.5 of these Bylaws shall have been
complied with.
7.4 DUTY OF CORPORATION TO REGISTER TRANSFER. Notwithstanding any of
the provisions of Section 7.3 of these Bylaws, the Corporation is under a duty
to register the transfer of its shares only if: (a) the share certificate is
endorsed by the appropriate person or persons;(b) reasonable assurance is given
that each required endorsement is genuine and effective; (c) the Corporation has
no duty to inquire into adverse claims or has discharged any such duty; (d) any
applicable law relating to the collection of taxes has been complied with; (e)
the transfer is in fact rightful or is to a bona fide purchaser; and (f) the
transfer is in compliance with applicable provisions of any transfer
restrictions of which the Corporation shall have notice.
7.5 LOST, STOLEN, OR DESTROYED CERTIFICATES. Any person claiming a
share certificate to be lost, stolen, or destroyed shall make an affidavit or
affirmation of this claim in such a manner as the Corporation may require and
shall, if the Corporation requires, give the Corporation a bond of indemnity in
form and amount, and with one or more sureties satisfactory to the Corporation,
as the Corporation may require, whereupon an appropriate new certificate may be
issued in lieu of the one alleged to have been lost, stolen or destroyed.
7.6 FIXING OF RECORD DATE. For the purpose of determining shareholders
(a) entitled to notice of or to vote at any meeting of shareholders or, if
necessary, any adjournment thereof, (b) entitled to receive payment of any
distribution or dividend, or (c) for any other proper purpose, the Board of
Directors may fix in advance a date as the record date. The record date may not
be more than 70 days (and, in the case of a notice to shareholders of a
shareholders' meeting, not less than 10 days) prior to the date on which the
particular action, requiring the determination of shareholders, is to be taken.
A separate record date may be established for each Voting Group entitled to vote
separately on a matter at a meeting. A determination of shareholders of record
entitled to notice of or to vote at a meeting of shareholders shall apply to any
adjournment of the meeting, unless the Board of Directors shall fix a new record
date for the reconvened meeting, which it must do if the meeting is adjourned to
a date more than 120 days after the date fixed for the original meeting.
7.7 RECORD DATE IF NONE FIXED. If no record date is fixed as provided
in Section 7.6, then the record date for any determination of shareholders that
may be proper or required by law shall be, as appropriate, the date on which
notice of a shareholders' meeting is mailed, the date on which the Board of
Directors adopts a resolution declaring a dividend or authorizing a
distribution, or the date on which any other action is taken that requires a
determination of shareholders.
12
<PAGE> 17
ARTICLE EIGHT
INDEMNIFICATION
8.1 INDEMNIFICATION OF DIRECTORS. The Corporation shall indemnify and
hold harmless any person (an "Indemnified Person") who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
whether formal or informal, including any action or suit by or in the right of
the Corporation (for purposes of this Article Eight, collectively, a
"Proceeding") because he or she is or was a director or officer of the
Corporation, against any judgment, settlement, penalty, fine, or reasonable
expenses (including, but not limited to, attorneys' fees and disbursements,
court costs, and expert witness fees) incurred with respect to the Proceeding
(for purposes of this Article Eight, a "Liability"), if such person acted in a
manner he or she believed in good faith to be in or not opposed to the best
interests of the Corporation, and, in the case of any criminal proceeding, had
no reasonable cause to believe his conduct was unlawful; provided, however, that
no indemnification shall be made for any Liability for which, under the Code,
indemnification may not be authorized by action of the Board of Directors, the
shareholders, or otherwise, including, but not limited to, any Liability of a
person to the Corporation for: (a) any appropriation by such person, in
violation of his or her duties, of any business opportunity of the corporation;
(b) any acts or omissions of such person that involve intentional misconduct or
a knowing violation of law; (c) the types of liability set forth in Code Section
14-2-832; or (d) any transaction from which such person received an improper
personal benefit. Indemnification in connection with a Proceeding brought by or
in the right of the Corporation is limited to reasonable expenses incurred in
connection with the Proceeding.
8.2 INDEMNIFICATION OF OTHERS. The Board of Directors shall have the
power to cause the Corporation to provide to employees and agents of the
Corporation all or any part of the right to indemnification and other rights of
the type provided under Sections 8.1, 8.5, and 8.11 of this Article Eight
(subject to the conditions, limitations, and obligations specified in those
sections) upon a resolution to that effect identifying such employees or agents
(by position or name) to be indemnified and specifying the particular rights
provided, which may be different for each of the persons identified. Each
employee or agent of the Corporation so identified shall be an "Indemnified
Person" for purposes of the provisions of this Article Eight.
8.3 OTHER ORGANIZATIONS. The Board of Directors shall provide to each
director, and the Board of Directors shall have the power to cause the
Corporation to provide to any officer, employee, or agent, of the Corporation
who is or was serving at the Corporation's request as a director, officer,
partner, trustee, employee, or agent of another corporation, partnership, joint
venture, trust, employee benefit plan, or other enterprise all or any part of
the right to indemnification and other rights of the type provided under
Sections 8.1, 8.5, and 8.11 of this Article Eight (subject to the conditions,
limitations, and obligations specified in those sections) upon a resolution to
that effect identifying the persons to be identified and specifying the
particular rights provided, which may be different for each of the persons
identified. Each person so identified shall be an "Indemnified Person" for
purposes of the provisions of this Article Eight.
13
<PAGE> 18
8.4 DETERMINATION. Notwithstanding any judgment, order, settlement,
conviction, or plea in any Proceeding, an Indemnified Person shall be entitled
to indemnification as provided in Section 8.1 if a determination that such
Indemnified Person is entitled to such indemnification shall be made (a) by the
Board of Directors by a majority vote of a quorum consisting of directors who
are not at the time parties to the Proceeding; (b) if a quorum cannot be
obtained under (a) above, by majority vote of a committee duly designated by the
Board of Directors (in which designated directors who are parties may
participate), consisting solely of two or more directors who are not at the time
parties to the Proceeding; (c) in a written opinion by special legal counsel
selected as required by the Code; or (d) by the shareholders; provided, however,
that shares owned by or voted under the control of directors who are at the time
parties to the Proceeding may not be voted on the determination.
8.5 ADVANCES. To the extent the Corporation has funds reasonably
available to be used for this purpose, expenses (including, but not limited to,
attorneys' fees and disbursements, court costs, and expert witness fees)
incurred by the Indemnified Person in defending any Proceeding of the kind
described in Section 8.1 (or in Sections 8.2 or 8.3, if the Board of Directors
has specified that advancement of expenses be made available to such Indemnified
Person) shall be paid by the Corporation in advance of the final disposition of
such Proceeding as set forth herein. The Corporation shall promptly pay the
amount of such expenses to the Indemnified Person, but in no event later than 10
days following the Indemnified Person's delivery to the Corporation of a written
request for an advance pursuant to this Section 8.5, together with a reasonable
accounting of such expenses; provided, however, that the Indemnified Person
shall furnish the Corporation a written affirmation of his good faith belief
that he has met the standard of conduct set forth in the Code and a written
undertaking and agreement to repay to the Corporation any advances made pursuant
to this Section 8.5 if it shall be determined that the Indemnified Person is not
entitled to be indemnified by the Corporation for such amounts. The Corporation
may make the advances contemplated by this Section 8.5 regardless of the
Indemnified Person's financial ability to make repayment. Any advances and
undertakings to repay pursuant to this Section 8.5 may be unsecured and
interest-free.
8.6 NON-EXCLUSIVITY. Subject to any applicable limitation imposed by
the Code or the Articles of Incorporation, the indemnification and advancement
of expenses provided by or granted pursuant to this Article Eight shall not be
deemed exclusive of any other rights to which a person seeking indemnification
or advancement of expenses may be entitled under any provision of the Articles
of Incorporation, or any Bylaw, resolution, or agreement specifically or in
general terms approved or ratified by the affirmative vote of holders of a
majority of the shares entitled to be voted thereon.
8.7 INSURANCE. The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee, or agent of the Corporation, or who, while serving in such a capacity,
is also or was also serving at the request of the Corporation as a director,
officer, trustee, partner, employee, or agent of any corporation, partnership,
joint venture, trust, employee benefit plan, or other enterprise, against any
Liability that may be asserted against him or incurred by him in any such
capacity, or arising out of his
14
<PAGE> 19
status as such, whether or not the Corporation would have the power to indemnify
him against such liability under the provisions of this Article Eight.
8.8 NOTICE. If the Corporation indemnifies or advances expenses to a
director under any of Sections 14-2-851 through 14-2-854 of the Code (or any
equivalent provision of these Bylaws) in connection with a Proceeding by or in
the right of the Corporation, the Corporation shall, to the extent required by
Section 14-2-1621 or any other applicable provision of the Code, report the
indemnification or advance in writing to the shareholders with or before the
notice of the next shareholders' meeting.
8.9 SECURITY. The Corporation may designate certain of its assets as
collateral, provide self-insurance, establish one or more indemnification
trusts, or otherwise secure or facilitate its ability to meet its obligations
under this Article Eight, or under any indemnification agreement or plan of
indemnification adopted and entered into in accordance with the provisions of
this Article Eight, as the Board of Directors deems appropriate.
8.10 AMENDMENT. Any amendment to this Article Eight that limits or
otherwise adversely affects the right of indemnification, advancement of
expenses, or other rights of any Indemnified Person hereunder shall, as to such
Indemnified Person, apply only to Proceedings based on actions, events, or
omissions occurring after such amendment and after delivery of notice of such
amendment to the Indemnified Person so affected (collectively, "Post Amendment
Events"). Any Indemnified Person shall, as to any Proceeding based on actions,
events, or omissions occurring prior to the date of receipt of such notice, be
entitled to the right of indemnification, advancement of expenses, and other
rights under this Article Eight to the same extent as if such provisions had
continued as part of the Bylaws of the Corporation without such amendment. This
Section 8.10 cannot be altered, amended, or repealed in a manner effective as to
any Indemnified Person (except as to Post Amendment Events) without the prior
written consent of such Indemnified Person.
8.11 AGREEMENTS. The provisions of this Article Eight shall be deemed
to constitute an agreement between the Corporation and each Indemnified Person
hereunder. In addition to the rights provided in this Article Eight, the
Corporation shall have the power, upon authorization by the Board of Directors,
to enter into an agreement or agreements providing to any Indemnified Person
indemnification rights substantially similar to those provided in this Article
Eight.
8.12 CONTINUING BENEFITS. The rights of indemnification and advancement
of expenses permitted or authorized by this Article Eight shall, unless
otherwise provided when such rights are granted or conferred, continue as to a
person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of such person.
8.13 SUCCESSORS. For purposes of this Article Eight, the term
"Corporation" shall include any corporation, joint venture, trust, partnership,
or unincorporated business association that is the successor to all or
substantially all of the business or assets of this Corporation, as a result of
merger, consolidation, sale, liquidation, or otherwise, and any such successor
shall be
15
<PAGE> 20
liable to the persons indemnified under this Article Eight on the same
terms and conditions and to the same extent as this Corporation.
8.14 SEVERABILITY. Each of the Sections of this Article Eight, and each
of the clauses set forth herein, shall be deemed separate and independent, and
should any part of any such Section or clause be declared invalid or
unenforceable by any court of competent jurisdiction, such invalidity or
unenforceability shall in no way render invalid or unenforceable any other part
thereof or any separate Section or clause of this Article Eight that is not
declared invalid or unenforceable.
8.15 ADDITIONAL INDEMNIFICATION. In addition to the specific
indemnification rights set forth herein, the Corporation shall indemnify each of
its directors and such of its officers as have been designated by the Board of
Directors to the full extent permitted by action of the Board of Directors
without shareholder approval under the Code or other laws of the State of
Georgia as in effect from time to time.
ARTICLE NINE
MISCELLANEOUS
9.1 INSPECTION OF BOOKS AND RECORDS. The Board of Directors shall have
the power to determine which accounts, books, and records of the Corporation
shall be available for shareholders to inspect or copy, except for those books
and records required by the Code to be made available upon compliance by a
shareholder with applicable requirements, and shall have the power to fix
reasonable rules and regulations (including confidentiality restrictions and
procedures) not in conflict with applicable law for the inspection and copying
of accounts, books, and records that by law or by determination of the Board of
Directors are made available. Unless required by the Code or otherwise provided
by the Board of Directors, a shareholder of the Corporation holding less than
two percent of the total shares of the Corporation then outstanding shall have
no right to inspect the books and records of the Corporation.
9.2 FISCAL YEAR. The Board of Directors is authorized to fix the fiscal
year of the Corporation and to change the fiscal year from time to time as it
deems appropriate. Unless otherwise provided by resolution of the Board of
Directors, the fiscal year of the Corporation shall be the calendar year and
shall end on December 31 of each calendar year.
9.3 CORPORATE SEAL. The corporate seal will be in such form as the
Board of Directors may from time to time determine. The Board of Directors may
authorize the use of one or more facsimile forms of the corporate seal. The
corporate seal need not be used unless its use is required by law, by these
Bylaws, or by the Articles of Incorporation.
9.4 ANNUAL STATEMENTS. Not later than four months after the close of
each fiscal year, and in any case prior to the next annual meeting of
shareholders, the Corporation shall prepare (a) a balance sheet showing in
reasonable detail the financial condition of the Corporation as of the
16
<PAGE> 21
close of its fiscal year, and (b) a profit and loss statement showing the
results of its operations during its fiscal year. Upon receipt of written
request, the Corporation promptly shall mail to any shareholder of record a copy
of the most recent such balance sheet and profit and loss statement, in such
form and with such information as the Code may require.
9.5 NOTICE. (a) Whenever these Bylaws require notice to be given to any
shareholder or to any director, the notice may be given by mail, in person, by
courier delivery, by telephone, or by telecopier, telegraph, or similar
electronic means. Notice may be given to any director by electronic mail,
provided that the director has approved the use of such means of transmission as
an acceptable form of service of notice to such director and shall remain an
acceptable form of notice until such member indicates otherwise. Whenever notice
is given to a shareholder or director by mail, the notice shall be sent by
depositing the notice in a post office or letter box in a postage-prepaid,
sealed envelope addressed to the shareholder or director at his or her address
as it appears on the books of the Corporation. Any such written notice given by
mail shall be effective: (i) if given to shareholders, at the time the same is
deposited in the United States mail; and (ii) in all other cases, at the
earliest of (x) when received or when delivered, properly addressed, to the
addressee's last known principal place of business or residence, (y) five days
after its deposit in the mail, as evidenced by the postmark, if mailed with
first-class postage prepaid and correctly addressed, or (z) on the date shown on
the return receipt, if sent by registered or certified mail, return receipt
requested, and the receipt is signed by or on behalf of the addressee. Whenever
notice is given to a shareholder or director by any means other than mail, the
notice shall be deemed given when received.
(b) In calculating time periods for notice, when a period of time
measured in days, weeks, months, years, or other measurement of time is
prescribed for the exercise of any privilege or the discharge of any duty, the
first day shall not be counted but the last day shall be counted.
ARTICLE TEN
AMENDMENTS
Except as otherwise provided under the Code, the Board of Directors
shall have the power to alter, amend, or repeal these Bylaws or adopt new
Bylaws. Any Bylaws adopted by the Board of Directors may be altered, amended, or
repealed, and new Bylaws adopted, by the shareholders. The shareholders may
prescribe in adopting any Bylaw or Bylaws that the Bylaw or Bylaws so adopted
shall not be altered, amended, or repealed by the Board of Directors.
17
<PAGE> 1
EXHIBIT 10.1
TOWNE SERVICES, INC.
1996 STOCK OPTION PLAN
<PAGE> 2
TOWNE SERVICES, INC.
1996 STOCK OPTION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I........................................................................1
I.1 Award.....................................................................1
I.2 Board.....................................................................1
I.3 ...........................................................................1
Change in Control...............................................................1
I.4 Code......................................................................1
I.5 Committee.................................................................2
I.6 Company...................................................................2
I.7 Director..................................................................2
Exchange Act....................................................................2
I.9 Exercise Price............................................................2
I.10 Fair Market Value.........................................................2
I.11 Grantee...................................................................2
I.12 Incentive Stock Option....................................................2
I.13 Non-Employee Director.....................................................3
I.14 Officer...................................................................3
I.15 Option....................................................................3
I.16 Optionee..................................................................3
I.17 ..........................................................................3
Permanent and Total Disability..................................................3
I.18 Plan......................................................................3
I.19 Purchasable...............................................................3
I.20 Qualified Domestic Relations Order........................................3
I.21 Reload Option.............................................................3
I.22 Restricted Stock..........................................................3
I.23 Restriction Agreement.....................................................3
I.24 SAR.......................................................................3
I.25 SAR Price.................................................................4
I.26 Section 16 Insider........................................................4
I.27 Stock.....................................................................4
I.28 Stock Option Agreement....................................................4
ARTICLE II .......................................................................4
II.1 Name .....................................................................4
II.2 Purpose...................................................................4
II.3 Effective Date............................................................4
II.4 Shareholder Approval......................................................4
ARTICLE III ......................................................................5
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE IV.......................................................................5
IV.1 Duties and Powers of the Committee........................................5
IV.2 Interpretation; Rules.....................................................5
IV.3 No Liability..............................................................6
IV.4 Majority Rule.............................................................6
IV.5 Company Assistance........................................................6
ARTICLE V........................................................................6
V.1 Limitations...............................................................6
V.2 Antidilution..............................................................7
ARTICLE VI.......................................................................8
VI.1 Types of Options Granted..................................................8
VI.2 Option Grant and Agreement................................................8
VI.3 Optionee Limitations......................................................9
VI.4 $100,000 Limitation.......................................................9
VI.5 Exercise Price............................................................9
VI.6 Exercise Period...........................................................9
VI.7 Option Exercise..........................................................10
VI.8 Reload Options...........................................................11
VI.9 Nontransferability of Option.............................................12
VI.10 Termination of Employment or Service....................................12
VI.11 Employment Rights.......................................................12
VI.12 Certain Successor Options...............................................12
VI.13 Effect of Change of Control.............................................12
ARTICLE VII.....................................................................13
VII.1 Awards of Restricted Stock..............................................13
VII.2 Non-Transferability.....................................................13
VII.3 Lapse of Restrictions...................................................13
VII.4 Termination of Employment...............................................13
VII.5 Treatment of Dividends..................................................13
VII.6 Delivery of Shares......................................................14
ARTICLE VIII....................................................................14
VIII.1 SAR Grants.............................................................14
VIII.2 Determination of Price.................................................14
VIII.3 Exercise of a SAR......................................................14
VIII.4 Payment for a SAR......................................................14
VIII.5 Status of a SAR under the Plan.........................................14
VIII.6 Termination of Employment..............................................14
VIII.7 No Shareholder Rights .................................................15
ARTICLE IX......................................................................15
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE X.......................................................................15
X.1 Termination and Amendment ...............................................15
X.2 Effect on Grantee's Rights...............................................16
ARTICLE XI......................................................................16
ARTICLE XII.....................................................................16
XII.1 Replacement or Amended Grants...........................................16
XII.2 Forfeiture for Competition..............................................16
XII.3 Plan Binding on Successors..............................................17
XII.4 Singular, Plural; Gender................................................17
XII.5 Headings, etc., No Part of Plan ........................................17
XII.6 Interpretation..........................................................17
</TABLE>
iii
<PAGE> 5
TOWNE SERVICES, INC.
1996 STOCK OPTION PLAN
ARTICLE I
DEFINITIONS
As used herein, the following terms have the following meanings unless
the context clearly indicates to the contrary:
I.1 "Award" shall mean a grant of Restricted Stock or an SAR.
I.2 "Board" shall mean the Board of Directors of the Company.
I.3 "Change in Control" shall mean the occurrence of either of the
following events:
(i) A change in the composition of the Board of Directors
as a result of which fewer than one-half of the
incumbent directors are directors who either:
(A) Had been directors of the Company 24 months
prior to such change; or
(B) Were elected, or nominated for election, to
the Board of Directors with the affirmative
votes of at least a majority of the
directors who had been directors of the
Company 24 months prior to such change and
who were still in office at the time of the
election or nomination; or
(ii) Any "person" (as such term is used in sections 13(d)
and 14(d) of the Exchange Act), other than any person
who is a shareholder of the Company on or before the
effective date of the Plan, by the acquisition or
aggregation of securities is or becomes the
beneficial owner, directly or indirectly, of
securities of the Company representing 50 percent or
more of the combined voting power of the Company's
then outstanding securities ordinarily (and apart
from rights accruing under special circumstances)
having the right to vote at elections of directors
(the "Base Capital Stock"); except that any change in
the relative beneficial ownership of the Company's
securities by any person resulting solely from a
reduction in the aggregate number of outstanding
shares of Base Capital Stock, and any decrease
thereafter in such person's ownership of securities,
shall be disregarded until such person increases in
any manner, directly or indirectly, such person's
beneficial ownership of any securities of the
Company.
I.4 "Code" shall mean the United States Internal Revenue Code of
1986, including effective date and transition rules (whether
or not codified). Any reference herein to a specific section
of the Code shall be deemed to include a reference to any
i
<PAGE> 6
corresponding provision of future law.
I.5 "Committee" shall mean a committee of at least two Directors
appointed from time to time by the Board. However, with
respect to any Options or Awards granted to a Section 16
Insider, the Committee shall consist: (i) of the entire Board,
or (ii) solely of two or more Non-Employee Directors (who need
not be members of the Committee with respect to Options or
Awards granted to any other individuals).
I.6 "Company" shall mean Towne Services, Inc., a Georgia
corporation.
I.7 "Director" shall mean a member of the Board and any person who
is an advisory or honorary director of the Company if such
person is considered a director for the purposes of Section 16
of the Exchange Act, as determined by reference to such
Section 16 and to the rules, regulations, judicial decisions,
and interpretative or "no-action" positions with respect
thereto of the Securities and Exchange Commission, as the same
may be in effect or set forth from time to time.
I.8 "Exchange Act" shall mean the Securities Exchange Act of 1934.
Any reference herein to a specific section of the Exchange Act
shall be deemed to include a reference to any corresponding
provision of future law.
I.9 "Exercise Price" shall mean the price at which an Optionee may
purchase a share of Stock under a Stock Option Agreement.
I.10 "Fair Market Value" on any date shall mean (i) the closing
sales price of the Stock, regular way, on such date on the
national securities exchange having the greatest volume of
trading in the Stock during the thirty-day period preceding
the day the value is to be determined or, if such exchange was
not open for trading on such date, the next preceding date on
which it was open; (ii) if the Stock is not traded on any
national securities exchange, the average of the closing high
bid and low asked prices of the Stock on the over-the-counter
market on the day such value is to be determined, or in the
absence of closing bids on such day, the closing bids on the
next preceding day on which there were bids; or (iii) if the
Stock also is not traded on the over-the-counter market, the
fair market value as determined in good faith by the Board or
the Committee based on such relevant facts as may be available
to the Board, which may include opinions of independent
experts, the price at which recent sales have been made, the
book value of the Stock, and the Company's current and future
earnings.
I.11 "Grantee" shall mean a person who is an Optionee or a person
who has received an Award of Restricted Stock or an SAR.
I.12 "Incentive Stock Option" shall mean an option to purchase any
stock of the Company, which complies with and is subject to
the terms, limitations and conditions of Section 422 of the
Code and any regulations promulgated with respect thereto.
ii
<PAGE> 7
I.13 "Non-Employee Director" shall have the meaning set forth in
Rule 16b-3 under the Exchange Act, as the same may be in
effect from time to time, or in any successor rule thereto,
and shall be determined for all purposes under the Plan
according to interpretative or "no-action" positions with
respect thereto issued by the Securities and Exchange
Commission.
I.14 "Officer" shall mean a person who constitutes an officer of
the Company for the purposes of Section 16 of the Exchange
Act, as determined by reference to such Section 16 and to the
rules, regulations, judicial decisions, and interpretative or
"no-action" positions with respect thereto of the Securities
and Exchange Commission, as the same may be in effect or set
forth from time to time.
I.15 "Option" shall mean an option, whether or not an Incentive
Stock Option, to purchase Stock granted pursuant to the
provisions of Article VI hereof.
I.16 "Optionee" shall mean a person to whom an Option has been
granted hereunder.
I.17 "Permanent and Total Disability" shall have the same meaning
as given to that term by Code Section 22(e)(3) and any
regulations or rulings promulgated thereunder.
I.18 "Plan" shall mean the Towne Services, Inc. 1996 Stock Option
Plan, the terms of which are set forth herein.
I.19 "Purchasable" shall refer to Stock which may be purchased by
an Optionee under the terms of this Plan on or after a certain
date specified in the applicable Stock Option Agreement.
I.20 "Qualified Domestic Relations Order" shall have the meaning
set forth in the Code or in the Employee Retirement Income
Security Act of 1974, or the rules and regulations promulgated
under the Code or such Act.
I.21 "Reload Option" shall have the meaning set forth in Section
6.8 hereof.
I.22 "Restricted Stock" shall mean Stock issued, subject to
restrictions, to a Grantee pursuant to Article VII hereof.
I.23 "Restriction Agreement" shall mean the agreement setting forth
the terms of an Award, and executed by a Grantee as provded in
Section 7.1 hereof.
I.24 "SAR" means a stock appreciation right, which is the right to
receive an amount equal to the appreciation, if any, in the
Fair Market Value of a share of Stock from the date of the
grant of the right to the date of its payment, all as provided
in Article VIII hereof.
iii
<PAGE> 8
I.25 "SAR Price" means the base value established by the Committee
for a SAR on the date the SAR is granted and which is used in
determining the amount of benefit, if any, paid to a Grantee.
I.26 "Section 16 Insider" shall mean any person who is subject to
the provisions of Section 16 of the Exchange Act, as provided
in Rule 16a-2 promulgated pursuant to the Exchange Act.
I.27 "Stock" shall mean the Common Stock, no par value, of the
Company or, in the event that the outstanding shares of Stock
are hereafter changed into or exchanged for shares of a
different stock or securities of the Company or some other
entity, such other stock or securities.
I.28 "Stock Option Agreement" shall mean an agreement between the
Company and an Optionee under which the Optionee may purchase
Stock hereunder, a sample form of which is attached hereto as
Exhibit A (which form may be varied by the Committee in
granting an Option).
ARTICLE II
THE PLAN
II.1 Name. This Plan shall be known as "Towne Services, Inc. 1996
Stock Option Plan."
II.2 Purpose. The purpose of the Plan is to advance the interests
of the Company, its subsidiaries, and its shareholders by
affording certain employees and Directors of the Company and
its subsidiaries, as well as key consultants and advisors to
the Company or any subsidiary, an opportunity to acquire or
increase their proprietary interests in the Company. The
objective of the issuance of the Options and Awards is to
promote the growth and profitability of the Company and its
subsidiaries because the Grantees will be provided with an
additional incentive to achieve the Company's objectives
through participation in its success and growth and by
encouraging their continued association with or service to the
Company.
II.3 Effective Date. The Plan shall become effective on October 15,
1996.
2.4 Shareholder Approval. The Company intends to obtain
shareholder approval of the Plan by October 15, 1997. If
shareholder approval of the Plan is not obtained by October
15, 1997, the Plan will remain in effect and all Options and
Awards granted by the Plan will remain valid. However, if
shareholder approval is at that time required by the Code for
Incentive Stock Options and such shareholder approval has not
been obtained, any Incentive Stock Options issued under the
Plan shall automatically become options which do not qualify
as Incentive Stock Options.
iv
<PAGE> 9
ARTICLE III
PARTICIPANTS
The class of persons eligible to participate in the Plan shall consist
of all persons whose participation in the Plan the Committee determines to be in
the best interests of the Company which shall include, but not be limited to,
all Directors and employees, including but not limited to executive personnel,
of the Company or any subsidiary, as well as key consultants and advisors to the
Company or any subsidiary.
ARTICLE IV
ADMINISTRATION
IV.1 Duties and Powers of the Committee. The Plan shall be
administered by the Committee. The Committee shall select one
of its members as its Chairman and shall hold its meetings at
such times and places as it may determine. The Committee shall
keep minutes of its meetings and shall make such rules and
regulations for the conduct of its business as it may deem
necessary. The Committee shall have the power to act by
unanimous written consent in lieu of a meeting, and to meet by
telephone. In administering the Plan, the Committee's actions
and determinations shall be binding on all interested parties.
The Committee shall have the power to grant Options or Awards
in accordance with the provisions of the Plan and may grant
Options and Awards singly, in combination, or in tandem.
Subject to the provisions of the Plan, the Committee shall
have the discretion and authority to determine those
individuals to whom Options or Awards will be granted and
whether such Options shall be accompanied by the right to
receive Reload Options, the number of shares of Stock subject
to each Option or Award, such other matters as are specified
herein, and any other terms and conditions of a Stock Option
Agreement or Restriction Agreement. The Committee shall also
have the discretion and authority to delegate to any Officer
its powers to grant Options or Awards under the Plan to any
person who is an employee of the Company but not an Officer or
Director. To the extent not inconsistent with the provisions
of the Plan, the Committee may give a Grantee an election to
surrender an Option or Award in exchange for the grant of a
new Option or Award, and shall have the authority to amend or
modify an outstanding Stock Option Agreement or Restriction
Agreement, or to waive any provision thereof, provided that
the Grantee consents to such action.
IV.2 Interpretation; Rules. Subject to the express provisions of
the Plan, the Committee also shall have complete authority to
interpret the Plan, to prescribe, amend, and rescind rules and
regulations relating to it, to determine the details and
provisions of each Stock Option Agreement, and to make all
other determinations necessary or advisable for the
administration of the Plan, including, without limitation, the
amending or altering of the Plan and any Options or Awards
granted hereunder as may be required to comply with or to
conform to any federal, state, or local laws or regulations.
v
<PAGE> 10
IV.3 No Liability. Neither any member of the Board nor any member
of the Committee shall be liable to any person for any act or
determination made in good faith with respect to the Plan or
any Option or Award granted hereunder.
IV.4 Majority Rule. A majority of the members of the Committee
shall constitute a quorum, and any action taken by a majority
at a meeting at which a quorum is present, or any action taken
without a meeting evidenced by a writing executed by all the
members of the Committee, shall constitute the action of the
Committee.
IV.5 Company Assistance. The Company shall supply full and timely
information to the Committee on all matters relating to
eligible persons, their employment, death, retirement,
disability, or other termination of employment, and such other
pertinent facts as the Committee may require. The Company
shall furnish the Committee with such clerical and other
assistance as is necessary in the performance of its duties.
ARTICLE V
SHARES OF STOCK SUBJECT TO PLAN
V.1 Limitations. Subject to any antidilution adjustment pursuant
to the provisions of Section 5.2 hereof, the maximum number of
shares of Stock that may be issued hereunder shall be 10,000.
Any or all shares of Stock subject to the Plan may be issued
in any combination of Incentive Stock Options, non-Incentive
Stock Options, Restricted Stock, or SARs, and the amount of
Stock subject to the Plan may be increased from time to time
in accordance with Article X, provided that the total number
of shares of Stock issuable pursuant to Incentive Stock
Options may not be increased to more than 10,000 (other than
pursuant to anti-dilution adjustments) without shareholder
approval. Shares subject to an Option or issued as an Award
may be either authorized and unissued shares or shares issued
and later acquired by the Company. The shares covered by any
unexercised portion of an Option that has terminated for any
reason (except as set forth in the following paragraph), or
any forfeited portion of an Award, may again be optioned or
awarded under the Plan, and such shares shall not be
considered as having been optioned or issued in computing the
number of shares of Stock remaining available for option or
award hereunder.
If Options are issued in respect of options to
acquire stock of any entity acquired, by merger or otherwise,
by the Company (or any subsidiary of the Company), to the
extent that such issuance shall not be inconsistent with the
terms, limitations and conditions of Code Section 422 or Rule
16b-3 under the Exchange Act, the aggregate number of shares
of Stock for which Options may be granted hereunder shall
automatically be increased by the number of shares subject to
the Options so issued; provided, however, that the aggregate
number of shares of Stock for which Options may be granted
hereunder shall automatically be
vi
<PAGE> 11
decreased by the number of shares covered by any unexercised
portion of an Option so issued that has terminated for any
reason, and the shares subject to any such unexercised portion
may not be optioned to any other person.
V.2 Antidilution.
(a) If (1) the outstanding shares of Stock are changed
into or exchanged for a different number or kind of
shares or other securities of the Company by reason
of merger, consolidation, reorganization,
recapitalization, reclassification, combination or
exchange of shares, or stock split or stock dividend,
(2) any spin-off, spin-out or other distribution of
assets materially affects the price of the Company's
stock, or (3) there is any assumption and conversion
to the Plan by the Company of an acquired company's
outstanding option grants, then:
(i) the aggregate number and kind of shares of
Stock for which Options or Awards may be
granted hereunder shall be adjusted
proportionately by the Committee; and
(ii) the rights of Optionees (concerning the
number of shares subject to Options and the
Exercise Price) under outstanding Options
and the rights of the holders of Awards
(concerning the terms and conditions of the
lapse of any then-remaining restrictions),
shall be adjusted proportionately by the
Committee.
(b) If the Company shall be a party to any reorganization
in which it does not survive, involving merger,
consolidation, or acquisition of the stock or
substantially all the assets of the Company, the
Committee, in its discretion, may:
(i) notwithstanding other provisions hereof,
declare that all Options granted under the
Plan shall become exercisable immediately
notwithstanding the provisions of the
respective Stock Option Agreements regarding
exercisability, that all such Options shall
terminate 90 days after the Committee gives
written notice of the immediate right to
exercise all such Options and of the
decision to terminate all Options not
exercised within such 90-day period, and
that all then-remaining restrictions
pertaining to Awards under the Plan shall
immediately lapse; and/or
(ii) notify all Grantees that all Options or
Awards granted under the Plan shall be
assumed by the successor corporation or
substituted on an equitable basis with
options or restricted stock issued by such
successor corporation.
(c) If the Company is to be liquidated or dissolved in
connection with a
vii
<PAGE> 12
reorganization described in Section 5.2(b), the
provisions of such Section shall apply. In all other
instances, the adoption of a plan of dissolution or
liquidation of the Company shall, notwithstanding
other provisions hereof, cause all then-remaining
restrictions pertaining to Awards under the Plan to
lapse, and shall cause every Option outstanding under
the Plan to terminate to the extent not exercised
prior to the adoption of the plan of dissolution or
liquidation by the shareholders, provided that,
notwithstanding other provisions hereof, the
Committee may declare all Options granted under the
Plan to be exercisable at any time on or before the
fifth business day following such adoption
notwithstanding the provisions of the respective
Stock Option Agreements regarding exercisability.
(d) The adjustments described in paragraphs (a) through
(c) of this Section 5.2, and the manner of their
application, shall be determined solely by the
Committee, and any such adjustment may provide for
the elimination of fractional share interests;
provided, however, that any adjustment made by the
Board or the Committee shall be made in a manner that
will not cause an Incentive Stock Option to be other
than an Incentive Stock Option under applicable
statutory and regulatory provisions. The adjustments
required under this Article V shall apply to any
successors of the Company and shall be made
regardless of the number or type of successive events
requiring such adjustments.
ARTICLE VI
OPTIONS
VI.1 Types of Options Granted. The Committee may, under this Plan,
grant either Incentive Stock Options or Options which do not
qualify as Incentive Stock Options. Within the limitations
provided in this Plan, both types of Options may be granted to
the same person at the same time, or at different times, under
different terms and conditions, as long as the terms and
conditions of each Option are consistent with the provisions
of the Plan. Without limitation of the foregoing, Options may
be granted subject to conditions based on the financial
performance of the Company or any other factor the Committee
deems relevant.
VI.2 Option Grant and Agreement. Each Option granted hereunder
shall be evidenced by minutes of a meeting or the written
consent of the Committee and by a written Stock Option
Agreement executed by the Company and the Optionee. The terms
of the Option, including the Option's durtion, time or times
of exercise, exercise price, whether the Option is intended to
be an Incentive Stock Option, and whether the Option is to be
accompanied by the right to receive a Reload Option, shall be
stated in the Stock Option Agreement. No Incentive Stock
Option may be granted more than ten years after the earlier to
occur of the effective date of the Plan or the date the Plan
is approved by the Company's shareholders.
viii
<PAGE> 13
Separate Stock Option Agreements may be used for
Options intended to be Incentive Stock Options and those not
so intended, but any failure to use such separate agreements
shall not invalidate, or otherwise adversely affect the
Optionee's interest in, the Options evidenced thereby.
VI.3 Optionee Limitations. The Committee shall not grant an
Incentive Stock Option to any person who, at the time the
Incentive Stock Option is granted:
(a) is not an employee of the Company or any of its
subsidiaries; or
(b) owns or is considered to own stock possessing at
least 10% of the total combined voting power of all
classes of stock of the Company or any of its parent
or subsidiary corporations; provided, however, that
this limitation shall not apply if at the time an
Incentive Stock Option is granted the Exercise Price
is at least 110% of the Fair Market Value of the
Stock subject to such Option and such Option by its
terms would not be exercisable after five years from
the date on which the Option is granted.
VI.4 $100,000 Limitation. Except as provided below, the Committee
shall not grant an Incentive Stock Option to, or modify the
exercise provisions of outstanding Incentive Stock Options
held by, any person who, at the time the Incentive Stock
Option is granted (or modified), would thereby receive or hold
any Incentive Stock Options of the Company and any parent or
subsidiary of the Company, such that the aggregate Fair Market
Value (determined as of the respective dates of grant or
modification of each option) of the stock with respect to
which such Incentive Stock Options are exercisable for the
first time during any calendar year is in excess of $100,000
(or such other limit as may be prescribed by the Code from
time to time); provided that the foregoing restriction on
modification of outstanding Incentive Stock Options shall not
preclude the Committee from modifying an outstanding Incentive
Stock Option if, as a result of such modification and with the
consent of the Optionee, such Option no longer constitutes an
Incentive Stock Option; and provided that, if the $100,000
limitation (or such other limitation prescribed by the Code)
described in this Section 6.4 is exceeded, the Incentive Stock
Option, the granting or modification of which resulted in the
exceeding of such limit, shall be treated as an Incentive
Stock Option up to the limitation and the excess shall be
treated as an Option not qualifying as an Incentive Stock
Option.
VI.5 Exercise Price. The Exercise Price of the Stock subject to
each Option shall be determined by the Committee. Subject to
the provisions of Section 6.3(b) hereof, the Exercise Price of
an Incentive Stock Option shall not be less than the Fair
Market Value of the Stock as of the date the Option is granted
(or in the case of an Incentive Stock Option that is
subsequently modified, on the date of such modification).
VI.6 Exercise Period. The period for the exercise of each Option
granted hereunder
ix
<PAGE> 14
shall be determined by the Committee, but the Stock Option
Agreement with respect to each Option intended to be an
Incentive Stock Option shall provide that such Option shall
not be exercisable after the expiration of ten years from the
date of grant (or modification) of the Option. In addition, no
Incentive Stock Option granted under the Plan shall be
exercisable prior to shareholder approval of the Plan.
VI.7 Option Exercise.
(a) Unless otherwise provided in the Stock Option
Agreement or Section 6.6 hereof, an Option may be
exercised at any time or from time to time during the
term of the Option as to any or all full shares which
have become Purchasable under the provisions of the
Option, but not at any time as to less than 100
shares unless the remaining shares that have become
so Purchasable are less than 100 shares. The
Committee shall have the authority to prescribe in
any Stock Option Agreement that the Option may be
exercised only in accordance with a vesting schedule
during the term of the Option.
(b) An Option shall be exercised by (i) delivery to the
Company at its principal office a written notice of
exercise with respect to a specified number of shares
of Stock and (ii) payment to the Company at that
office of the full amount of the Exercise Price for
such number of shares in accordance with Section
6.7(c). If requested by an Optionee, an Option may be
exercised with the involvement of a stockbroker in
accordance with the federal margin rules set forth in
Regulation T (in which case the certificates
representing the underlying shares will be delivered
by the Company directly to the stockbroker).
(c) The Exercise Price is to be paid in full in cash upon
the exercise of the Option and the Company shall not
be required to deliver certificates for the shares
purchased until such payment has been made; provided,
however, that in lieu of cash, all or any portion of
the Exercise Price may be paid by tendering to the
Company shares of Stock duly endorsed for transfer
and owned by the Optionee, or by authorization to the
Company to withhold shares of Stock otherwise
issuable upon exercise of the Option, in each case to
be credited against the Exercise Price at the Fair
Market Value of such shares on the date of exercise
(however, no fractional shares may be so transferred,
and the Company shall not be obligated to make any
cash payments in consideration of any excess of the
aggregate Fair Market Value of shares transferred
over the aggregate Exercise Price); provided further,
that the Board may provide in a Stock Option
Agreement (or may otherwise determine in its sole
discretion at the time of exercise) that, in lieu of
cash or shares, all or a portion of the Exercise
Price may be paid by the Optionee's execution of a
recourse note equal to the Exercise Price or relevant
portion thereof, subject to compliance with
applicable state and
x
<PAGE> 15
federal laws, rules and regulations.
(d) In addition to and at the time of payment of the
Exercise Price, the Optionee shall pay to the Company
in cash the full amount of any federal, state, and
local income, employment, or other withholding taxes
applicable to the taxable income of such Optionee
resulting from such exercise. However, in the
discretion of the Committee any Stock Option
Agreement may provide that all or any portion of such
tax obligations, together with additional taxes not
exceeding the actual additional taxes to be owed by
the Optionee as a result of such exercise, may, upon
the irrevocable election of the Optionee, be paid by
tendering to the Company whole shares of Stock duly
endorsed for transfer and owned by the Optionee, or
by authorization to the Company to withhold shares of
Stock otherwise issuable upon exercise of the Option,
in either case in that number of shares having a Fair
Market Value on the date of exercise equal to the
amount of such taxes thereby being paid, and subject
to such restrictions as to the approval and timing of
any such election as the Committee may from time to
time determine to be necessary or appropriate to
satisfy the conditions of the exemption set forth in
Rule 16b-3 under the Exchange Act, if such rule is
applicable.
(e) The holder of an Option shall not have any of the
rights of a shareholder with respect to the shares of
Stock subject to the Option until such shares have
been issued and transferred to the Optionee upon the
exercise of the Option.
VI.8 Reload Options.
(a) The Committee may specify in a Stock Option Agreement
(or may otherwise determine in its sole discretion)
that a Reload Option shall be granted, without
further action of the Committee, (i) to an Optionee
who exercises an Option (including a Reload Option)
by surrendering shares of Stock in payment of amounts
specified in Sections 6.7(c) or 6.7(d) hereof, (ii)
for the same number of shares as are surrendered to
pay such amounts, (iii) as of the date of such
payment and at an Exercise Price equal to the Fair
Market Value of the Stock on such date, and (iv)
otherwise on the same terms and conditions as the
Option whose exercise has occasioned such payment,
subject to such other conditions or terms as the
Committee shall specify at the time such exercised
Option is granted.
(b) Unless provided otherwise in the Stock Option
Agreement, a Reload Option may not be exercised by an
Optionee (i) prior to the end of a one- year period
from the date that the Reload Option is granted, and
(ii) unless the Optionee retains beneficial ownership
of the shares of Stock issued to such Optionee upon
exercise of the Option referred to above in Section
6.8(a)(i) for a period of one year from the date of
such exercise.
xi
<PAGE> 16
VI.9 Nontransferability of Option. No Option shall be transferable
by an Optionee other than by will or the laws of descent and
distribution or, in the case of non- Incentive Stock Options,
pursuant to a Qualified Domestic Relations Order, and no
Option shall be transferable by an Optionee who is a Section
16 Insider prior to shareholder approval of the Plan. During
the lifetime of an Optionee, Options shall be exercisable only
by such Optionee (or by such Optionee's guardian or legal
representative, should one be appointed).
VI.10 Termination of Employment or Service. The Committee shall have
the power to specify, with respect to the Options granted to a
particular Optionee, the effect upon such Optionee's right to
exercise an Option of termination of such Optionee's
employment or service under various circumstances, which
effect may include immediate or deferred termination of such
Optionee's rights under an Option, or acceleration of the date
at which an Option may be exercised in full; provided,
however, that in no event may an Incentive Stock Option be
exercised after the expiration of ten years from the date of
grant thereof.
VI.11 Employment Rights. Nothing in the Plan or in any Stock Option
Agreement shall confer on any person any right to continue in
the employ of the Company or any of its subsidiaries, or shall
interfere in any way with the right of the Company or any of
its subsidiaries to terminate such person's employment at any
time.
VI.12 Certain Successor Options. To the extent not inconsistent with
the terms, limitations and conditions of Code Section 422 and
any regulations promulgated with respect thereto, an Option
issued in respect of an option held by an employee to acquire
stock of any entity acquired, by merger or otherwise, by the
Company (or any subsidiary of the Company) may contain terms
that differ from those stated in this Article VI, but solely
to the extent necessary to preserve for any such employee the
rights and benefits contained in such predecessor option, or
to satisfy the requirements of Code Section 424(a).
VI.13 Effect of Change in Control. The Committee may determine, at
the time of granting an Option or thereafter, that such Option
shall become exercisable on an accelerated basis in the event
that a Change in Control occurs with respect to the Company
(and the Committee shall have the discretion to modify the
definition of a Change in Control in a particular Option
Agreement). If the Committee finds that there is a reasonable
possibility that, within the succeeding six months, a Change
in Control will occur with respect to the Company, then the
Committee may determine that all outstanding Options shall be
exercisable on an accelerated basis.
xii
<PAGE> 17
ARTICLE VII
RESTRICTED STOCK
VII.1 Awards of Restricted Stock. The Committee may grant Awards of
Restricted Stock, which shall be governed by a Restriction
Agreement between the Company and the Grantee. Each
Restriction Agreement shall contain such restrictions, terms,
and conditions as the Committee may, in its discretion,
determine, and may require that an appropriate legend be
placed on the certificates evidencing the subject Restricted
Stock. Shares of Restricted Stock granted pursuant to an Award
hereunder shall be issued in the name of the Grantee as soon
as reasonably practicable after the Award is granted, provided
that the Grantee has executed the Restriction Agreement
governing the Award, the appropriate blank stock powers, and,
in the discretion of the Committee, an escrow agreement and
any other documents which the Committee may require as a
condition to the issuance of such shares. If a Grantee shall
fail to execute the foregoing documents within any time period
prescribed by the Committee, the Award shall be void. At the
discretion of the Committee, shares issued in connection with
an Award may be held by the Company for the account of the
Grantee or deposited together with the stock powers with an
escrow agent designated by the Committee. Unless the Committee
determines otherwise and as set forth in the Restriction
Agreement, upon issuance of the shares, the Grantee shall have
all of the rights of a shareholder with respect to such
shares, including the right to vote the shares and to receive
all dividends or other distributions paid or made with respect
to the shares.
VII.2 Non-Transferability. Until any restrictions upon Restricted
Stock awarded to a Grantee shall have lapsed in a manner set
forth in Section 7.3, such shares of Restricted Stock shall
not be transferable other than by will or the laws of descent
and distribution, or pursuant to a Qualified Domestic
Relations Order, nor shall they be delivered to the Grantee.
VII.3 Lapse of Restrictions. Restrictions upon Restricted Stock
awarded hereunder shall lapse at such time or times and on
such terms and conditions as the Committee may, in its
discretion, determine at the time the Award is granted or
thereafter.
VII.4 Termination of Employment. The Committee shall have the power
to specify, with respect to each Award granted to any
particular Grantee, the effect upon such Grantee's rights with
respect to such Restricted Stock of the termination of such
Grantee's employment under various circumstances, which effect
may include immediate or deferred forfeiture of such
Restricted Stock or acceleration of the date at which any
then-remaining restrictions shall lapse.
VII.5 Treatment of Dividends. At the time an Award of Restricted
Stock is made the Committee may, in its discretion, determine
that the payment to the Grantee of any dividends, or a
specified portion thereof, declared or paid on such Restricted
Stock shall be (i) deferred until the lapsing of the relevant
restrictions and (ii) held by the Company for the account of
the Grantee until such lapsing. In the event of such deferral,
there shall be credited at the end of each year (or portion
thereof) interest on the amount of the account at the
beginning of the year at a rate per annum determined by the
Committee. Payment of deferred dividends, together with
xiii
<PAGE> 18
interest thereon, shall be made upon the lapsing of
restrictions imposed on such Restricted Stock, and any
dividends deferred (together with any interest thereon) in
respect of Restricted Stock shall be forfeited upon any
forfeiture of such Restricted Stock.
VII.6 Delivery of Shares. Except as provided otherwise in Article IX
below, within a reasonable period of time following the lapse
of the restrictions on shares of Restricted Stock, the
Committee shall cause a stock certificate to be delivered to
the Grantee with respect to such shares and such shares shall
be free of all restrictions hereunder.
ARTICLE VIII
STOCK APPRECIATION RIGHTS
VIII.1 SAR Grants. The Committee, in its sole discretion, may grant
to any Grantee a SAR. The Committee may impose such conditions
or restrictions on the exercise of any SAR as it may deem
appropriate, including, without limitation, restricting the
time of exercise of the SAR to specified periods as may be
necessary to satisfy the requirements of Rule 16b-3.
VIII.2 Determination of Price. The SAR Price shall be established by
the Committee in its sole discretion. The SAR Price shall not
be less than 100% of the Fair Market Value of the Stock on the
date the SAR is granted for a SAR issued in tandem with an
Incentive Stock Option.
VIII.3 Exercise of a SAR. Upon exercise of a SAR, the Grantee shall
be entitled, subject to the terms and conditions of this Plan
and the Agreement, to receive the excess for each share of
Stock being exercised under the SAR of (i) the Fair Market
Value of such share of Stock on the date of exercise over (ii)
the SAR Price for such share of Stock.
VIII.4 Payment for a SAR. At the sole discretion of the Committee,
the payment of such excess shall be made in (i) cash, (ii)
shares of Stock, or (iii) a combination of both. Shares of
Stock used for this payment shall be valued at their Fair
Market Value on the date of exercise of the applicable SAR.
VIII.5 Status of a SAR under the Plan. Shares of Stock subject to an
Award of a SAR shall be considered shares of Stock which may
be issued under the Plan for purposes of Section 5.1 hereof,
unless the Agreement making the Award of the SAR provides that
the exercise of such SAR results in the termination of an
unexercised Option for the same number of shares of Stock.
VIII.6 Termination of Employment. The Committee shall have the power
to specify, with respect to each SAR granted to any particular
Grantee, the effect upon such Grantee's rights with respect to
such SAR of the termination of such Grantee's employment under
various circumstances, which effect may include immediate or
xiv
<PAGE> 19
deferred forfeiture of such SAR or accleration of the date at
which any then- remaining restrictions shall lapse.
VIII.7 No Shareholder Rights. The Grantee shall have no rights as a
shareholder with respect to a SAR. In addition, no adjustment
shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or
distributions or rights except as provided in Section 5.2
hereof.
ARTICLE IX
STOCK CERTIFICATES
The Company shall not be required to issue or deliver any certificate
for shares of Stock purchased upon the exercise of any Option granted hereunder
or any portion thereof, or deliver any certificate for shares of Restricted
Stock granted hereunder, prior to fulfillment of all of the following
conditions:
(a) The admission of such shares to listing on all stock exchanges
on which the Stock is then listed;
(b) The completion of any registration or other qualification of
such shares which the Committee shall deem necessary or
advisable under any federal or state law or under the rulings
or regulations of the Securities and Exchange Commission or
any other governmental regulatory body;
(c) The obtaining of any approval or other clearance from any
federal or state governmental agency or body which the
Committee shall determine to be necessary or advisable; and
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Board from time to time may
establish for reasons of administrative convenience.
Stock certificates issued and delivered to Grantees shall bear such
restrictive legends as the Company shall deem necessary or advisable pursuant to
applicable federal and state securities laws.
ARTICLE X
TERMINATION AND AMENDMENT
X.1 Termination and Amendment. The Board may at any time terminate
the Plan, and may at any time and from time to time and in any
respect amend the Plan; provided, however, that the Board
(unless its actions are approved or ratified by the
shareholders of the Company within twelve months of the date
that the Board amends the Plan) may not amend the Plan to:
xv
<PAGE> 20
(a) Increase the total number of shares of Stock issuable
pursuant to Incentive Stock Options, except as
contemplated in Section 5.2;
(b) Change the class of employees eligible to receive
Incentive Stock Options that may participate in the
Plan; or
(c) Otherwise materially increase the benefits accruing
to recipients of Incentive Stock Options under the
Plan.
X.2 Effect on Grantee's Rights. No termination, amendment, or
modification of the Plan shall affect adversely a Grantee's
rights under a Stock Option Agreement or Restriction Agreement
without the consent of the Grantee or his legal
representative.
ARTICLE XI
RELATIONSHIP TO OTHER COMPENSATION PLANS
The adoption of the Plan shall not affect any other stock option,
incentive, or other compensation plans in effect for the Company or any of its
subsidiaries; nor shall the adoption of the Plan preclude the Company or any of
its subsidiaries from establishing any other form of incentive or other
compensation plan for employees or Directors of the Company or any of its
subsidiaries.
ARTICLE XII
MISCELLANEOUS
XII.1 Replacement or Amended Grants. At the sole discretion of the
Committee, and subject to the terms of the Plan, the Committee
may modify outstanding Options or Awards or accept the
surrender of outstanding Options or Awards and grant new
Options or Awards in substitution for them. However no
modification of an Option or Award shall adversely affect a
Grantee's rights under a Stock Option Agreement or Restriction
Agreement without the consent of the Grantee or his legal
representative.
XII.2 Forfeiture for Competition. If a Grantee provides services to
a competitor of the Company or any of its subsidiaries,
whether as an employee, officer, director, independent
contractor, consultant, agent, or otherwise, such services
being of a nature that can reasonably be expected to involve
the skills and experience used or developed by the Grantee
while an employee of the Company or subsidiary, then that
Grantee's rights under any Options outstanding hereunder shall
be forfeited and terminated, and any shares of Restricted
Stock held by such Grantee subject to remaining restrictions
shall be forfeited, subject in each case to a determination to
the contrary by the Committee.
xvi
<PAGE> 21
XII.3 Plan Binding on Successors. The Plan shall be binding upon the
successors and assigns of the Company.
XII.4 Singular, Plural; Gender. Whenever used herein, nouns in the
singular shall include the plural, and the masculine pronoun
shall include the feminine gender.
XII.5 Headings, etc., No Part of Plan. Headings of Articles and
Sections hereof are inserted for convenience and reference;
they do not constitute part of the Plan.
XII.6 Interpretation. With respect to Section 16 Insiders,
transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under
the Exchange Act. To the extent any provision of the Plan or
action by the Plan administrators fails to so comply, it shall
be deemed void to the extent permitted by law and deemed
advisable by the Plan administrators.
xvii
<PAGE> 22
Exhibit A to Towne Services,
Inc. 1996 Stock Option Plan -
Form of Stock Option Agreement
TOWNE SERVICES, INC.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement"), entered into as of this
day of , , by and between Towne Services, Inc., a Georgia corporation (the
"Company"), and _________________ (the "Optionee").
WHEREAS, on October 15, 1996, the Board of Directors of the Company
adopted a stock option plan known as the "Towne Services, Inc. 1996 Stock Option
Plan" (the "Plan"), and recommended that the Plan be approved by the Company's
shareholders; and
WHEREAS, the Committee has granted the Optionee a stock option to
purchase the number of shares of the Company's common stock as set forth below,
and in consideration of the granting of that stock option the Optionee intends
to remain in the employ of the Company; and
WHEREAS, the Company and the Optionee desire to enter into a written
agreement with respect to such option in accordance with the Plan.
NOW, THEREFORE, as an employment incentive and to encourage stock
ownership, and also in consideration of the mutual covenants contained herein,
the parties hereto agree as follows.
1. Incorporation of Plan. This option is granted pursuant to the
provisions of the Plan and the terms and definitions of the
Plan are incorporated herein by reference and made a part
hereof. A copy of the Plan has been delivered to, and receipt
is hereby acknowledged by, the Optionee.
2. Grant of Option. Subject to the terms, restrictions,
limitations and conditions stated herein, the Company hereby
evidences its grant to the Optionee, not in lieu of salary or
other compensation, of the right and option (the "Option") to
purchase all or any part of the number of shares of the
Company's Common Stock, no par value (the "Stock"), set forth
on Schedule A attached hereto and incorporated herein by
reference. The Option shall be exercisable in the amounts and
at the time specified on Schedule A. The Option shall expire
and shall not be exercisable on the date specified on Schedule
A or on such earlier date as determined pursuant to Section 8,
9, or 10 hereof. Schedule A states whether the Option is
intended to be an Incentive Stock Option.
3. Purchase Price. The price per share to be paid by the Optionee
for the shares subject to this Option (the "Exercise Price")
shall be as specified on Schedule A, which price shall be an
amount not less than the Fair Market Value of a share of
i
<PAGE> 23
Stock as of the Date of Grant (as defined in Section 11 below)
if the Option is an Incentive Stock Option.
4. Exercise Terms. The Optionee must exercise the Option for at
least the lesser of 100 shares or the number of shares of
Purchasable Stock as to which the Option remains unexercised.
In the event this Option is not exercised with respect to all
or any part of the shares subject to this Option prior to its
expiration, the shares with respect to which this Option was
not exercised shall no longer be subject to this Option.
5. Option Non-Transferable. No Option shall be transferable by an
Optionee other than by will or the laws of descent and
distribution or, in the case of non-Incentive Stock Options,
pursuant to a Qualified Domestic Relations Order, and no
Option shall be transferable by an Optionee who is a Section
16 Insider prior to shareholder approval of the Plan. During
the lifetime of an Optionee, Options shall be exercisable only
by such Optionee (or by such Optionee's guardian or legal
representative, should one be appointed).
6. Notice of Exercise of Option. This Option may be exercised by
the Optionee, or by the Optionee's administrators, executors
or personal representatives, by a written notice (in
substantially the form of the Notice of Exercise attached
hereto as Schedule B) signed by the Optionee, or by such
administrators, executors or personal representatives, and
delivered or mailed to the Company as specified in Section 14
hereof to the attention of the President or such other officer
as the Company may designate. Any such notice shall (a)
specify the number of shares of Stock which the Optionee or
the Optionee's administrators, executors or personal
representatives, as the case may be, then elects to purchase
hereunder, (b) contain such information as may be reasonably
required pursuant to Section 12 hereof, and (c) be accompanied
by (i) a certified or cashier's check payable to the Company
in payment of the total Exercise Price applicable to such
shares as provided herein, (ii) shares of Stock owned by the
Optionee and duly endorsed or accompanied by stock transfer
powers having a Fair Market Value equal to the total Exercise
Price applicable to such shares purchased hereunder, or (iii)
a certified or cashier's check accompanied by the number of
shares of Stock whose Fair Market Value when added to the
amount of the check equals the total Exercise Price applicable
to such shares purchased hereunder. Upon receipt of any such
notice and accompanying payment, and subject to the terms
hereof, the Company agrees to issue to the Optionee or the
Optionee's administrators, executors or personal
representatives, as the case may be, stock certificates for
the number of shares specified in such notice registered in
the name of the person exercising this Option.
7. Adjustment in Option. The number of shares subject to this
Option, the Exercise Price and other matters are subject to
adjustment during the term of this Option in accordance with
Section 5.2 of the Plan.
ii
<PAGE> 24
8. Termination of Employment.
(a) Except as otherwise specified in Schedule A hereto,
in the event of the termination of the Optionee's
employment with the Company or any of its
subsidiaries, other than a termination that is either
(i) for cause, (ii) voluntary on the part of the
Optionee and without written consent of the Company,
or (iii) for reasons of death or disability or
retirement, the Optionee may exercise this Option at
any time within 90 days after such termination to the
extent of the number of shares which were Purchasable
hereunder at the date of such termination.
(b) Except as specified in Schedule A attached hereto, in
the event of a termination of the Optionee's
employment that is either (i) for cause or (ii)
voluntary on the part of the Optionee and without the
written consent of the Company, this Option, to the
extent not previously exercised, shall terminate
immediately and shall not thereafter be or become
exercisable.
(c) Unless and to the extent otherwise provided in
Exhibit A hereto, in the event of the retirement of
the Optionee at the normal retirement date as
prescribed from time to time by the Company or any
subsidiary, the Optionee shall continue to have the
right to exercise any Options for shares which were
Purchasable at the date of the Optionee's retirement
(provided that, on the date which is three months
after the date of retirement, the Options will become
void and unexercisable unless on the date of
retirement the Optionee enters into a noncompete
agreement with Towne Services, Inc. and continues to
comply with such noncompete agreement). This Option
does not confer upon the Optionee any right with
respect to continuance of employment by the Company
or by any of its subsidiaries. This Option shall not
be affected by any change of employment so long as
the Optionee continues to be an employee of the
Company or one of its subsidiaries.
9. Disabled Optionee. In the event of termination of employment
because of the Optionee's becoming a Disabled Optionee, the
Optionee (or his or her personal representative) may exercise
this Option, within a period ending on the earlier of (a) the
last day of the one year period following the Optionee's death
or (b) the expiration date of this Option, to the extent of
the number of shares which were Purchasable hereunder at the
date of such termination.
iii
<PAGE> 25
10. Death of Optionee. Except as otherwise set forth in Schedule A
with respect to the rights of the Optionee upon termination of
employment under Section 8(a) above, in the event of the
Optionee's death while employed by the Company or any of its
subsidiaries or within three months after a termination of
such employment (if such termination was neither (i) for cause
nor (ii) voluntary on the part of the Optionee and without the
written consent of the Company), the appropriate persons
described in Section 6 hereof or persons to whom all or a
portion of this Option is transferred in accordance with
Section 5 hereof may exercise this Option at any time within a
period ending on the earlier of (a) the last day of the one
year period following the Optionee's death or (b) the
expiration date of this Option. If the Optionee was an
employee of the Company at the time of death, this Option may
be so exercised to the extent of the number of shares that
were Purchasable hereunder at the date of death. If the
Optionee's employment terminated prior to his or her death,
this Option may be exercised only to the extent of the number
of shares covered by this Option which were Purchasable
hereunder at the date of such termination.
11. Date of Grant. This Option was granted by the Board of
Directors of the Company on the date set forth in Schedule A
(the "Date of Grant").
12. Compliance with Regulatory Matters. The Optionee acknowledges
that the issuance of capital stock of the Company is subject
to limitations imposed by federal and state law and the
Optionee hereby agrees that the Company shall not be obligated
to issue any shares of Stock upon exercise of this Option that
would cause the Company to violate law or any rule,
regulation, order or consent decree of any regulatory
authority (including without limitation the Securities and
Exchange Commission) having jurisdiction over the affairs of
the Company. The Optionee agrees that he or she will provide
the Company with such information as is reasonably requested
by the Company or its counsel to determine whether the
issuance of Stock complies with the provisions described by
this Section 12.
13. Restriction on Disposition of Shares. The shares purchased
pursuant to the exercise of an Incentive Stock Option shall
not be transferred by the Optionee except pursuant to the
Optionee's will, or the laws of descent and distribution,
until such date which is the later of two years after the
grant of such Incentive Stock Option or one year after the
transfer of the shares to the Optionee pursuant to the
exercise of such Incentive Stock Option.
14. Miscellaneous.
(a) This Agreement shall be binding upon the parties
hereto and their representatives, successors and
assigns.
(b) This Agreement is executed and delivered in, and
shall be governed by the laws of, the State of
Georgia.
iv
<PAGE> 26
(c) Any requests or notices to be given hereunder shall
be deemed given, and any elections or exercises to be
made or accomplished shall be deemed made or
accomplished, upon actual delivery thereof to the
designated recipient, or three days after deposit
thereof in the United States mail, registered, return
receipt requested and postage prepaid, addressed, if
to the Optionee, at the address set forth below and,
if to the Company, to the executive offices of the
Company at 6621 Bay Circle, Suite 170, Norcross, GA
30071.
(d) This Agreement may not be modified except in writing
executed by each of the parties hereto.
IN WITNESS WHEREOF, the Board of Directors of the Company has caused
this Stock Option Agreement to be executed on behalf of the Company and the
Company's seal to be affixed hereto and attested by the Secretary or an
Assistant Secretary of the Company, and the Optionee has executed this Stock
Option Agreement under seal, all as of the day and year first above written.
TOWNE SERVICES, INC. OPTIONEE
By:
--------------
Name: Name:
Title: Address:
ATTEST:
Secretary/Assistant Secretary
[SEAL]
<PAGE> 27
SCHEDULE A
TO
STOCK OPTION AGREEMENT
BETWEEN
TOWNE SERVICES, INC.
AND
Dated:
--------------
1. Number of Shares Subject to Option:________________________shares.
2. This Option (Check one) [ ] is [ ] is not an Incentive Stock Option.
3. Option Exercise Price: $________________per share.
4. Date of Grant:
5. Option Vesting Schedule:
Check one:
( ) Options are exercisable with respect to all shares on
or after the date hereof
( ) Options are exercisable with respect to the number
of shares indicated below on or after the date
indicated next to the number of shares:
No. of Shares Vesting Date
6. Option Exercise Period:
Check One:
( ) All options expire and are void unless exercised on
or before _____________, 199__.
( ) Options expire and are void unless exercised on or
before the date indicated next to the number of
shares:
No. of Shares Expiration Date
7. Effect of Termination of Employment of Optionee (if different from that
set forth in Sections 8 and 10 of the Stock Option Agreement):
vi
<PAGE> 28
SCHEDULE B
NOTICE OF EXERCISE
The undersigned hereby notifies Towne Services, Inc. (the "Company") of
this election to exercise the undersigned's stock option to purchase ___________
shares of the Company's common stock, no par value (the "Common Stock"),
pursuant to the Stock Option Agreement (the "Agreement") between the undersigned
and the Company dated ___________. Accompanying this Notice is (1) a certified
or a cashier's check in the amount of $ payable to the Company, and/or (2)
_______________ shares of the Company's Common Stock presently owned by the
undersigned and duly endorsed or accompanied by stock transfer powers, having an
aggregate Fair Market Value (as defined in the Towne Services, Inc. 1996 Stock
Option Plan) as of the date hereof of $__________________, such amounts being
equal, in the aggregate, to the purchase price per share set forth in Section 3
of the Agreement multiplied by the number of shares being purchased hereby (in
each instance subject to appropriate adjustment pursuant to Section 5.2 of the
Agreement).
IN WITNESS WHEREOF, the undersigned has set his hand and seal, this
____ day of ________, 199__.
OPTIONEE [OR OPTIONEE'S
ADMINISTRATOR,
EXECUTOR OR PERSONAL
REPRESENTATIVE]
Name:
Position (if other than Optionee):
vii
<PAGE> 1
EXHIBIT 10.2
TOWNE SERVICES, INC.
1998 STOCK OPTION PLAN
<PAGE> 2
TOWNE SERVICES, INC.
1998 STOCK OPTION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I DEFINITIONS..........................................................1
ARTICLE II THE PLAN............................................................5
Name..................................................................5
Purpose...............................................................5
Shareholder Approval..................................................5
ARTICLE III PARTICIPANTS.......................................................5
ARTICLE IV ADMINISTRATION......................................................6
Duties and Powers of the Committee....................................6
Interpretation; Rules.................................................6
No Liability..........................................................6
Majority Rule.........................................................6
Company Assistance....................................................7
ARTICLE V SHARES OF STOCK SUBJECT TO PLAN......................................7
Limitations...........................................................7
Antidilution..........................................................8
ARTICLE VI OPTIONS.............................................................9
Types of Options Granted..............................................9
Option Grant and Agreement............................................9
Optionee Limitation..................................................10
$100,000 Limitation..................................................10
Exercise Price.......................................................11
Exercise Period......................................................11
Option Exercise......................................................11
Reload Options.......................................................12
Nontransferability of Option.........................................13
Termination of Employment or Service.................................13
Employment Rights....................................................13
Certain Successor Options............................................14
Effect of Change in Control..........................................14
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE VII RESTRICTED STOCK..................................................14
Awards of Restricted Stock...........................................14
Non-Transferability..................................................15
Lapse of Restrictions................................................15
Termination of Employment............................................15
Treatment of Dividends...............................................15
Delivery of Shares...................................................15
ARTICLE VIII STOCK APPRECIATION RIGHTS........................................15
SAR Grants...........................................................15
Determination of Price...............................................16
Exercise of a SAR....................................................16
Payment for a SAR....................................................16
Status of a SAR under the Plan.......................................16
Termination of Employment............................................16
No Shareholder Rights................................................16
ARTICLE IX STOCK CERTIFICATES.................................................16
ARTICLE X TERMINATION AND AMENDMENT...........................................17
Termination and Amendment............................................17
Effect on Grantee's Rights...........................................17
ARTICLE XI RELATIONSHIP TO OTHER COMPENSATION PLANS...........................18
ARTICLE XII MISCELLANEOUS.....................................................18
Replacement or Amended Grants........................................18
Forfeiture for Competition...........................................18
Plan Binding on Successors...........................................18
Singular, Plural; Gender.............................................18
Headings, etc., No Part of Plan......................................18
Interpretation.......................................................19
EXHIBIT A (Stock Option Agreement)....................................i
SCHEDULE A (Option Terms)............................................vi
SCHEDULE B (Notice of Exercise).............................................viii
</TABLE>
<PAGE> 4
TOWNE SERVICES, INC.
1998 STOCK OPTION PLAN
ARTICLE I
DEFINITIONS
As used herein, the following terms have the following meanings unless
the context clearly indicates to the contrary:
1.1 "Award" shall mean a grant of Restricted Stock or an SAR.
1.2 "Board" shall mean the Board of Directors of the Company.
1.3 "Cause" (i) with respect to the Company or any subsidiary
which employs the recipient of an Award or Option (the
"recipient") or for which such recipient primarily performs
services, the commission by the recipient of an act of fraud,
embezzlement, theft or proven dishonesty, or any other illegal
act or practice (whether or not resulting in criminal
prosecution or conviction), or any act or practice which the
Committee shall, in good faith, deem to have resulted in the
recipient's becoming unbondable under the Company's or the
subsidiary's fidelity bond; (ii) the willful engaging by the
recipient in misconduct which is deemed by the Committee, in
good faith, to be materially injurious to the Company or any
subsidiary, monetarily or otherwise, including, but not
limited, improperly disclosing trade secrets or other
confidential or sensitive business information and data about
the Company or any subsidiaries and competing with the Company
or its subsidiaries, or soliciting employees, consultants or
customers of the Company in violation of law or any employment
or other agreement to which the recipient is a party; or (iii)
the willful and continued failure or habitual neglect by the
recipient to perform his or her duties with the Company or the
subsidiary substantially in accordance with the operating and
personnel policies and procedures of the Company or the
subsidiary generally applicable to all their employees. For
purposes of this Plan, no act or failure to act by the
recipient shall be deemed be "willful" unless done or omitted
to be done by recipient not in good faith and without
reasonable belief that the recipient's action or omission was
in the best interest of the Company and/or the subsidiary.
Notwithstanding the foregoing, if the recipient has entered
into an employment agreement that is binding as of the date of
employment termination, and if such employment agreement
defines "Cause," then the definition of "Cause" in such
agreement shall apply to the recipient in this Plan. "Cause"
under either (i), (ii) or (iii) shall be determined by the
Committee.
1.4 "Change in Control" shall mean the occurrence of either of the
following events:
(i) A change in the composition of the Board as a result
of which fewer than one-half of the incumbent
directors are directors who either:
<PAGE> 5
(A) Had been directors of the Company 24 months
prior to such change; or
(B) Were elected, or nominated for election, to
the Board with the affirmative votes of at
least a majority of the directors who had
been directors of the Company 24 months
prior to such change and who were still in
office at the time of the election or
nomination; or
(ii) Any "person" (as such term is used in sections 13(d)
and 14(d) of the Exchange Act), other than any person
who is a shareholder of the Company on or before the
Effective Date, by the acquisition or aggregation of
securities is or becomes the beneficial owner,
directly or indirectly, of securities of the Company
representing 50 percent or more of the combined
voting power of the Company's then outstanding
securities ordinarily (and apart from rights accruing
under special circumstances) having the right to vote
at elections of directors (the "Base Capital Stock");
except that any change in the relative beneficial
ownership of the Company's securities by any person
resulting solely from a reduction in the aggregate
number of outstanding shares of Base Capital Stock,
and any decrease thereafter in such person's
ownership of securities, shall be disregarded until
such person increases in any manner, directly or
indirectly, such person's beneficial ownership of any
securities of the Company.
1.5 "Code" shall mean the United States Internal Revenue Code of
1986, including effective date and transition rules (whether
or not codified). Any reference herein to a specific section
of the Code shall be deemed to include a reference to any
corresponding provision of future law.
1.6 "Committee" shall mean a committee of at least two Directors
appointed from time to time by the Board, having the duties
and authority set forth herein in addition to any other
authority granted by the Board. In selecting the Committee,
the Board shall consider (i) the benefits under Section 162(m)
of the Code of having a Committee composed of "outside
directors" (as that term is defined in the Code) for certain
grants of Options to highly compensated executives, and (ii)
the benefits under Rule 16b-3 of having a Committee composed
of either the entire Board or a Committee of at least two
Directors who are Non-Employee Directors for Options granted
to or held by any Section 16 Insider. At any time that the
Board shall not have appointed a committee as described above,
any reference herein to the Committee shall mean the Board.
1.7 "Company" shall mean Towne Services, Inc., a Georgia
corporation.
1.8 "Effective Date" shall mean May 19, 1998.
2
<PAGE> 6
1.9 "Director" shall mean a member of the Board and any person who
is an advisory or honorary director of the Company if such
person is considered a director for the purposes of Section 16
of the Exchange Act, as determined by reference to such
Section 16 and to the rules, regulations, judicial decisions,
and interpretative or "no-action" positions with respect
thereto of the Securities and Exchange Commission, as the same
may be in effect or set forth from time to time.
1.10 "Exchange Act" shall mean the Securities Exchange Act of 1934.
Any reference herein to a specific section of the Exchange Act
shall be deemed to include a reference to any corresponding
provision of future law
1.11 "Exercise Price" shall mean the price at which an Optionee may
purchase a share of Stock under a Stock Option Agreement.
1.12 "Fair Market Value" on any date shall mean (i) the closing
sales price of the Stock, regular way, on such date on the
national securities exchange having the greatest volume of
trading in the Stock during the thirty-day period preceding
the day the value is to be determined or, if such exchange was
not open for trading on such date, the next preceding date on
which it was open; (ii) if the Stock is not traded on any
national securities exchange, the average of the closing high
bid and low asked prices of the Stock on the over-the-counter
market on the day such value is to be determined, or in the
absence of closing bids on such day, the closing bids on the
next preceding day on which there were bids; or (iii) if the
Stock also is not traded on the over-the-counter market, the
fair market value as determined in good faith by the Board or
the Committee based on such relevant facts as may be available
to the Board, which may include opinions of independent
experts, the price at which recent sales have been made, the
book value of the Stock, and the Company's current and future
earnings.
1.13 "Grantee" shall mean a person who is an Optionee or a person
who has received an Award of Restricted Stock or an SAR.
1.14 "Incentive Stock Option" shall mean an option to purchase any
stock of the Company, which complies with and is subject to
the terms, limitations and conditions of Section 422 of the
Code and any regulations promulgated with respect thereto
1.15 "Non-Employee Director" shall have the meaning set forth in
Rule 16b-3 under the Exchange Act, as the same may be in
effect from time to time, or in any successor rule thereto,
and shall be determined for all purposes under the Plan
according to interpretative or "no-action" positions with
respect thereto issued by the Securities and Exchange
Commission.
1.16 "Officer" shall mean a person who constitutes an officer of
the Company for the purposes of Section 16 of the Exchange
Act, as determined by reference to such
3
<PAGE> 7
Section 16 and to the rules, regulations, judicial decisions,
and interpretative or "no-action" positions with respect
thereto of the Securities and Exchange Commission, as the same
may be in effect or set forth from time to time.
1.17 "Option" shall mean an option, whether or not an Incentive
Stock Option, to purchase Stock granted pursuant to the
provisions of Article VI hereof.
1.18 "Optionee" shall mean a person to whom an Option has been
granted hereunder.
1.19 "Permanent and Total Disability" shall have the same meaning
as given to that term by Code Section 22(e)(3) and any
regulations or rulings promulgated thereunder.
1.20 "Plan" shall mean Towne Services, Inc. 1998 Stock Option Plan,
the terms of which are set forth herein.
1.21 "Purchasable" shall refer to Stock which may be purchased by
an Optionee under the terms of this Plan on or after a certain
date specified in the applicable Stock Option Agreement.
1.22 "Qualified Domestic Relations Order" shall have the meaning
set forth in the Code or in the Employee Retirement Income
Security Act of 1974, or the rules and regulations promulgated
under the Code or such Act.
1.23 "Reload Option" shall have the meaning set forth in Section
6.8 hereof.
1.24 "Restricted Stock" shall mean Stock issued, subject to
restrictions, to a Grantee pursuant to Article VII hereof.
1.25 "Restriction Agreement" shall mean the agreement setting forth
the terms of an Award, and executed by a Grantee as provided
in Section 7.1 hereof.
1.26 "SAR" means a stock appreciation right, which is the right to
receive an amount equal to the appreciation, if any, in the
Fair Market Value of a share of Stock from the date of the
grant of the right to the date of its payment, all as provided
in Article VIII hereof.
1.27 "SAR Price" means the base value established by the Committee
for a SAR on the date the SAR is granted and which is used in
determining the amount of benefit, if any, paid to a Grantee.
1.28 "Section 16 Insider" shall mean any person who is subject to
the provisions of Section 16 of the Exchange Act, as provided
in Rule 16a-2 promulgated pursuant to the Exchange Act.
4
<PAGE> 8
1.29 "Stock" shall mean the Common Stock, no par value, of the
Company or, in the event that the outstanding shares of Stock
are hereafter changed into or exchanged for shares of a
different stock or securities of the Company or some other
entity, such other stock or securities.
1.30 "Stock Option Agreement" shall mean an agreement between the
Company and an Optionee under which the Optionee may purchase
Stock hereunder, a sample form of which is attached hereto as
Exhibit A (which form may be varied by the Committee in
granting an Option).
ARTICLE II
THE PLAN
2.1 Name. This Plan shall be known as "The Towne Services, Inc.
1998 Stock Option Plan."
2.2 Purpose. The purpose of the Plan is to advance the interests
of the Company, its subsidiaries, and its shareholders by
affording certain employees and Directors of the Company and
its subsidiaries, as well as key consultants and advisors to
the Company or any subsidiary, an opportunity to acquire or
increase their proprietary interests in the Company. The
objective of the issuance of the Options and Awards is to
promote the growth and profitability of the Company and its
subsidiaries because the Grantees will be provided with an
additional incentive to achieve the Company's objectives
through participation in its success and growth and by
encouraging their continued association with or service to the
Company.
2.3 Shareholder Approval. The Plan shall become effective on May
19, 1998; provided, however, that if the shareholders of the
Company have not approved the Plan on or prior to the first
anniversary of such effective date, then all options granted
under the Plan shall be non-Incentive Stock Options. If, at
the time of any amendment to the Plan, shareholder approval is
required by the Code for Incentive Stock Options and such
shareholder approval has not been obtained (or is not obtained
within 12 months thereof), any Incentive Stock Options issued
under the Plan shall automatically become options which do not
qualify as Incentive Stock Options.
ARTICLE III
PARTICIPANTS
The class of persons eligible to participate in the Plan shall consist
of all persons whose participation in the Plan the Committee determines to be in
the best interests of the Company which shall include, but not be limited to,
all Directors and employees, including but not limited to executive personnel,
of the Company or any subsidiary, as well as key consultants and advisors to the
Company or any subsidiary.
4
<PAGE> 9
ARTICLE IV
ADMINISTRATION
4.1 Duties and Powers of the Committee. The Plan shall be
administered by the Committee. The Committee shall select one
of its members as its Chairman and shall hold its meetings at
such times and places as it may determine. The Committee shall
keep minutes of its meetings and shall make such rules and
regulations for the conduct of its business as it may deem
necessary. The Committee shall have the power to act by
unanimous written consent in lieu of a meeting, and to meet by
telephone. In administering the Plan, the Committee's actions
and determinations shall be binding on all interested parties.
The Committee shall have the power to grant Options or Awards
in accordance with the provisions of the Plan and may grant
Options and Awards singly, in combination, or in tandem.
Subject to the provisions of the Plan, the Committee shall
have the discretion and authority to determine those
individuals to whom Options or Awards will be granted and
whether such Options shall be accompanied by the right to
receive Reload Options, the number of shares of Stock subject
to each Option or Award, such other matters as are specified
herein, and any other terms and conditions of a Stock Option
Agreement or Restriction Agreement. The Committee shall also
have the discretion and authority to delegate to any Officer
its powers to grant Options or Awards under the Plan to any
person who is an employee of the Company but not an Officer or
Director. To the extent not inconsistent with the provisions
of the Plan, the Committee may give a Grantee an election to
surrender an Option or Award in exchange for the grant of a
new Option or Award, and shall have the authority to amend or
modify an outstanding Stock Option Agreement or Restriction
Agreement, or to waive any provision thereof, provided that
the Grantee consents to such action.
4.2 Interpretation; Rules. Subject to the express provisions of
the Plan, the Committee also shall have complete authority to
interpret the Plan, to prescribe, amend, and rescind rules and
regulations relating to it, to determine the details and
provisions of each Stock Option Agreement, and to make all
other determinations necessary or advisable for the
administration of the Plan, including, without limitation, the
amending or altering of the Plan and any Options or Awards
granted hereunder as may be required to comply with or to
conform to any federal, state, or local laws or regulations.
4.3 No Liability. Neither any member of the Board nor any member
of the Committee shall be liable to any person for any act or
determination made in good faith with respect to the Plan or
any Option or Award granted hereunder.
4.4 Majority Rule. A majority of the members of the Committee
shall constitute a quorum, and any action taken by a majority
at a meeting at which a quorum is
6
<PAGE> 10
present, or any action taken without a meeting evidenced by a
writing executed by all the members of the Committee, shall
constitute the action of the Committee.
4.5 Company Assistance. The Company shall supply full and timely
information to the Committee on all matters relating to
eligible persons, their employment, death, retirement,
disability, or other termination of employment, and such other
pertinent facts as the Committee may require. The Company
shall furnish the Committee with such clerical and other
assistance as is necessary in the performance of its duties.
ARTICLE V
SHARES OF STOCK SUBJECT TO PLAN
5.1 Limitations. Subject to any antidilution adjustment pursuant
to the provisions of Section 5.2 hereof, the maximum number of
shares of Stock that may be issued hereunder shall be
2,000,000, and not more than 500,000 shares of Stock may be
made subject to Options to any individual in the aggregate in
any one fiscal year of the Company, such limitation to be
applied in a manner consistent with the requirements of, and
only to the extent required for compliance with, the exclusion
from the limitation on deductibility of compensation under
Section 162(m) of the Code. The number of shares of Stock
available for issuance hereunder shall automatically increase
on the first trading day each calendar year beginning January
1, 1999, by an amount equal to three percent (3%) of the
shares of Stock outstanding on the trading day immediately
preceding January 1; but in no event shall any such annual
increase exceed 500,000 shares (subject to adjustment under
Section 5.2). Any or all shares of Stock subject to the Plan
may be issued in any combination of Incentive Stock Options,
non-Incentive Stock Options, Restricted Stock, or SARs, and
the amount of Stock subject to the Plan may be increased from
time to time in accordance with Article X, provided that the
total number of shares of Stock issuable pursuant to Incentive
Stock Options may not be increased to more than 2,000,000
(other than pursuant to anti-dilution adjustments and the
annual increase provided above) without shareholder approval.
Shares subject to an Option or issued as an Award may be
either authorized and unissued shares or shares issued and
later acquired by the Company. The shares covered by any
unexercised portion of an Option or Award that has terminated
for any reason (except as set forth in the following
paragraph), or any forfeited portion of an Option or Award,
and shares tendered for cashless exercise and withheld for
taxes may again be optioned or awarded under the Plan, and
such shares shall not be considered as having been optioned or
issued in computing the number of shares of Stock remaining
available for option or award hereunder.
If Options are issued in respect of options to
acquire stock of any entity acquired, by merger or otherwise,
by the Company (or any subsidiary of the
7
<PAGE> 11
Company), to the extent that such issuance shall not be
inconsistent with the terms, limitations and conditions of
Code Section 422 or Rule 16b-3 under the Exchange Act, the
aggregate number of shares of Stock for which Options may be
granted hereunder shall automatically be increased by the
number of shares subject to the Options so issued; provided,
however, that the aggregate number of shares of Stock for
which Options may be granted hereunder shall automatically be
decreased by the number of shares covered by any unexercised
portion of an Option so issued that has terminated for any
reason, and the shares subject to any such unexercised portion
may not be optioned to any other person.
5.2 Antidilution.
(a) If (1) the outstanding shares of Stock are changed
into or exchanged for a different number or kind of
shares or other securities of the Company by reason
of merger, consolidation, reorganization,
recapitalization, reclassification, combination or
exchange of shares, or stock split or stock dividend,
(2) any spin-off, spin-out or other distribution of
assets materially affects the price of the Company's
stock, or (3) there is any assumption and conversion
to the Plan by the Company of an acquired company's
outstanding option grants, then:
(iii) the aggregate number and kind of shares of
Stock for which Options or Awards may be
granted hereunder shall be adjusted
proportionately by the Committee; and
(iv) the rights of Optionees (concerning the
number of shares subject to Options and the
Exercise Price) under outstanding Options
and the rights of the holders of Awards
(concerning the terms and conditions of the
lapse of any then-remaining restrictions),
shall be adjusted proportionately by the
Committee.
(b) In the event of an anticipated Change in Control or
the Company shall be a party to any reorganization,
involving merger, consolidation, or acquisition of
the stock or substantially all the assets of the
Company, the Board or the Committee, in its
discretion, may:
(i) notwithstanding other provisions hereof,
declare that all Options granted under the
Plan shall become exercisable immediately
notwithstanding the provisions of the
respective Stock Option Agreements regarding
exercisability, that all such Options shall
terminate 90 days after the Committee gives
written notice of the immediate right to
exercise all such Options and of the
decision to terminate all Options not
exercised within such 90-day period, and
that all then-remaining restrictions
pertaining to Awards under the Plan shall
immediately lapse; and/or
8
<PAGE> 12
(ii) notify all Grantees that all Options or
Awards granted under the Plan shall be
assumed by the successor corporation or
substituted on an equitable basis with
options or restricted stock issued by such
successor corporation.
(c) If the Company is to be liquidated or dissolved in
connection with a reorganization described in Section
5.2(b), the provisions of such Section shall apply.
In all other instances, the adoption of a plan of
dissolution or liquidation of the Company shall,
notwithstanding other provisions hereof, cause all
then-remaining restrictions pertaining to Awards
under the Plan to lapse, and shall cause every Option
outstanding under the Plan to terminate to the extent
not exercised prior to the adoption of the plan of
dissolution or liquidation by the shareholders,
provided that, notwithstanding other provisions
hereof, the Committee may declare all Options granted
under the Plan to be exercisable at any time on or
before the fifth business day following such adoption
notwithstanding the provisions of the respective
Stock Option Agreements regarding exercisability.
(d) The adjustments described in paragraphs (a) through
(c) of this Section 5.2, and the manner of their
application, shall be determined solely by the Board
or the Committee, and any such adjustment may provide
for the elimination of fractional share interests;
provided, however, that any adjustment made by the
Board or the Committee shall be made in a manner that
will not cause an Incentive Stock Option to be other
than an Incentive Stock Option under applicable
statutory and regulatory provisions. The adjustments
required under this Article V shall apply to any
successors of the Company and shall be made
regardless of the number or type of successive events
requiring such adjustments.
ARTICLE VI
OPTIONS
6.1 Types of Options Granted. The Committee may, under this Plan,
grant either Incentive Stock Options or Options which do not
qualify as Incentive Stock Options. Within the limitations
provided in this Plan, both types of Options may be granted to
the same person at the same time, or at different times, under
different terms and conditions, as long as the terms and
conditions of each Option are consistent with the provisions
of the Plan. Without limitation of the foregoing, Options may
be granted subject to conditions based on the financial
performance of the Company or any other factor the Committee
deems relevant.
6.2 Option Grant and Agreement. Each Option granted hereunder
shall be evidenced by minutes of a meeting or the written
consent of the Committee and by a written
9
<PAGE> 13
Stock Option Agreement executed by the Company and the
Optionee. The terms of the Option, including the Option's
duration, time or times of exercise, exercise price, whether
the Option is intended to be an Incentive Stock Option, and
whether the Option is to be accompanied by the right to
receive a Reload Option, shall be stated in the Stock Option
Agreement. No Incentive Stock Option may be granted more than
ten years after the earlier to occur of the Effective Date or
the date the Plan is approved by the Company's shareholders.
Separate Stock Option Agreements may be used for
Options intended to be Incentive Stock Options and those not
so intended, but any failure to use such separate agreements
shall not invalidate, or otherwise adversely affect the
Optionee's interest in, the Options evidenced thereby.
6.3 Optionee Limitation. The Committee shall not grant an
Incentive Stock Option to any person who, at the time the
Incentive Stock Option is granted:
(a) is not an employee of the Company or any of its
subsidiaries; or
(b) owns or is considered to own stock possessing at
least 10% of the total combined voting power of all
classes of stock of the Company or any of its parent
or subsidiary corporations; provided, however, that
this limitation shall not apply if at the time an
Incentive Stock Option is granted the Exercise Price
is at least 110% of the Fair Market Value of the
Stock subject to such Option and such Option by its
terms would not be exercisable after five years from
the date on which the Option is granted.
6.4 $100,000 Limitation. Except as provided below, the Committee
shall not grant an Incentive Stock Option to, or modify the
exercise provisions of outstanding Incentive Stock Options
held by, any person who, at the time the Incentive Stock
Option is granted (or modified), would thereby receive or hold
any Incentive Stock Options of the Company and any parent or
subsidiary of the Company, such that the aggregate Fair Market
Value (determined as of the respective dates of grant or
modification of each option) of the stock with respect to
which such Incentive Stock Options are exercisable for the
first time during any calendar year is in excess of $100,000
(or such other limit as may be prescribed by the Code from
time to time); provided that the foregoing restriction on
modification of outstanding Incentive Stock Options shall not
preclude the Committee from modifying an outstanding Incentive
Stock Option if, as a result of such modification and with the
consent of the Optionee, such Option no longer constitutes an
Incentive Stock Option; and provided that, if the $100,000
limitation (or such other limitation prescribed by the Code)
described in this Section 6.4 is exceeded, the Incentive Stock
Option, the granting or modification of which resulted in the
exceeding of such limit, shall be treated as an Incentive
Stock Option up to the limitation and the excess shall be
treated as an Option not qualifying as an Incentive Stock
Option.
10
<PAGE> 14
6.5 Exercise Price. The Exercise Price of the Stock subject to
each Option shall be determined by the Committee. Subject to
the provisions of Section 6.3(b) hereof, the Exercise Price of
an Incentive Stock Option shall not be less than the Fair
Market Value of the Stock as of the date the Option is granted
(or in the case of an Incentive Stock Option that is
subsequently modified, on the date of such modification).
6.6 Exercise Period. The period for the exercise of each Option
granted hereunder shall be determined by the Committee, but
the Stock Option Agreement with respect to each Option
intended to be an Incentive Stock Option shall provide that
such Option shall not be exercisable after the expiration of
ten years from the date of grant (or modification) of the
Option. In addition, no Incentive Stock Option granted under
the Plan shall be exercisable prior to shareholder approval of
the Plan.
6.7 Option Exercise.
(a) Unless otherwise provided in the Stock Option
Agreement or Section 6.6 hereof, an Option may be
exercised at any time or from time to time during the
term of the Option as to any or all full shares which
have become Purchasable under the provisions of the
Option, but not at any time as to less than 100
shares unless the remaining shares that have become
so Purchasable are less than 100 shares. The
Committee shall have the authority to prescribe in
any Stock Option Agreement that the Option may be
exercised only in accordance with a vesting schedule
during the term of the Option.
(b) An Option shall be exercised by (i) delivery to the
Company at its principal office a written notice of
exercise with respect to a specified number of shares
of Stock and (ii) payment to the Company at that
office of the full amount of the Exercise Price for
such number of shares in accordance with Section
6.7(c). If requested by an Optionee, an Option may be
exercised with the involvement of a stockbroker in
accordance with the federal margin rules set forth in
Regulation T (in which case the certificates
representing the underlying shares will be delivered
by the Company directly to the stockbroker).
(c) The Exercise Price is to be paid in full in cash upon
the exercise of the Option and the Company shall not
be required to deliver certificates for the shares
purchased until such payment has been made; provided,
however, that in lieu of cash, all or any portion of
the Exercise Price may be paid by tendering to the
Company shares of Stock duly endorsed for transfer
and owned by the Optionee, or by authorization to the
Company to withhold shares of Stock otherwise
issuable upon exercise of the Option, in each
11
<PAGE> 15
case to be credited against the Exercise Price at the
Fair Market Value of such shares on the date of
exercise (however, no fractional shares may be so
transferred, and the Company shall not be obligated
to make any cash payments in consideration of any
excess of the aggregate Fair Market Value of shares
transferred over the aggregate Exercise Price);
provided further, that the Board may provide in a
Stock Option Agreement (or may otherwise determine in
its sole discretion at the time of exercise) that, in
lieu of cash or shares, all or a portion of the
Exercise Price may be paid by the Optionee's
execution of a recourse note equal to the Exercise
Price or relevant portion thereof, subject to
compliance with applicable state and federal laws,
rules and regulations.
(d) In addition to and at the time of payment of the
Exercise Price, the Optionee shall pay to the Company
in cash the full amount of any federal, state, and
local income, employment, or other withholding taxes
applicable to the taxable income of such Optionee
resulting from such exercise. However, in the
discretion of the Committee any Stock Option
Agreement may provide that all or any portion of such
tax obligations, together with additional taxes not
exceeding the actual additional taxes to be owed by
the Optionee as a result of such exercise, may, upon
the irrevocable election of the Optionee, be paid by
tendering to the Company whole shares of Stock duly
endorsed for transfer and owned by the Optionee, or
by authorization to the Company to withhold shares of
Stock otherwise issuable upon exercise of the Option,
in either case in that number of shares having a Fair
Market Value on the date of exercise equal to the
amount of such taxes thereby being paid, and subject
to such restrictions as to the approval and timing of
any such election as the Committee may from time to
time determine to be necessary or appropriate to
satisfy the conditions of the exemption set forth in
Rule 16b-3 under the Exchange Act, if such rule is
applicable.
(e) The holder of an Option shall not have any of the
rights of a shareholder with respect to the shares of
Stock subject to the Option until such shares have
been issued and transferred to the Optionee upon the
exercise of the Option.
12
<PAGE> 16
6.8 Reload Options.
(a) The Committee may specify in a Stock Option Agreement
(or may otherwise determine in its sole discretion)
that a Reload Option shall be granted, without
further action of the Committee, (i) to an Optionee
who exercises an Option (including a Reload Option)
by surrendering shares of Stock in payment of amounts
specified in Sections 6.7(c) or 6.7(d) hereof, (ii)
for the same number of shares as are surrendered to
pay such amounts, (iii) as of the date of such
payment and at an Exercise Price equal to the Fair
Market Value of the Stock on such date, and (iv)
otherwise on the same terms and conditions as the
Option whose exercise has occasioned such payment,
subject to such other conditions or terms as the
Committee shall specify at the time such exercised
Option is granted.
(b) Unless provided otherwise in the Stock Option
Agreement, a Reload Option may not be exercised by an
Optionee (i) prior to the end of a one-year period
from the date that the Reload Option is granted, and
(ii) unless the Optionee retains beneficial ownership
of the shares of Stock issued to such Optionee upon
exercise of the Option referred to above in Section
6.8(a)(i) for a period of one year from the date of
such exercise.
6.9 Nontransferability of Option. No Option shall be transferable
by an Optionee other than by will or the laws of descent and
distribution or, in the case of non-Incentive Stock Options,
pursuant to a Qualified Domestic Relations Order, and no
Option shall be transferable by an Optionee who is a Section
16 Insider prior to shareholder approval of the Plan. During
the lifetime of an Optionee, Options shall be exercisable only
by such Optionee (or by such Optionee's guardian or legal
representative, should one be appointed).
6.10 Termination of Employment or Service. The Committee shall have
the power to specify, with respect to the Options granted to a
particular Optionee, the effect upon such Optionee's right to
exercise an Option of termination of such Optionee's
employment or service under various circumstances, which
effect may include immediate or deferred termination of such
Optionee's rights under an Option, or acceleration of the date
at which an Option may be exercised in full; provided,
however, that in no event may an Incentive Stock Option be
exercised after the expiration of ten years from the date of
grant thereof. Unless a Stock Option Agreement specifically
provides otherwise, in the event the recipient of an Option or
Award is terminated from his or her employment or other
service to the Company or its subsidiaries for Cause, Options
and Awards, whether vested or unvested, granted to such person
shall terminate immediately and shall not thereafter be
exercisable.
6.11 Employment Rights. Nothing in the Plan or in any Stock Option
Agreement shall confer on any person any right to continue in
the employ of the Company or any of its subsidiaries, or shall
interfere in any way with the right of the Company or any of
its subsidiaries to terminate such person's employment at any
time.
13
<PAGE> 17
6.12 Certain Successor Options. To the extent not inconsistent with
the terms, limitations and conditions of Code Section 422 and
any regulations promulgated with respect thereto, an Option
issued in respect of an option held by an employee to acquire
stock of any entity acquired, by merger or otherwise, by the
Company (or any subsidiary of the Company) may contain terms
that differ from those stated in this Article VI, but solely
to the extent necessary to preserve for any such employee the
rights and benefits contained in such predecessor option, or
to satisfy the requirements of Code Section 424(a).
6.13 Effect of Change in Control. The Committee may determine, at
the time of granting an Option or thereafter, that such Option
shall become exercisable on an accelerated basis in the event
that a Change in Control occurs with respect to the Company
(and the Committee shall have the discretion to modify the
definition of a Change in Control in a particular Option
Agreement). If the Committee finds that there is a reasonable
possibility that, within the succeeding six months, a Change
in Control will occur with respect to the Company, then the
Committee may determine that all outstanding Options shall be
exercisable on an accelerated basis.
ARTICLE VII
RESTRICTED STOCK
7.1 Awards of Restricted Stock. The Committee may grant Awards of
Restricted Stock, which shall be governed by a Restriction
Agreement between the Company and the Grantee. Each
Restriction Agreement shall contain such restrictions, terms,
and conditions as the Committee may, in its discretion,
determine, and may require that an appropriate legend be
placed on the certificates evidencing the subject Restricted
Stock. Shares of Restricted Stock granted pursuant to an Award
hereunder shall be issued in the name of the Grantee as soon
as reasonably practicable after the Award is granted, provided
that the Grantee has executed the Restriction Agreement
governing the Award, the appropriate blank stock powers, and,
in the discretion of the Committee, an escrow agreement and
any other documents which the Committee may require as a
condition to the issuance of such shares. If a Grantee shall
fail to execute the foregoing documents within any time period
prescribed by the Committee, the Award shall be void. At the
discretion of the Committee, shares issued in connection with
an Award may be held by the Company for the account of the
Grantee or deposited together with the stock powers with an
escrow agent designated by the Committee. Unless the Committee
determines otherwise and as set forth in the Restriction
Agreement, upon issuance of the shares, the Grantee shall have
all of the rights of a shareholder with respect to such
shares, including the right to vote the shares and to receive
all dividends or other distributions paid or made with respect
to the shares.
14
<PAGE> 18
7.2 Non-Transferability. Until any restrictions upon Restricted
Stock awarded to a Grantee shall have lapsed in a manner set
forth in Section 7.3, such shares of Restricted Stock shall
not be transferable other than by will or the laws of descent
and distribution, or pursuant to a Qualified Domestic
Relations Order, nor shall they be delivered to the Grantee.
7.3 Lapse of Restrictions. Restrictions upon Restricted Stock
awarded hereunder shall lapse at such time or times and on
such terms and conditions as the Committee may, in its
discretion, determine at the time the Award is granted or
thereafter.
7.4 Termination of Employment. The Committee shall have the power
to specify, with respect to each Award granted to any
particular Grantee, the effect upon such Grantee's rights with
respect to such Restricted Stock of the termination of such
Grantee's employment under various circumstances, which effect
may include immediate or deferred forfeiture of such
Restricted Stock or acceleration of the date at which any
then-remaining restrictions shall lapse.
7.5 Treatment of Dividends. At the time an Award of Restricted
Stock is made the Committee may, in its discretion, determine
that the payment to the Grantee of any dividends, or a
specified portion thereof, declared or paid on such Restricted
Stock shall be (i) deferred until the lapsing of the relevant
restrictions and (ii) held by the Company for the account of
the Grantee until such lapsing. In the event of such deferral,
there shall be credited at the end of each year (or portion
thereof) interest on the amount of the account at the
beginning of the year at a rate per annum determined by the
Committee. Payment of deferred dividends, together with
interest thereon, shall be made upon the lapsing of
restrictions imposed on such Restricted Stock, and any
dividends deferred (together with any interest thereon) in
respect of Restricted Stock shall be forfeited upon any
forfeiture of such Restricted Stock.
7.6 Delivery of Shares. Except as provided otherwise in Article IX
below, within a reasonable period of time following the lapse
of the restrictions on shares of Restricted Stock, the
Committee shall cause a stock certificate to be delivered to
the Grantee with respect to such shares and such shares shall
be free of all restrictions hereunder.
ARTICLE VIII
STOCK APPRECIATION RIGHTS
8.1 SAR Grants. The Committee, in its sole discretion, may grant
to any Grantee a SAR. The Committee may impose such conditions
or restrictions on the exercise of any SAR as it may deem
appropriate, including, without limitation, restricting the
time of exercise of the SAR to specified periods as may be
necessary to satisfy the requirements of Rule 16b-3.
15
<PAGE> 19
8.2 Determination of Price. The SAR Price shall be established by
the Committee in its sole discretion. The SAR Price shall not
be less than 100% of the Fair Market Value of the Stock on the
date the SAR is granted for a SAR issued in tandem with an
Incentive Stock Option.
8.3 Exercise of a SAR. Upon exercise of a SAR, the Grantee shall
be entitled, subject to the terms and conditions of this Plan
and the Agreement, to receive the excess for each share of
Stock being exercised under the SAR of (i) the Fair Market
Value of such share of Stock on the date of exercise over (ii)
the SAR Price for such share of Stock.
8.4 Payment for a SAR. At the sole discretion of the Committee,
the payment of such excess shall be made in (i) cash, (ii)
shares of Stock, or (iii) a combination of both. Shares of
Stock used for this payment shall be valued at their Fair
Market Value on the date of exercise of the applicable SAR.
8.5 Status of a SAR under the Plan. Shares of Stock subject to an
Award of a SAR shall be considered shares of Stock which may
be issued under the Plan for purposes of Section 5.1 hereof,
unless the Agreement making the Award of the SAR provides that
the exercise of such SAR results in the termination of an
unexercised Option for the same number of shares of Stock.
8.6 Termination of Employment. The Committee shall have the power
to specify, with respect to each SAR granted to any particular
Grantee, the effect upon such Grantee's rights with respect to
such SAR of the termination of such Grantee's employment under
various circumstances, which effect may include immediate or
deferred forfeiture of such SAR or acceleration of the date at
which any then-remaining restrictions shall lapse.
8.7 No Shareholder Rights. The Grantee shall have no rights as a
shareholder with respect to a SAR. In addition, no adjustment
shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or
distributions or rights except as provided in Section 5.2
hereof.
ARTICLE IX
STOCK CERTIFICATES
The Company shall not be required to issue or deliver any certificate
for shares of Stock purchased upon the exercise of any Option granted hereunder
or any portion thereof, or deliver any certificate for shares of Restricted
Stock granted hereunder, prior to fulfillment of all of the following
conditions:
16
<PAGE> 20
(a) The admission of such shares to listing on all stock exchanges
on which the Stock is then listed;
(b) The completion of any registration or other qualification of
such shares which the Committee shall deem necessary or
advisable under any federal or state law or under the rulings
or regulations of the Securities and Exchange Commission or
any other governmental regulatory body;
(c) The obtaining of any approval or other clearance from any
federal or state governmental agency or body which the
Committee shall determine to be necessary or advisable; and
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Board from time to time may
establish for reasons of administrative convenience.
Stock certificates issued and delivered to Grantees shall bear such
restrictive legends as the Company shall deem necessary or advisable pursuant to
applicable federal and state securities laws.
ARTICLE X
TERMINATION AND AMENDMENT
10.1 Termination and Amendment. The Board may at any time terminate
the Plan, and may at any time and from time to time and in any
respect amend the Plan; provided, however, that the Board
(unless its actions are approved or ratified by the
shareholders of the Company within twelve months of the date
that the Board amends the Plan) may not amend the Plan to:
(a) Increase the total number of shares of Stock issuable
pursuant to Incentive Stock Options, except as
contemplated in Sections 5.1 and 5.2;
(b) Change the class of employees eligible to receive
Incentive Stock Options that may participate in the
Plan; or
(c) Otherwise materially increase the benefits accruing
to recipients of Incentive Stock Options under the
Plan.
10.2 Effect on Grantee's Rights. No termination, amendment, or
modification of the Plan shall affect adversely a Grantee's
rights under a Stock Option Agreement or Restriction Agreement
without the consent of the Grantee or his legal
representative.
17
<PAGE> 21
ARTICLE XI
RELATIONSHIP TO OTHER COMPENSATION PLANS
The adoption of the Plan shall not affect any other stock option,
incentive, or other compensation plans in effect for the Company or any of its
subsidiaries; nor shall the adoption of the Plan preclude the Company or any of
its subsidiaries from establishing any other form of incentive or other
compensation plan for employees or Directors of the Company or any of its
subsidiaries.
ARTICLE XII
MISCELLANEOUS
12.1 Replacement or Amended Grants. At the sole discretion of the
Committee, and subject to the terms of the Plan, the Committee
may modify outstanding Options or Awards or accept the
surrender of outstanding Options or Awards and grant new
Options or Awards in substitution for them. However no
modification of an Option or Award shall adversely affect a
Grantee's rights under a Stock Option Agreement or Restriction
Agreement without the consent of the Grantee or his legal
representative.
12.2 Forfeiture for Competition. If a Grantee provides services to
a competitor of the Company or any of its subsidiaries,
whether as an employee, officer, director, independent
contractor, consultant, agent, or otherwise, such services
being of a nature that can reasonably be expected to involve
the skills and experience used or developed by the Grantee
while an employee of the Company or subsidiary, then that
Grantee's rights under any Options outstanding hereunder shall
be forfeited and terminated, and any shares of Restricted
Stock held by such Grantee subject to remaining restrictions
shall be forfeited, subject in each case to a determination to
the contrary by the Committee.
12.3 Plan Binding on Successors. The Plan shall be binding upon the
successors and assigns of the Company.
12.4 Singular, Plural; Gender. Whenever used herein, nouns in the
singular shall include the plural, and the masculine pronoun
shall include the feminine gender.
12.5 Headings, etc., No Part of Plan. Headings of Articles and
Sections hereof are inserted for convenience and reference;
they do not constitute part of the Plan.
18
<PAGE> 22
12.6 Interpretation. With respect to Section 16 Insiders,
transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under
the Exchange Act. To the extent any provision of the Plan or
action by the Plan administrators fails to so comply, it shall
be deemed void to the extent permitted by law and deemed
advisable by the Plan administrators.
19
<PAGE> 23
Exhibit A to
The Towne Services, Inc.
1998 Stock Option Plan -
Form of Stock Option Agreement
TOWNE SERVICES, INC.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement"), entered into as of this
____ day of _________, ____, by and between Towne Services, Inc., a Georgia
corporation (the "Company"), and _________________ (the "Optionee").
WHEREAS, effective as of May 19, 1998, the Board of Directors of the
Company adopted a stock option plan known as the "Towne Services, Inc. 1998
Stock Option Plan" (the "Plan"), and recommended that the Plan be approved by
the Company's shareholders; and
WHEREAS, the Committee has granted the Optionee a stock option to
purchase the number of shares of the Company's common stock as set forth below,
and in consideration of the granting of that stock option the Optionee intends
to remain in the employ of the Company; and
WHEREAS, the Company and the Optionee desire to enter into a written
agreement with respect to such option in accordance with the Plan.
NOW, THEREFORE, as an employment incentive and to encourage stock
ownership, and also in consideration of the mutual covenants contained herein,
the parties hereto agree as follows.
1. Incorporation of Plan. This option is granted pursuant to the
provisions of the Plan and the terms and definitions of the
Plan are incorporated herein by reference and made a part
hereof. A copy of the Plan has been delivered to, and receipt
is hereby acknowledged by, the Optionee.
2. Grant of Option. Subject to the terms, restrictions,
limitations and conditions stated herein, the Company hereby
evidences its grant to the Optionee, not in lieu of salary or
other compensation, of the right and option (the "Option") to
purchase all or any part of the number of shares of the
Company's Common Stock, no par value (the "Stock"), set forth
on Schedule A attached hereto and incorporated herein by
reference. The Option shall be exercisable in the amounts and
at the time specified on Schedule A. The Option shall expire
and shall not be exercisable on the date specified on Schedule
A or on such earlier date as determined pursuant to Section 8,
9, or 10 hereof. Schedule A states whether the Option is
intended to be an Incentive Stock Option.
i
<PAGE> 24
3. Purchase Price. The price per share to be paid by the Optionee
for the shares subject to this Option (the "Exercise Price")
shall be as specified on Schedule A, which price shall be an
amount not less than the Fair Market Value of a share of Stock
as of the Date of Grant (as defined in Section 11 below) if
the Option is an Incentive Stock Option.
4. Exercise Terms. The Optionee must exercise the Option for at
least the lesser of 100 shares or the number of shares of
Purchasable Stock as to which the Option remains unexercised.
In the event this Option is not exercised with respect to all
or any part of the shares subject to this Option prior to its
expiration, the shares with respect to which this Option was
not exercised shall no longer be subject to this Option.
5. Option Non-Transferable. No Option shall be transferable by an
Optionee other than by will or the laws of descent and
distribution or, in the case of non-Incentive Stock Options,
pursuant to a Qualified Domestic Relations Order, and no
Option shall be transferable by an Optionee who is a Section
16 Insider prior to shareholder approval of the Plan. During
the lifetime of an Optionee, Options shall be exercisable only
by such Optionee (or by such Optionee's guardian or legal
representative, should one be appointed).
6. Notice of Exercise of Option. This Option may be exercised by
the Optionee, or by the Optionee's administrators, executors
or personal representatives, by a written notice (in
substantially the form of the Notice of Exercise attached
hereto as Schedule B) signed by the Optionee, or by such
administrators, executors or personal representatives, and
delivered or mailed to the Company as specified in Section 14
hereof to the attention of the President or such other officer
as the Company may designate. Any such notice shall (a)
specify the number of shares of Stock which the Optionee or
the Optionee's administrators, executors or personal
representatives, as the case may be, then elects to purchase
hereunder, (b) contain such information as may be reasonably
required pursuant to Section 12 hereof, and (c) be accompanied
by (i) a certified or cashier's check payable to the Company
in payment of the total Exercise Price applicable to such
shares as provided herein, (ii) shares of Stock owned by the
Optionee and duly endorsed or accompanied by stock transfer
powers having a Fair Market Value equal to the total Exercise
Price applicable to such shares purchased hereunder, or (iii)
a certified or cashier's check accompanied by the number of
shares of Stock whose Fair Market Value when added to the
amount of the check equals the total Exercise Price applicable
to such shares purchased hereunder. Upon receipt of any such
notice and accompanying payment, and subject to the terms
hereof, the Company agrees to issue to the Optionee or the
Optionee's administrators, executors or personal
representatives, as the case may be, stock certificates for
the number of shares specified in such notice registered in
the name of the person exercising this Option.
ii
<PAGE> 25
7. Adjustment in Option. The number of shares subject to this
Option, the Exercise Price and other matters are subject to
adjustment during the term of this Option in accordance with
Section 5.2 of the Plan.
8. Termination of Employment.
(a) Except as otherwise specified in Schedule A hereto,
in the event of the termination of the Optionee's
employment with the Company or any of its
subsidiaries, other than a termination that is either
(i) for Cause, (ii) voluntary on the part of the
Optionee and without written consent of the Company,
or (iii) for reasons of death or disability or
retirement, the Optionee may exercise this Option at
any time within 90 days after such termination to the
extent of the number of shares which were Purchasable
hereunder at the date of such termination.
(b) Except as specified in Schedule A attached hereto, in
the event of a termination of the Optionee's
employment that is either (i) for Cause or (ii)
voluntary on the part of the Optionee and without the
written consent of the Company, this Option, to the
extent not previously exercised, shall terminate
immediately and shall not thereafter be or become
exercisable.
(c) Unless and to the extent otherwise provided in
Exhibit A hereto, in the event of the retirement of
the Optionee at the normal retirement date as
prescribed from time to time by the Company or any
subsidiary, the Optionee shall continue to have the
right to exercise any Options for shares which were
Purchasable at the date of the Optionee's retirement
(provided that, on the date which is three months
after the date of retirement, the Options will become
void and unexercisable unless on the date of
retirement the Optionee enters into a noncompete
agreement with Towne Services, Inc. and continues to
comply with such noncompete agreement). This Option
does not confer upon the Optionee any right with
respect to continuance of employment by the Company
or by any of its subsidiaries. This Option shall not
be affected by any change of employment so long as
the Optionee continues to be an employee of the
Company or one of its subsidiaries.
9. Disabled Optionee. In the event of termination of employment
because of the Optionee's becoming a Disabled Optionee, the
Optionee (or his or her personal representative) may exercise
this Option, within a period ending on the earlier of (a) the
last day of the one year period following the Optionee's death
or (b) the expiration date of this Option, to the extent of
the number of shares which were Purchasable hereunder at the
date of such termination.
iii
<PAGE> 26
10. Death of Optionee. Except as otherwise set forth in Schedule A
with respect to the rights of the Optionee upon termination of
employment under Section 8(a) above, in the event of the
Optionee's death while employed by the Company or any of its
subsidiaries or within three months after a termination of
such employment (if such termination was neither (i) for cause
nor (ii) voluntary on the part of the Optionee and without the
written consent of the Company), the appropriate persons
described in Section 6 hereof or persons to whom all or a
portion of this Option is transferred in accordance with
Section 5 hereof may exercise this Option at any time within a
period ending on the earlier of (a) the last day of the one
year period following the Optionee's death or (b) the
expiration date of this Option. If the Optionee was an
employee of the Company at the time of death, this Option may
be so exercised to the extent of the number of shares that
were Purchasable hereunder at the date of death. If the
Optionee's employment terminated prior to his or her death,
this Option may be exercised only to the extent of the number
of shares covered by this Option which were Purchasable
hereunder at the date of such termination.
11. Date of Grant. This Option was granted by the Board of
Directors of the Company on the date set forth in Schedule A
(the "Date of Grant").
12. Compliance with Regulatory Matters. The Optionee acknowledges
that the issuance of capital stock of the Company is subject
to limitations imposed by federal and state law and the
Optionee hereby agrees that the Company shall not be obligated
to issue any shares of Stock upon exercise of this Option that
would cause the Company to violate law or any rule,
regulation, order or consent decree of any regulatory
authority (including without limitation the Securities and
Exchange Commission) having jurisdiction over the affairs of
the Company. The Optionee agrees that he or she will provide
the Company with such information as is reasonably requested
by the Company or its counsel to determine whether the
issuance of Stock complies with the provisions described by
this Section 12.
13. Restriction on Disposition of Shares. The shares purchased
pursuant to the exercise of an Incentive Stock Option shall
not be transferred by the Optionee except pursuant to the
Optionee's will, or the laws of descent and distribution,
until such date which is the later of two years after the
grant of such Incentive Stock Option or one year after the
transfer of the shares to the Optionee pursuant to the
exercise of such Incentive Stock Option.
14. Miscellaneous.
(a) This Agreement shall be binding upon the parties
hereto and their representatives, successors and
assigns.
iv
<PAGE> 27
(b) This Agreement is executed and delivered in, and
shall be governed by the laws of, the State of
Georgia.
(c) Any requests or notices to be given hereunder shall
be deemed given, and any elections or exercises to be
made or accomplished shall be deemed made or
accomplished, upon actual delivery thereof to the
designated recipient, or three days after deposit
thereof in the United States mail, registered, return
receipt requested and postage prepaid, addressed, if
to the Optionee, at the address set forth below and,
if to the Company, to the executive offices of the
Company at 3295 River Exchange Drive, Suite 350,
Norcross, Georgia 30092.
(d) This Agreement may not be modified except in writing
executed by each of the parties hereto.
IN WITNESS WHEREOF, the Board of Directors of the Company has caused
this Stock Option Agreement to be executed on behalf of the Company and the
Company's seal to be affixed hereto and attested by the Secretary or an
Assistant Secretary of the Company, and the Optionee has executed this Stock
Option Agreement under seal, all as of the day and year first above written.
TOWNE SERVICES, INC. OPTIONEE
By:
------------------------------- -------------------------------
Name: Name:
Title: Address:
ATTEST:
- ------------------------------------
Secretary/Assistant Secretary
[SEAL]
v
<PAGE> 28
SCHEDULE A
TO
STOCK OPTION AGREEMENT
BETWEEN
TOWNE SERVICES, INC.
AND
_________________________
Dated: _______________
1. Number of Shares Subject to Option: _________________ shares.
2. This Option (Check one) [ ] is [ ] is not an Incentive Stock Option.
3. Option Exercise Price: $_____________ per share.
4. Date of Grant: ___________________
5. Option Vesting Schedule:
Check one:
( ) Options are exercisable with respect to all shares on
or after the date hereof
( ) Options are exercisable with respect to the number
of shares indicated below on or after the date
indicated next to the number of shares:
<TABLE>
<CAPTION>
No. of Shares Vesting Date
------------- ------------
<S> <C>
</TABLE>
6. Option Exercise Period:
Check One:
( ) All options expire and are void unless exercised on
or before ______________, 199___.
( ) Options expire and are void unless exercised on or
before the date indicated next to the number of
shares:
<TABLE>
<CAPTION>
No. of Shares Expiration Date
------------- ---------------
<S> <C>
</TABLE>
vi
<PAGE> 29
7. Effect of Termination of Employment of Optionee (if different from that
set forth in Sections 8, 9 and 10 of the Stock Option Agreement):
vii
<PAGE> 30
SCHEDULE B
NOTICE OF EXERCISE
The undersigned hereby notifies Towne Services, Inc. (the
"Company") of this election to exercise the undersigned's stock option to
purchase __________ shares of the Company's common stock, no par value (the
"Common Stock"), pursuant to the Stock Option Agreement (the "Agreement")
between the undersigned and the Company dated ________________. Accompanying
this Notice is (1) a certified or a cashier's check in the amount of $_________
payable to the Company, and/or (2) __________ shares of the Company's Common
Stock presently owned by the undersigned and duly endorsed or accompanied by
stock transfer powers, having an aggregate Fair Market Value (as defined in The
Towne Services, Inc. 1998 Stock Option Plan) as of the date hereof of
$____________, such amounts being equal, in the aggregate, to the purchase price
per share set forth in Section 3 of the Agreement multiplied by the number of
shares being purchased hereby (in each instance subject to appropriate
adjustment pursuant to Section 5.2 of the Agreement).
IN WITNESS WHEREOF, the undersigned has set his hand and seal,
this _____ day of ______________, _______.
OPTIONEE [OR OPTIONEE'S
ADMINISTRATOR,
EXECUTOR OR PERSONAL
REPRESENTATIVE]
--------------------------------------------
Name:
Position (if other than Optionee):
viii
<PAGE> 1
EXHIBIT 10.3
TOWNE SERVICES, INC.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement"), entered into as of this
____ day of _____________, _____, by and between Towne Services, Inc., a Georgia
corporation (the "Company"), and __________________ (the "Optionee").
WHEREAS, the Board of Directors of the Company agreed as of
______________, _____, to grant the Optionee a stock option to purchase the
number of shares of the Company's Common Stock as set forth below;
WHEREAS, the Company and the Optionee desire to enter into a written
agreement with respect to such option.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereto agree as follows.
1. Grant of Option. Subject to the terms, restrictions,
limitations, and conditions stated herein, the Company hereby evidences its
grant to the Optionee of the right and option (the "Option") to purchase all or
any part of the number of shares of the Company's Common Stock, no par value
(the "Stock"), set forth on Schedule A attached hereto and incorporated herein
by reference. The Option shall be exercisable in the amounts and at the time
specified on Schedule A. The Option shall expire and shall not be exercisable on
the date specified on Schedule A or on such earlier date as determined pursuant
to Section 9 hereof.
2. Purchase Price. The price per share to be paid by the Optionee
for the shares subject to this Option (the "Exercise Price") shall be as
specified on Schedule A.
3. Exercise Terms. The Optionee must exercise the Option for at
least the lesser of 100 shares or the number of shares of Purchasable Stock as
to which the Option remains unexercised. If this Option is not exercised with
respect to all or any part of the shares subject to this Option prior to its
expiration, the shares with respect to which this Option was not exercised shall
no longer be subject to this Option.
4. Restrictions on Transferability. No Option shall be
transferable by an Optionee other than by will or the laws of descent and
distribution or pursuant to a Qualified Domestic Relations Order. During the
lifetime of an Optionee, Options shall be exercisable only by such Optionee (or
by such Optionee's guardian or legal representative, should one be appointed).
5. Notice of Exercise of Option. This Option may be exercised by
the Optionee, or by the Optionee's administrators, executors or personal
representatives, by a written notice (in substantially the form of the Notice of
Exercise attached hereto as Schedule B) signed by the Optionee, or by such
administrators, executors or personal representatives, and delivered or mailed
to the Company as specified in Section 14 hereof to the attention of the
President or such other officer as the Company may designate. Any such notice
shall (a) specify the number of shares of Stock which the Optionee or the
Optionee's administrators, executors or personal representatives, as the case
may be, then elects to purchase hereunder, (b) contain such information as may
be reasonably required by the Company, and (c) be accompanied by (i) a certified
or cashier's check payable to the Company in payment of the total Exercise Price
applicable to such shares as provided herein, (ii) shares of Stock owned by the
Optionee and duly endorsed or accompanied by stock transfer powers having a Fair
Market Value (as determined
<PAGE> 2
by the Board of Directors) equal to the total Exercise Price applicable to such
shares purchased hereunder, or (iii) a certified or cashier's check accompanied
by the number of shares of Stock whose Fair Market Value when added to the
amount of the check equals the total Exercise Price applicable to such shares
purchased hereunder. Upon receipt of any such notice and accompanying payment,
and subject to the terms hereof, the Company agrees to issue to the Optionee or
the Optionee's administrators, executors or personal representatives, as the
case may be, stock certificates for the number of shares specified in such
notice registered in the name of the person exercising this Option.
6. Adjustment in Option. The number of Shares subject to this
Option, the Exercise Price and other matters are subject to adjustment during
the term of this Option as appropriate for stock splits, stock dividends, and
similar events.
7. Termination of Employment.
(a) Except as may otherwise be specified in Schedule A
hereto, in the event of the termination of the Optionee's employment with the
Company or any of its Subsidiaries, the Optionee may exercise this Option at any
time within 30 days after such termination to the extent of the number of shares
which were Purchasable hereunder at the date of such termination.
(b) Unless and to the extent otherwise provided in
Schedule A hereto, in the event of the retirement of the Optionee at the normal
retirement date as prescribed from time to time by the Company or any
Subsidiary, the Optionee shall continue to have the right to exercise any
Options for shares which were Purchasable at the date of the Optionee's
retirement. This Option does not confer upon the Optionee any right with respect
to continuance of employment by the Company or by any of its Subsidiaries. This
Option shall not be affected by any change of employment so long as the Optionee
continues to be an employee of the Company or one of its Subsidiaries.
8. Disabled Optionee. In the event of termination of employment
because of the Optionee's becoming a Disabled Optionee, the Optionee (or his or
her personal representative) may exercise this Option at any time within three
months after such termination to the extent of the number of shares which were
Purchasable hereunder at the date of such termination.
9. Death of Optionee. Except as otherwise may be set forth in
Schedule A with respect to the rights of the Optionee upon termination of
employment under Section 8(a) above, hereof, in the event of the Optionee's
death while employed by the Company or any of its Subsidiaries or within three
months after a termination of such employment, the appropriate persons described
in Section 6 hereof or persons to whom all or a portion of this Option is
transferred in accordance with Section 5 hereof may exercise this Option at any
time within a period ending on the earlier of (a) the last day of the three
month period following the Optionee's death or (b) the expiration date of this
Option. If the Optionee was an employee of the Company at the time of death,
this Option may be so exercised to the extent of the number of shares that were
Purchasable hereunder at the date of death. If the Optionee's employment
terminated prior to his or her death, this Option may be exercised only to the
extent of the number of shares covered by this Option which were Purchasable
hereunder at the date of such termination.
9. Date of Grant. This Option was granted by the Board of
Directors of the Company on the date set forth in Schedule A (the "Date of
Grant").
10. Compliance with Regulatory Matters. The Optionee acknowledges
that the issuance of capital stock of the Company is subject to limitations
imposed by federal and state law and the Optionee hereby agrees that the Company
shall not be obligated to issue any shares of Stock upon exercise of this
<PAGE> 3
Option that would cause the Company to violate law or any rule, regulation,
order or consent decree of any regulatory authority (including without
limitation the Securities and Exchange Commission) having jurisdiction over the
affairs of the Company. The Optionee agrees that he or she will provide the
Company with such information as is reasonably requested by the Company or its
counsel to determine whether the issuance of Stock complies with the provisions
described by this Section.
11. Restriction on Disposition of Shares. The shares purchased
pursuant to the exercise of an Incentive Stock Option shall not be transferred
by the Optionee except pursuant to the Optionee's will or the laws of descent
and distribution until such date which is the later of two years after the grant
of such Incentive Stock Option or one year after the transfer of the shares to
the Optionee pursuant to the exercise of such Incentive Stock Option.
12. Miscellaneous.
(a) This Agreement shall be binding upon the parties
hereto and their representatives, successors and assigns.
(b) This Agreement is executed and delivered in, and
shall be governed by the laws of, the State of Georgia.
(c) Any requests or notices to be given hereunder shall
be deemed given, and any elections or exercises to be made or accomplished shall
be deemed made or accomplished, upon actual delivery thereof to the designated
recipient, or three days after deposit thereof in the United States mail,
registered, return receipt requested and postage prepaid, addressed, if to the
Optionee, at the address set forth below and, if to the Company, to the
executive offices of the Company.
(d) This Agreement may not be modified except in writing
executed by each of the parties hereto.
(e) THE OPTIONEE ACKNOWLEDGES THAT THIS OPTION AND ALL
SHARES OF STOCK ACQUIRED PURSUANT TO THE EXERCISE OF THIS OPTION ARE DEEMED TO
BE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144 PROMULGATED PURSUANT TO THE
SECURITIES ACT OF 1933 AND, THEREFORE, RESALE OF SUCH SHARES MUST BE MADE
PURSUANT TO THE REGISTRATION PROVISIONS OF SUCH ACT OR AN EXEMPTION THEREFROM.
<PAGE> 4
IN WITNESS WHEREOF, the Board of Directors of the Company has caused
this Stock Option Agreement to be executed on behalf of the Company and the
Company's seal to be affixed hereto and attested by the Secretary or an
Assistant Secretary of the Company, and the Optionee has executed this Stock
Option Agreement under seal, all as of the day and year first above written.
COMPANY:
TOWNE SERVICES, INC.
Attest:
By:
- ------------------------------- ------------------------------------
Secretary
Name:
[SEAL] ----------------------------
Title:
---------------------------
OPTIONEE:
---------------------------------------
Name:
---------------------------
Address:
-------------------------
-------------------------
<PAGE> 5
SCHEDULE A
TO
STOCK OPTION AGREEMENT
BETWEEN
TOWNE SERVICES, INC.
AND
_________________________
Dated ___________________
1. Number of Shares Subject to Option: ___________ shares of the Company's
Common Stock
2. This Option (Check one) [ ] is [x] is not an Incentive Stock Option.
3. Option Exercise Price: $_______ per share.
4. Date of Grant:
5. Option Vesting Schedule:
Check one:
( ) Options are exercisable with respect to all shares on
or after the date hereof
( ) Options are exercisable with respect to the number
of shares indicated below on or after the date
indicated next to the number of shares:
6. Option Exercise Period:
Options expire and are void unless exercised on or before
_________________.
A-1
<PAGE> 6
SCHEDULE B
TO
STOCK OPTION AGREEMENT
BETWEEN
TOWNE SERVICES, INC.
AND
________________________
Dated ____________________
NOTICE OF EXERCISE
The undersigned hereby notifies Towne Services, Inc. (the
"Company") of this election to exercise the undersigned's stock option to
purchase ______ shares of the Company's Common Stock, no par value (the "Common
Stock"), pursuant to the Stock Option Agreement (the "Agreement") between the
undersigned and the Company dated ________________. Accompanying this Notice is
(1) a certified or a cashier's check in the amount of $________________ payable
to the Company, and/or (2) _______________ shares of the Company's Common Stock
presently owned by the undersigned and duly endorsed or accompanied by stock
transfer powers, having an aggregate Fair Market Value as of the date hereof of
$__________________, such amounts being equal, in the aggregate, to the purchase
price per share set forth in Section 3 of the Agreement multiplied by the number
of shares being purchased hereby (in each instance subject to appropriate
adjustment pursuant to Section 7 of the Agreement).
IN WITNESS WHEREOF, the undersigned has set his hand and seal,
this ___th day of ___________, ____.
OPTIONEE [OR OPTIONEE'S
ADMINISTRATOR,
EXECUTOR OR PERSONAL
REPRESENTATIVE]
--------------------------------------------
Name:
Position (if other than Optionee):
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made by and between EBB
Holdings, Inc., a Georgia corporation (the "Company"), and DREW W. EDWARDS, an
individual resident of Georgia (the "Executive"), as of this 15th day of
October, 1995.
The Company presently employs the Executive as its Chairman and Chief
Executive Officer. The Board of Directors of the Company (the "Board")
recognizes that the Executive's contribution to the growth and success of the
Company is substantial. The Board desires to provide for the employment of the
Executive which the Board has determined will reinforce and encourage the
dedication of the Executive to the Company and will promote the best interests
of the Company and its stockholders. The Executive is willing to serve the
Company on the terms and conditions herein provided.
In consideration of the foregoing, the mutual covenants contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto, intending to be legally
bound, hereby agree that on the Effective Date:
1. Employment. The Company shall employ the Executive,
and the Executive shall serve the Company, as Chairman and Chief Executive
Officer upon the terms and conditions set forth herein. The Executive shall have
such authority and responsibilities consistent with his position and which may
be set forth in the Company's bylaws or assigned by the Board from time to time.
The Executive shall devote his full business time, attention, skill and efforts
to the performance of his duties hereunder, except during periods of illness or
periods of vacation and leaves of absence consistent with Company policy. The
Executive may devote reasonable periods of time to serve as a director or
advisor to other organizations, to perform charitable and other community
activities, and to manage his personal investments; provided, however, that such
activities do not materially interfere with the performance of his duties
hereunder and are not in conflict or competitive with, or adverse to, the
interests of the Company.
2. Term. Unless earlier terminated as provided herein,
the Executive's employment under this Agreement shall be for a continuing term
(the "Term") of three years, which shall be extended automatically (without
further action of the Company or the Executive) each day for an additional day
so that the remaining term shall continue to be three years; provided, however,
that either party (in the case of the Company, by the Required Vote if the
Initial Public Offering has not yet occurred) may at any time, by written notice
to the other, fix the Term to a finite term of three years, without further
automatic extension, commencing with the date of such notice.
3. Compensation and Benefits.
a. The Company shall pay the Executive a salary at a
rate of not less than $62,000 per annum in accordance with the salary payment
practices of the Company. The Board (or an appropriate committee of the Board)
shall review the Executive's salary at least annually (on October 15, 1996, for
the first review) and may increase the Executive's base salary if it
<PAGE> 2
determines in its sole discretion that an increase is appropriate. The Company
shall also pay to the Executive same amount of directors' fees, if any, that are
paid to any of the directors.
b. The Executive shall participate in a management
incentive program and shall be eligible to receive quarterly bonus payments
based upon achievement of targeted levels of performance and such other criteria
as the Board (or an appropriate committee of the Board) shall establish from
time to time pursuant to that program. Within twelve months of the date hereof,
the Board shall establish such targeted goals. Prior to that time, the
determination of any bonus amount shall be within the Board's discretion, except
that if no targeted goals and bonus amount have been set within this twelve
month period, the annual bonus shall be designated as 100% of the Executive's
annual base salary then in effect, and this amount shall apply for all purposes
of this Agreement until the Board sets such target goals and a bonus amount. In
addition, the Board shall annually consider the Executive's performance and
determine if any additional bonus is appropriate.
c. The Company anticipates adopting a stock option plan
and, when it does, the Executive shall participate in the plan and be eligible
for the grant of stock options, restricted stock and other awards thereunder.
d. The Executive shall participate in all retirement,
welfare, deferred compensation, life and health insurance, and other benefit
plans or programs of the Company now or hereafter applicable to the Executive or
applicable generally to employees of the Company or to a class of employees that
includes senior executives of the Company; provided, however, that during any
period during the Term that the Executive is subject to a Disability, and during
the 365-day period of physical or mental infirmity leading up to the Executive's
Disability, the amount of the Executive's compensation provided under this
Section 3 shall be reduced by the sum of the amounts, if any, paid to the
Executive for the same period under any disability benefit or pension plan of
the Company or any of its subsidiaries.
e. The Executive currently leases a 1996 Jeep Grand
Cherokee pursuant to a twenty-four month lease with World Omni Limited (a copy
of which is attached). The Company shall pay all costs and expenses incurred
pursuant to this lease, including the monthly lease payment (which shall not
exceed $375.00) and all excess mileage penalties. After the termination of the
lease, the Company shall provide to the Executive an automobile owned or leased
by the Company of a make and model appropriate to the Executive's status. The
Company shall also reimburse all reasonable expenses incurred by the Executive
in connection with the operation and maintenance of the automobile, including
for gasoline, insurance, tires and similar items.
f. The Company shall reimburse the Executive's
reasonable expenses for dues and capital assessments for country and dining club
memberships currently held by the Executive; provided, however, that if the
Executive during the term of his employment with the Company ceases his
membership in any such clubs and any bonds or other capital payments made by the
Company are repaid to the Executive, the Executive shall pay over such payments
to the Company.
2
<PAGE> 3
g. The Company shall reimburse the Executive for travel,
seminar, and other expenses related to the Executive's duties which are incurred
and accounted for in accordance with the historic practices of the Company.
4. Termination.
a. The Executive's employment under this Agreement may
be terminated prior to the end of the Term only as follows:
(i) upon the death of the Executive;
(ii) by the Company (pursuant to the Required
Vote if the Initial Public Offering has not yet occurred) due
to the Disability of the Executive upon delivery of a Notice
of Termination to the Executive;
(iii) by the Company (pursuant to the Required
Vote if the Initial Public Offering has not yet occurred) for
Cause upon delivery of a Notice of Termination to the
Executive; and
(iv) by the Executive for any reason upon
delivery of a Notice of Termination to the Company.
b. If the Executive's employment with the Company shall
be terminated during the Term (i) by reason of the Executive's death, or (ii) by
the Company for Disability or Cause, the Company shall pay to the Executive (or
in the case of his death, the Executive's estate) within fifteen days after the
Termination Date a lump sum cash payment equal to the Accrued Compensation and,
if such termination is other than by the Company for Cause, the Pro Rata Bonus.
c. If the Executive's employment with the Company shall
be terminated by the Company in violation of this Agreement or by the Executive
for any reason after a Change in Control, in addition to other rights and
remedies available in law or equity, the Executive shall be entitled to the
following:
(i) the Company shall pay the Executive in cash
within fifteen days of the Termination Date an amount equal to
all Accrued Compensation and the Pro Rata Bonus;
(ii) the Company shall pay to the Executive in
cash at the end of each of the thirty-six consecutive 30-day
periods following the Termination Date an amount equal to
one-twelfth of the sum of the Base Amount and the Bonus
Amount.
(iii) for the period from the Termination Date
through the date of the Executive's death (the "Continuation
Period"), the Company shall at its expense on behalf of the
Executive and his dependents and beneficiaries pay the life
insurance,
3
<PAGE> 4
disability, medical, dental and hospitalization benefits
provided (x) to the Executive at any time during the 90-day
period prior to the Change in Control or at any time
thereafter or (y) to other similarly situated executives who
are in the employ of the Company during the Continuation
Period. The coverage and benefits (including deductibles and
costs) provided in this Section 4(c)(iii) during the
Continuation Period shall be no less favorable to the
Executive and his dependents and beneficiaries than the most
favorable of such coverages and benefits during any of the
periods referred to in clauses (x) and (y) above. The
Company's obligation hereunder with respect to the foregoing
benefits shall be limited to the extent that the Executive
obtains any such benefits pursuant to a subsequent employer's
benefit plans, in which case the Company may reduce the
coverage of any benefits it is required to provide the
Executive hereunder as long as the aggregate coverages and
benefits of the combined benefit plans is no less favorable to
the Executive than the coverages and benefits required to be
provided hereunder. This subsection (iii) shall not be
interpreted so as to limit any benefits to which the Executive
or his dependents or beneficiaries may be entitled under any
of the Company's employee benefit plans, programs or practices
following the Executive's termination of employment, including
without limitation, retiree medical and life insurance
benefits; and
(iv) the restrictions on any outstanding
incentive awards (including stock options) granted to the
Executive under any stock option or other incentive plan or
arrangement shall lapse and such incentive award shall become
100% vested, all stock options and stock appreciation rights
granted to the Executive shall become immediately exercisable
and shall become 100% vested, and all stock options granted to
the Executive shall become 100% vested.
d. If the Executive's employment with the Company is
terminated by the Executive within 12 months of the date hereof for any reason
other than as a result of a Change in Control or the Company's breach of this
Agreement, the Executive will forfeit 100% of his stock in the Company.
e. The Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Executive in any subsequent employment
except as provided in Section 4(c)(iii).
f. In the event that any payment or benefit (within the
meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended
(the "Code")) to the Executive or for his benefit paid or payable or distributed
or distributable pursuant to the terms of this Agreement or otherwise in
connection with, or arising out of, his employment with the Company or a change
in ownership or effective control of the Company or of a substantial portion of
its assets (a "Payment" or "Payments"), would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are incurred by
the Executive with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive will be entitled to receive an additional
4
<PAGE> 5
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties, other than interest
and penalties imposed by reason of the Executive's failure to file timely a tax
return or pay taxes shown due on his return, imposed with respect to such taxes
and the Excise Tax), including any Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.
g. The severance pay and benefits provided for in this
Section 4 shall be in lieu of any other severance or termination pay to which
the Executive may be entitled under any Company severance or termination plan,
program, practice or arrangement. The Executive's entitlement to any other
compensation or benefits shall be determined in accordance with the Company's
employee benefit plans and other applicable programs, policies and practices
then in effect.
5. Trade Secrets. The Executive shall not, at any time,
either during the Term of his employment or after the Termination Date, if such
Termination is for Cause or at the Executive's election for any reason prior to
a Change in Control, use or disclose any Trade Secrets of the Company, except in
fulfillment of his duties as the Executive during his employment, for so long as
the pertinent information or data remain Trade Secrets, whether or not the Trade
Secrets are in written or tangible form.
6. Successors; Binding Agreement
a. This Agreement shall be binding upon and shall inure
to the benefit of the Company, its Successors and Assigns and the Company shall
require any Successors and Assigns to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place.
b. Neither this Agreement nor any right or interest
hereunder shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except by will or by the laws of descent
and distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal personal representative.
7. Fees and Expenses. The Company shall pay all legal
fees and related expenses (including but not limited to the costs of experts,
accountants and counsel) incurred by the Executive as they become due as a
result of (a) the Executive's termination of employment (including all such fees
and expenses, if any, incurred in contesting or disputing any such termination
of employment) and (b) the Executive seeking to obtain or enforce any right or
benefit provided by this Agreement; provided, however, that the total cost of
the Executive's representation shall not exceed $30,000.
8. Notice. For the purposes of this Agreement, notices
and all other communications provided for in the Agreement (including the Notice
of Termination) shall be in writing and shall be deemed to have been duly given
when personally delivered or sent by certified mail, return receipt requested,
postage prepaid, addressed to the respective addresses last
5
<PAGE> 6
given by each party to the other; provided, however, that all notices to the
Company shall be directed to the attention of the Board with a copy to the
Secretary of the Company. All notices and communications shall be deemed to have
been received on the date of delivery thereof.
9. Settlement of Claims. The Company's obligation to
make the payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any circumstances, including,
without limitation, any set-off, counterclaim, recoupment, defense or other
right which the Company may have against the Executive or others. The Company
may, however, withhold from any benefits payable under this Agreement all
federal, state, city, or other taxes as shall be required pursuant to any law or
governmental regulation or ruling.
10. Modification and Waiver. No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing and signed by the Executive and the
Company. No waiver by any party hereto at any time of any breach by the other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
11. Governing Law; Arbitration. This Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of Georgia without giving effect to the conflict of laws principles thereof. Any
controversy, claim or dispute arising out of or relating to this Agreement, or
any breach thereof, including without limitation any dispute concerning the
scope of this arbitration clause, shall be settled by arbitration.
12. Severability. The provisions of this Agreement shall
be deemed severable and the invalidity or unenforceability of any provision
shall not affect the validity or enforceability of the other provisions hereof.
13. Entire Agreement. This Agreement constitutes the
entire agreement between the parties hereto and supersedes all prior agreements,
if any, understandings and arrangements, oral or written, between the parties
hereto with respect to the subject matter hereof.
14. Headings. The headings of Sections herein are
included solely for convenience of reference and shall not control the meaning
or interpretation of any of the provisions of this Agreement.
15. Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
16. Demand Registration Rights.
a. Rights. Subject to the provisions of this Section
16(a), upon the Executive's termination of employment, for any reason, and after
the Company completes its Initial Public Offering the Executive may request
registration for sale under the Act of all or part
6
<PAGE> 7
of the Common Stock then held by him (excluding, for purposes of this Section
16(a), shares subject to the stock options held by the Executive as to which the
vesting provisions shall not have lapsed). Any such request shall specify the
number of shares proposed to be registered and sold and the name of the managing
underwriter of the proposed offering (who must be acceptable to the Company in
its reasonable discretion).
b. Exceptions. The Company shall not be required to
effect a demand registration under the Act pursuant to Section 16(a) above if
(i) the aggregate market value of the shares of Common Stock proposed to be
registered does not equal or exceed $1,000,000; (ii) within twelve months prior
to any such request for registration, a registration of securities of the
Company has been effected in which the Executive had the right to participate
pursuant to this Section 16 or Section 17 hereof; (iii) the Company receives
such request for registration within 180 days preceding the anticipated
effective date of a proposed underwritten public offering of securities of the
Company approved by the Board prior to the Company's receipt of such request; or
(iv) the Board reasonably determines in good faith that effecting such a demand
registration at such time would have a material adverse effect upon a proposed
sale of all (or substantially all) of the assets of the Company, or a merger,
reorganization, recapitalization, or similar transaction materially affecting
the capital structure or equity ownership of the Company which is actively being
negotiated with another party whose identity is disclosed to the Executive;
provided, however, that the Company may only delay a demand registration
pursuant to this Section 16(b)(iv) for a period not exceeding 6 months (or until
such earlier time as such transaction is consummated or no longer proposed). The
Company shall promptly notify in writing the Executive of any decision not to
effect any such request for registration pursuant to this Section 16(b), which
notice shall set forth in reasonable detail the reason for such decision and
shall include an undertaking by the Company promptly to notify the Executive as
soon as a demand registration may be effected.
c. Reduction. If the managing underwriters advise the
Company and the Executive participating in the demand registration in writing
that in their opinion the number of shares of Common Stock held by the Executive
which they requested to be included in such registration exceeds the number
which can be sold in such offering, then the amount of such shares that may be
included in such registration shall be reduced to the number of shares that the
managing underwriters determine is marketable.
d. Withdrawal. The Executive may withdraw at any time
before a registration statement filed pursuant to this section is declared
effective, in which event the Company may withdraw such registration statement.
If the Company withdraws a registration statement under this Section 16 (d) in
respect of a registration for which the Company would otherwise be required to
pay some expenses under Section 18(c),(d) and (e) hereof, then the Executive
shall be liable to the Company for all expenses of such registration specified
in Section 18 (c), (d) and (e) hereof.
17. Piggyback Registration Rights.
a. Rights. Subject to the provision of this Section 17,
after the Company completes its Initial Public Offering, if the Company proposes
to make a registered public
7
<PAGE> 8
offering of any of its securities under the Act (whether to be sold by it or by
one or more third parties), other than an offering pursuant to a demand
registration under Section 16 hereof or an offering registered on Form S-8, Form
S-4, or comparable forms, the Company shall, not less than 45 days prior to the
proposed filing date of the registration form, give written notice of the
proposed registration to the Executive, and at the written request of the
Executive delivered to the Company within 15 days after the receipt of such
notice, shall include in such registration and offering, and in any underwriting
of such offering, all shares of Common Stock as may have been designated in the
Executive's request.
b. Primary Offering Reduction. If a registration in
which the Executive has the right to participate pursuant to this Section 17 is
an underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering, the Company shall include in such
registration (i) first, the securities of the Company proposed to be sold, and
(ii) second, the Common Stock owned by the Executive.
c. Secondary Offering Reduction. If a registration in
which the Executive has the right to participate pursuant to this Section 17 is
an underwritten secondary registration, and the managing underwriters advise the
Company in writing that in their opinion the number of shares requested to be
included in such registration exceeds the number of shares which can be sold in
such offering, then the Company shall include in such offering the number of
shares of Common Stock owned and proposed to be sold by the Company and by any
other participants (including other Executive) proposing (and entitled) to sell
shares pursuant to such registration which the underwriters advise the Company
can be sold in the offering, in proportion to the number of shares of Common
Stock so requested by each of them to be included.
18. Other Registration Issues.
a. The Company shall have no obligation to file a
registration statement pursuant to Section 16 hereof, or to include shares of
Common Stock owned by the Executive in a registration statement pursuant to
Section 17 hereof, unless and until the Executive has furnished the Company with
all information and statements about or pertaining to the Executive in such
reasonable detail as is reasonably deemed by the Company to be necessary or
appropriate with respect to the preparation of the registration statement.
Whenever any Executive has requested that any shares of Common Stock be
registered pursuant to Sections 16 or 17 hereof, subject to the provisions of
those Sections, the Company shall, as expeditiously as reasonably possible:
(i) prepare and file with the SEC a registration
statement with respect to such shares and use its best efforts to cause
such registration statement to become effective as soon as reasonably
practicable thereafter (provided that before filing a registration
statement or prospectus or any amendments or supplements thereto, the
Company shall furnish counsel (who is acceptable to the Executive in
his reasonable discretion) for the Executive with copies of all such
documents proposed to be filed);
8
<PAGE> 9
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a period of not less than nine months or until
the underwriters have completed the distribution described in such
registration statement, whichever occurs first;
(iii) furnish to the Executive such number of copies of
such registration statement, each amendment and supplement thereto, the
prospectus included in such registration statement (including each
preliminary prospectus), and such other documents as the Executive may
reasonably request;
(iv) use its best efforts to register or qualify such
shares under such other securities or Blue Sky Laws of such
jurisdictions as the Executive reasonably requests (and to maintain
such registrations and qualifications effective for a period of nine
months or until the underwriters have completed the distribution of
such shares, whichever occurs first), and to do any and all other acts
and things which may be necessary or advisable to enable the Executive
or underwriters to consummate the disposition in such jurisdictions of
such shares; provided, however, that the Company will not be required
to (a) qualify generally to do business in any jurisdiction where it
would not be required but for this Section 18(a)(iv), or (b) subject
itself to taxation in any such jurisdiction; provided, further,
however, that, notwithstanding anything to the contrary in this
Agreement with respect to the bearing of expenses, if any such
jurisdiction shall require that expenses incurred in connection with
the qualification of such shares in that jurisdiction be borne in part
or full by the Executive, then the Executive shall pay such expenses to
the extent required by such jurisdiction;
(v) cause all such shares to be listed on securities
exchanges, if any, on which similar securities issued by the Company
are then listed;
(vi) provide a transfer agent and registrar for all such
shares not later than the effective date of such registration
statements;
(vii) enter into such customary agreements (including an
underwriting agreement in customary form) and take all such other
actions as the Executive and underwriters reasonably request (and
subject to approval by the Company's counsel) in order to expedite or
facilitate the disposition of such shares; and
(viii) make available for inspection by the Executive, by
any underwriter participating in any distribution pursuant to such
registration statement, and by any attorney, accountant or other agent
retained by the Executive or underwriter, or by any such underwriter,
all financial and other records, pertinent corporate documents, and
properties (other than confidential intellectual property) of the
Company; provided, however, that the Company can condition delivery of
any information, records or corporate documents upon the receipt from
the Executive and the underwriter and their counsel, accountants,
advisors and agents, of a
9
<PAGE> 10
confidentiality agreement in form and substance acceptable to the
Company and its counsel in the exercise of their exclusive discretion.
b. Holdback Agreement. In the event that the Company
effects an underwritten public offering of any of the Company's equity
securities, the Executive agrees, if requested by the managing underwriters, not
to effect any sale or distribution, including any sale pursuant to Rule 144
under the Act, of any equity securities (except as part of such underwritten
offering) during the 180-day period commencing with the effective date of the
registration statement for such offering.
c. Stockholder Expenses. If, pursuant to Section 16 or
17 hereof, shares of Common Stock owned by the Executive is included in a
registration statement, then the Executive shall pay all transfer taxes, if any,
relating to the sale of its shares, the fees and expenses of his own counsel,
and its pro rata portion of any underwriting discounts, fees or commissions or
the equivalent thereof.
d. The Company's Expenses. Except for the fees and
expenses specified in Section 18(c) hereof and except as provided below in this
Section 18(d), the Company shall pay all expenses incident to the registration
and to the Company's performance of or compliance with this Agreement,
including, without limitation, all registration and filing fees, fees and
expenses of compliance with securities or Blue Sky Laws, underwriting discounts,
fees and commissions (other than the Executive's pro rata portion of any
underwriting discounts or commissions or the equivalent thereof), printing
expenses, messenger and delivery expenses, and fees and expenses of counsel for
the Company and all independent certified public accountants and other persons
retained by the Company. If the Company shall previously have paid, pursuant to
this Section 18(d), the expenses of a registration, then the Executive shall pay
all expenses described in this Section 18 (d) (but not expenses described in
Section 18 (e) hereof).
e. Other. With respect to any registration pursuant to
Section 16 or 17 hereof, the Company shall pay its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties) and the expenses and fees for listing the
securities to be registered on exchanges on which similar securities issued by
the Company are then listed.
f. Indemnity. In the event that any shares of Common
Stock owned by the Executive is offered or sold by means of a registration
statement pursuant to Section 16 or 17 hereof, the Company agrees to indemnify
and hold harmless the Executive and each person, if any, who controls or may
control the Executive within the meaning of the Act (the Executive and any such
other persons being hereinafter referred to individually as an "Indemnified
Person" and collectively as "Indemnified Persons") from and against all demands,
claims, actions or causes of action, assessments, losses, damages, liabilities,
costs, and expenses, including, without limitation, interest, penalties, and
reasonable attorneys fees and disbursements, asserted against, resulting to,
imposed upon or incurred by such Indemnified Person, jointly or severally,
directly or indirectly (hereinafter referred to in this Section 18 (f) in the
singular as a "claim" and in the plural as "claims"), based upon, arising out
of, or resulting from any untrue statement or alleged untrue statement of a
material fact contained in the registration statement, any preliminary or final
10
<PAGE> 11
prospectus contained therein, or any amendment or supplement thereto, or any
document incident to registration or qualification of any such shares, or any
omission or alleged omission to state therein a material fact necessary to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading, or any violation by the Company of the Act of any
state securities or Blue Sky Laws, except insofar as such claim is based upon,
arises out of or results from information developed or certified by the
Executive for use in connection with the registration statement or arises out of
or results from the omission of information known to the Executive prior to the
violation or alleged violation; provided, however, that the maximum amount of
liability in respect of such indemnification shall be limited, in the case of
the Company, to an amount equal to the net proceeds actually received by the
Company from the sale of such shares effected pursuant to such registration. The
Executive agrees to indemnify and hold harmless the Company, its officers and
directors, and each person, if any, who controls or may control the Company
within the mean of the Act (the Company, its officers and directors, and any
such persons also being hereinafter referred to individually in this context as
an "Indemnified Person" and collectively as "Indemnified Persons") from and
against all claims based upon, arising out of, or resulting from any untrue
statement of a material fact contained in the registration statement, or any
omission to state therein a material fact necessary in order to make the
statement made therein, in the light of the circumstances under which they were
made, not misleading, to the extent that such claim is based upon, arises out
of, or results from information developed or certified by the Executive for use
in connection with the registration statement or arises out of, or results from
an omission of information known to the Executive prior to the violation or
alleged violation. The indemnifications set forth herein shall be in addition to
any liability the Company or the Executive may otherwise have to the Indemnified
Persons. Promptly after actually receiving definitive notice of any claim in
respect of which an Indemnified Person may seek indemnification under this
Section 18(f), such Indemnified Person shall submit written notice thereof to
either the Company or the Executive, as the case may be (sometimes being
hereinafter referred to as an "Indemnifying Person"). The omission of the
Indemnified Person so to notify the Indemnifying Person of any such claim shall
not relieve the Indemnifying Person from any liability it may have hereunder
except to the extent that (a) such liability was caused or increased by such
omission, or (b) the ability of the Indemnifying Person to reduce such liability
was materially adversely affected by such omission. In addition, the omission of
the Indemnified Person to notify the Indemnifying Person of any such claim shall
not relieve the Indemnifying Person from any liability it may have otherwise
than hereunder. The Indemnifying Person shall have the right to undertake, by
counsel or representatives of its own choosing, the defense, compromise or
settlement (without admitting liability of the Indemnified Person) of any such
claim asserted, such defense, compromise or settlement to be undertaken at the
expense and risk of the Indemnifying Person, and the Indemnified Person shall
have the right to engage separate counsel, at its own expense, whom counsel for
the Indemnifying Person shall keep informed and consult with in a reasonable
manner. In the event the Indemnifying Person shall elect not to undertake such
defense by its own representatives, the Indemnifying Person shall give prompt
written notice of such election to the Indemnified Person, and the Indemnified
Person shall undertake the defense, compromise or settlement (without admitting
liability of the Indemnified Person) thereof on behalf of and for the account
and risk of the Indemnifying Person by counsel or other representatives designed
by the Indemnified Person. In the event that any claim shall arise out of a
transaction or cover any period or periods wherein the Company and the Executive
shall each be liable hereunder for part of the liability or obligation arising
therefrom,
11
<PAGE> 12
then the parties shall, each choosing its own counsel and bearing its own
expenses, defend such claim, and no settlement or compromise of such claim may
be made without the joint consent or approval of the Company and the Executive.
Notwithstanding the foregoing, no Indemnifying Person shall be obligated
hereunder with respect to amounts paid in settlement or any claim if such
settlement is effected without the consent of such Indemnifying Person (which
consent shall not be unreasonably withheld).
19. Definitions. For purposes of this Agreement, the
following terms shall have the following meanings:
a. "Accrued Compensation" shall mean an amount which
shall include all amounts earned or accrued through the Termination Date but not
paid as of the Termination Date including (i) base salary, (ii) reimbursement
for reasonable and necessary expenses incurred by the Executive on behalf of the
Company during the period ending on the Termination Date, and (iii) bonuses and
incentive compensation (other than the Pro Rata Bonus).
b. "Act" shall mean the Securities Act of 1933, as
amended.
c. "Base Amount" shall mean the greater of the
Executive's annual base salary (i) at the rate in effect on the Termination Date
or (ii) at the highest rate in effect at any time during the 90-day period prior
to the Change in Control, and shall include all amounts of his base salary that
are deferred under the qualified and non-qualified employee benefit plans of the
Company or any other agreement or arrangement.
d. "Board" shall have the meaning set forth in the
recitals.
e. "Bonus Amount" shall mean the greater of (i) the most
recent annual bonus paid or payable to the Executive, or, if greater, the annual
bonus paid or payable for the full fiscal year ended prior to the fiscal year
during which a Change in Control occurred or (ii) the average of the annual
bonuses paid or payable during the three full fiscal years ended prior to the
Termination Date or, if greater, the three full fiscal years ended prior to the
Change in Control (or, in each case, such lesser period for which annual bonuses
were paid or payable to the Executive).
f. The termination of the Executive's employment shall
be for "Cause" if it is a result of:
(i) any act that (A) constitutes, on the part of
the Executive, fraud, dishonesty, gross malfeasance of duty,
or conduct grossly inappropriate to the Executive's office,
and (B) is demonstrably likely to lead to material injury to
the Company or resulted or was intended to result in direct or
indirect gain to or personal enrichment of the Executive; or
(ii) the conviction (from which no appeal may be
or is timely taken) of the Executive of a felony;
12
<PAGE> 13
provided, however, that in the case of clause (i) above, such conduct shall not
constitute Cause:
(x) unless (A) there shall have been delivered
to the Executive a written notice setting forth with
specificity the reasons that the Board believes the
Executive's conduct constitutes the criteria set forth in
clause (i), (B) the Executive shall have been provided the
opportunity to be heard in person by the Board (with the
assistance of the Executive's counsel if the Executive so
desires), and (C) after such hearing, the termination is
evidenced by a resolution adopted in good faith by either
two-thirds of the members of the Board (other than the
Executive), or, if the Initial Public Offering has not yet
occurred, then by all the members of the Board of Directors
(other than the Executive); or
(y) if such conduct (A) was believed by the
Executive in good faith to have been in or not opposed to the
interests of the Company, and (B) was not intended to and did
not result in the direct or indirect gain to or personal
enrichment of the Executive.
g. A "Change in Control" shall mean the occurrence
during the Term of any of the following events:
(i) An acquisition (other than directly from the
Company) of any voting securities of the Company (the "Voting
Securities") by any "Person" (as the term person is used for
purposes of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934 (the "1934 Act")) immediately after which such
Person has "Beneficial Ownership" (within the meaning of Rule
13d-3 promulgated under the 1934 Act) of 20% or more of the
combined voting power of the Company's then outstanding Voting
Securities; provided, however, that in determining whether a
Change in Control has occurred, Voting Securities which are
acquired in a "Non-Control Acquisition" (as hereinafter
defined) shall not constitute an acquisition which would cause
a Change in Control. A "Non-Control Acquisition" shall mean an
acquisition by (1) an employee benefit plan (or a trust
forming a part thereof) maintained by (x) the Company or (y)
any corporation or other Person of which a majority of its
voting power or its equity securities or equity interest is
owned directly or indirectly by the Company (a "Subsidiary"),
(2) the Company or any Subsidiary, or (3) any Person in
connection with a "Non-Control Transaction" (as hereinafter
defined).
(ii) The individuals who, as of the date of this
Agreement, are members of the Board (the "Incumbent Board")
cease for any reason to constitute at least two-thirds of the
Board; provided, however, that if the election, or nomination
for election by the Company's stockholders, of any new
director was approved by a vote of at least two-thirds of the
Incumbent Board, such new director shall, for purposes of this
Agreement, be considered as a member of the Incumbent Board;
provided, further, however, that no individual shall be
considered a member of the Incumbent Board if such individual
initially assumed office as a result of either an
13
<PAGE> 14
actual or threatened "Election Contest" (as described in Rule
14a-11 promulgated under the 1934 Act) or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board (a "Proxy Contest") including
by reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest; or
(iii) Approval by stockholders of the Company of:
(A) (1) After the Initial Public Offering,
a merger, consolidation or
reorganization involving the
Company, unless
(x) the stockholders of the Company,
immediately before such merger,
consolidation or reorganization,
own, directly or indirectly,
immediately following such merger,
consolidation or reorganization, at
least two-thirds of the combined
voting power of the outstanding
voting securities of the
corporation resulting from such
merger or consolidation or
reorganization (the "Surviving
Corporation") in substantially the
same proportion as their ownership
of the Voting Securities
immediately before such merger,
consolidation or reorganization,
and
(y) the individuals who were members of
the Incumbent Board immediately
prior to the execution of the
agreement providing for such
merger, consolidation or
reorganization constitute at least
two-thirds of the members of the
board of directors of the Surviving
Corporation;
(A transaction described in clauses (x)
and (y) shall herein be referred to as a
"Non-Control Transaction"); or
(2) Prior to the Initial Public
Offering, a merger, consolidation
or reorganization involving the
Company, unless the transaction is
approved by the Required Vote.
(B) A complete liquidation or dissolution of
the Company; or
(C) An agreement for the sale or other
disposition of all or substantially all
of the assets of the Company to any
Person (other than a transfer to a
Subsidiary), unless such sale or
disposition occurs prior to the Initial
Public Offering and is approved by the
Required Vote.
14
<PAGE> 15
(iv) Notwithstanding anything contained in this
Agreement to the contrary, if the Executive's employment is
terminated prior to a Change in Control and the Executive
reasonably demonstrates that such termination (A) was at the
request of a third party who has indicated an intention or
taken steps reasonably calculated to effect a Change in
Control and who effectuates a Change in Control (a "Third
Party") or (B) otherwise occurred in connection with, or in
anticipation of, a Change in Control which actually occurs,
then for all purposes of this Agreement, the date of a Change
in Control with respect to the Executive shall mean the date
immediately prior to the date of such termination of the
Executive's employment.
h. "Continuation Period" shall have the meaning ascribed
to it in Section 4(c)(iii).
i. "Disability" shall mean a physical or mental
infirmity which impairs the Executive's ability to substantially perform his
duties with the Company for a period of 180 consecutive days, as determined by
an independent physician selected with the approval of both the Company and the
Executive.
j. "Notice of Termination" shall mean a written notice
of termination from the Company or the Executive which specifies an effective
date of termination, indicates the specific termination provision in this
Agreement relied upon, and sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
k. "Initial Directors" shall mean Thomas A. Bryan, G.
Lynn Boggs, and Drew W. Edwards.
l. "Initial Public Offering" shall mean the closing of
the first public offering of the Company's Common Stock registered under the Act
in which aggregate proceeds to the Company, net of all underwriting discounts
and commissions and other expenses of issuance and distribution as stated in the
prospectus relating to such offering, are equal to at least $10,000,000.
m. "Pro Rata Bonus" shall mean an amount equal to the
Bonus Amount multiplied by a fraction the numerator of which is the number of
days in the fiscal year through the Termination Date and the denominator of
which is 365.
n. Any action under this Agreement which requires a
"Required Vote" shall require approval of at least two-thirds of the Initial
Directors and all other members of the Board of Directors.
o. "Successors and Assigns" shall mean a corporation or
other entity acquiring all or substantially all the assets and business of the
Company (including this Agreement), whether by operation of law or otherwise.
15
<PAGE> 16
p. "Termination Date" shall mean, in the case of the
Executive's death, his date of death, and in all other cases, the date specified
in the Notice of Termination.
q. "Trade Secrets" shall mean any information, including
but not limited to technical or non-technical data, a formula, a pattern, a
compilation, a program, a device, a method, a technique, a drawing, a process,
financial data, financial plans, product plans, information on customers, or a
list of actual or potential customers or suppliers, which: (i) derives economic
value, actual or potential, from not being generally known to, and not being
readily ascertainable by proper means by, other persons who can obtain economic
value from its disclosure or use, and (ii) is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and its seal to be affixed hereunto by its officers thereunto duly
authorized, and the Executive has signed and sealed this Agreement, effective as
of the date first above written.
EBB HOLDINGS, INC.
ATTEST:
By: /s/ John W. Collins By: /s/Tom A. Bryan
-------------------------- ----------------------------
Name: John Collins Name: Tom A. Bryan
Title: Board Member Title: Secretary
(CORPORATE SEAL)
EXECUTIVE
/s/ Drew W. Edwards
------------------------------------
DREW W. EDWARDS
16
<PAGE> 1
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made by and between Towne
Services, Inc., a Georgia corporation (the "Company"), and HENRY M. BAROCO, an
individual resident of Georgia (the "Executive"), as of this 15th day of
January, 1997.
The Company desires to employ the Executive as its President and Chief
Operating Officers. The Board of Directors of the Company (the "Board")
recognizes that the Executive's contribution to the growth and success of the
Company is substantial. The Board desires to provide for the employment of the
Executive which the Board has determined will reinforce and encourage the
dedication of the Executive to the Company and will promote the best interests
of the Company and its stockholders. The Executive is willing to serve the
Company on the terms and conditions herein provided.
In consideration of the foregoing, the mutual covenants contained herein,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto, intending to be legally bound,
hereby agree that on the Effective Date:
1. Employment. The Company shall employ the Executive, and the
Executive shall serve the Company, as President and Chief Operating Officer upon
the terms and conditions set forth herein. The Executive shall have such
authority and responsibilities consistent with his position and which may be set
forth in the Company's bylaws or assigned by the Board from time to time. The
Executive shall devote his full business time, attention, skill and efforts to
the performance of his duties hereunder, except during periods of illness or
periods of vacation and leaves of absence consistent with Company policy. The
Executive may devote reasonable periods of time to serve as a director or
advisor to other organizations, to perform charitable and other community
activities, and to manage his personal investments; provided, however, that such
activities do not materially interfere with the performance of his duties
hereunder and are not in conflict or competitive with, or adverse to, the
interests of the Company.
2. Term. Unless earlier terminated as provided herein, the Executive's
employment under this Agreement shall be for a continuing term (the "Term") of
two years, which shall be extended automatically (without further action of the
Company or the Executive) each day for an additional day so that the remaining
term shall continue to be two years; provided, however, that either party (in
the case of the Company, by the Required Vote if the Initial Public Offering has
not yet occurred) may at any time, by written notice to the other, fix the Term
to a finite term of two years, without further automatic extension, commencing
with the date of such notice.
3. Compensation and Benefits.
a. The Company shall pay the Executive a salary at a rate of not less
than $100,000 per annum in accordance with the salary payment practices of the
Company. The Board (or an appropriate committee of the Board) shall review the
Executive's salary at least annually and may increase the Executive's base
salary if it determines in its sole discretion that an
<PAGE> 2
increase is appropriate. The Company shall also pay to the Executive same amount
of directors' fees, if any, that are paid to any of the directors.
b. The Executive shall participate in a management incentive program
and shall be eligible to receive quarterly bonus payments based upon achievement
of targeted levels of performance and such other criteria as the Board (or an
appropriate committee of the Board) shall establish from time to time pursuant
to that program. In addition, the Board shall annually consider the Executive's
performance and determine if any additional bonus is appropriate.
c. The Executive shall participate in the Company's stock option plan
and be eligible for the grant of stock options, restricted stock and other
awards thereunder.
d. The Executive shall participate in all retirement, welfare,
deferred compensation, life and health insurance, and other benefit plans or
programs of the Company now or hereafter applicable to the Executive or
applicable generally to employees of the Company or to a class of employees that
includes senior executives of the Company; provided, however, that during any
period during the Term that the Executive is subject to a Disability, and during
the 365-day period of physical or mental infirmity leading up to the Executive's
Disability, the amount of the Executive's compensation provided under this
Section 3 shall be reduced by the sum of the amounts, if any, paid to the
Executive for the same period under any disability benefit or pension plan of
the Company or any of its subsidiaries.
e. The Company shall provide to the Executive an automobile owned or
leased by the Company of a make and model appropriate to the Executive's status
or an automobile allowance of $520.00 per month, at the Company's election. The
Company shall also reimburse all reasonable expenses incurred by the Executive
in connection with the operation and maintenance of the automobile, including
for gasoline, insurance, tires and similar items.
f. The Company shall reimburse the Executive's reasonable expenses for
dues and capital assessments for country and dining club memberships currently
held by the Executive; provided, however, that if the Executive during the term
of his employment with the Company ceases his membership in any such clubs and
any bonds or other capital payments made by the Company are repaid to the
Executive, the Executive shall pay over such payments to the Company.
g. The Company shall reimburse the Executive for travel, seminar, and
other expenses related to the Executive's duties which are incurred and
accounted for in accordance with the historic practices of the Company.
4. Termination.
a. The Executive's employment under this Agreement may be terminated
prior to the end of the Term only as follows:
(i) upon the death of the Executive;
2
<PAGE> 3
(ii) by the Company (pursuant to the Required Vote if the Initial
Public Offering has not yet occurred) due to the Disability of the
Executive upon delivery of a Notice of Termination to the Executive;
(iii) by the Company (pursuant to the Required Vote if the
Initial Public Offering has not yet occurred) for Cause upon delivery
of a Notice of Termination to the Executive; and
(iv) by the Executive for any reason upon delivery of a Notice of
Termination to the Company.
b. If the Executive's employment with the Company shall be terminated
during the Term (i) by reason of the Executive's death, or (ii) by the Company
for Disability or Cause, the Company shall pay to the Executive (or in the case
of his death, the Executive's estate) within fifteen days after the Termination
Date a lump sum cash payment equal to the Accrued Compensation and, if such
termination is other than by the Company for Cause, the Pro Rata Bonus.
c. If the Executive's employment with the Company shall be terminated
by the Company in violation of this Agreement or by the Executive for any reason
after a Change in Control, in addition to other rights and remedies available in
law or equity, the Executive shall be entitled to the following:
(i) the Company shall pay the Executive in cash within fifteen
days of the Termination Date an amount equal to all Accrued
Compensation and the Pro Rata Bonus;
(ii) the Company shall pay to the Executive in cash at the end of
each of the thirty-six consecutive 30-day periods following the
Termination Date an amount equal to one-twelfth of the sum of the Base
Amount and the Bonus Amount.
(iii) for the period from the Termination Date through the date
of the Executive's death (the "Continuation Period"), the Company
shall at its expense on behalf of the Executive and his dependents and
beneficiaries the life insurance, disability, medical, dental and
hospitalization benefits provided (x) to the Executive at any time
during the 90-day period prior to the Change in Control or at any time
thereafter or (y) to other similarly situated executives who are in
the employ of the Company during the Continuation Period. The coverage
and benefits (including deductibles and costs) provided in this
Section 4(c)(iii) during the Continuation Period shall be no less
favorable to the Executive and his dependents and beneficiaries than
the most favorable of such coverages and benefits during any of the
periods referred to in clauses (x) and (y) above. The Company's
obligation hereunder with respect to the foregoing benefits shall be
limited to the extent that the Executive obtains any such benefits
pursuant to a subsequent employer's benefit plans, in which case the
Company may reduce the
3
<PAGE> 4
coverage of any benefits it is required to provide the Executive
hereunder as long as the aggregate coverages and benefits of the
combined benefit plans is no less favorable to the Executive than the
coverages and benefits required to be provided hereunder. This
subsection (iii) shall not be interpreted so as to limit any benefits
to which the Executive or his dependents or beneficiaries may be
entitled under any of the Company's employee benefit plans, programs
or practices following the Executive's termination of employment,
including without limitation, retiree medical and life insurance
benefits; and
(iv) the restrictions on any outstanding incentive awards
(including stock options) granted to the Executive under any stock
option or other incentive plan or arrangement shall lapse and such
incentive award shall become 100% vested, all stock options and stock
appreciation rights granted to the Executive shall become immediately
exercisable and shall become 100% vested, and all stock options
granted to the Executive shall become 100% vested.
d. The Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Executive in any subsequent employment except as
provided in Section 4(c)(iii).
e. In the event that any payment or benefit (within the meaning of
Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the
"Code")) to the Executive or for his benefit paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise in connection
with, or arising out of, his employment with the Company or a change in
ownership or effective control of the Company or of a substantial portion of its
assets (a "Payment" or "Payments"), would be subject to the excise tax imposed
by Section 4999 of the Code or any interest or penalties are incurred by the
Executive with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive will be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties, other than interest
and penalties imposed by reason of the Executive's failure to file timely a tax
return or pay taxes shown due on his return, imposed with respect to such taxes
and the Excise Tax), including any Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.
f. The severance pay and benefits provided for in this Section 4 shall
be in lieu of any other severance or termination pay to which the Executive may
be entitled under any Company severance or termination plan, program, practice
or arrangement. The Executive's entitlement to any other compensation or
benefits shall be determined in accordance with the Company's employee benefit
plans and other applicable programs, policies and practices then in effect.
5. Trade Secrets. The Executive shall not, at any time, either during
the Term of his employment or after the Termination Date, if such Termination is
for Cause or at the
4
<PAGE> 5
Executive's election for any reason prior to a Change in Control, use or
disclose any Trade Secrets of the Company, except in fulfillment of his duties
as the Executive during his employment, for so long as the pertinent information
or data remain Trade Secrets, whether or not the Trade Secrets are in written or
tangible form.
6. Successors; Binding Agreement.
a. This Agreement shall be binding upon and shall inure to the benefit
of the Company, its Successors and Assigns and the Company shall require any
Successors and Assigns to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Company would be required to
perform it if no such succession or assignment had taken place.
b. Neither this Agreement nor any right or interest hereunder shall be
assignable or transferable by the Executive, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal personal representative.
7. Fees and Expenses. The Company shall pay all legal fees and related
expenses (including but not limited to the costs of experts, accountants and
counsel) incurred by the Executive as they become due as a result of (a) the
Executive's termination of employment (including all such fees and expenses, if
any, incurred in contesting or disputing any such termination of employment) and
(b) the Executive seeking to obtain or enforce any right or benefit provided by
this Agreement; provided, however, that the total cost of the Executive's
representation shall not exceed $30,000.
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement (including the Notice of
Termination) shall be in writing and shall be deemed to have been duly given
when personally delivered or sent by certified mail, return receipt requested,
postage prepaid, addressed to the respective addresses last given by each party
to the other; provided, however, that all notices to the Company shall be
directed to the attention of the Board with a copy to the Secretary of the
Company. All notices and communications shall be deemed to have been received on
the date of delivery thereof.
9. Settlement of Claims. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or others. The Company may, however,
withhold from any benefits payable under this Agreement all federal, state,
city, or other taxes as shall be required pursuant to any law or governmental
regulation or ruling.
10. Modification and Waiver. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and the Company. No waiver by
any party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of
5
<PAGE> 6
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
11. Governing Law; Arbitration. This Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Georgia
without giving effect to the conflict of laws principles thereof. Any
controversy, claim or dispute arising out of or relating to this Agreement, or
any breach thereof, including without limitation any dispute concerning the
scope of this arbitration clause, shall be settled by arbitration.
12. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
13. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior agreements, if any,
understandings and arrangements, oral or written, between the parties hereto
with respect to the subject matter hereof.
14. Headings. The headings of Sections herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
19. Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
a. "Accrued Compensation" shall mean an amount which shall include all
amounts earned or accrued through the Termination Date but not paid as of the
Termination Date including (i) base salary, (ii) reimbursement for reasonable
and necessary expenses incurred by the Executive on behalf of the Company during
the period ending on the Termination Date, and (iii) bonuses and incentive
compensation (other than the Pro Rata Bonus).
b. "Act" shall mean the Securities Act of 1933, as amended.
c. "Base Amount" shall mean the greater of the Executive's annual base
salary (i) at the rate in effect on the Termination Date or (ii) at the highest
rate in effect at any time during the 90-day period prior to the Change in
Control, and shall include all amounts of his base salary that are deferred
under the qualified and non-qualified employee benefit plans of the Company or
any other agreement or arrangement.
d. "Board" shall have the meaning set forth in the recitals.
e. "Bonus Amount" shall mean the greater of (i) the most recent annual
bonus paid or payable to the Executive, or, if greater, the annual bonus paid or
payable for the full fiscal
6
<PAGE> 7
year ended prior to the fiscal year during which a Change in Control occurred or
(ii) the average of the annual bonuses paid or payable during the three full
fiscal years ended prior to the Termination Date or, if greater, the three full
fiscal years ended prior to the Change in Control (or, in each case, such lesser
period for which annual bonuses were paid or payable to the Executive).
f. The termination of the Executive's employment shall be for "Cause"
if it is a result of:
(v) any act that (A) constitutes, on the part of the Executive,
fraud, dishonesty, gross malfeasance of duty, or conduct grossly
inappropriate to the Executive's office, and (B) is demonstrably
likely to lead to material injury to the Company or resulted or was
intended to result in direct or indirect gain to or personal
enrichment of the Executive; or
(vi) the conviction (from which no appeal may be or is timely
taken) of the Executive of a felony;
provided, however, that in the case of clause (i) above, such conduct shall not
constitute Cause:
(x) unless (A) there shall have been delivered to the Executive a
written notice setting forth with specificity the reasons that the
Board believes the Executive's conduct constitutes the criteria set
forth in clause (i), (B) the Executive shall have been provided the
opportunity to be heard in person by the Board (with the assistance of
the Executive's counsel if the Executive so desires), and (C) after
such hearing, the termination is evidenced by a resolution adopted in
good faith by either two-thirds of the members of the Board (other
than the Executive), or, if the Initial Public Offering has not yet
occurred, then by all the members of the Board of Directors (other
than the Executive); or
(y) if such conduct (A) was believed by the Executive in good
faith to have been in or not opposed to the interests of the Company,
and (B) was not intended to and did not result in the direct or
indirect gain to or personal enrichment of the Executive.
g. A "Change in Control" shall mean the occurrence during the Term of
any of the following events:
(i) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any
"Person" (as the term person is used for purposes of Section 13(d) or
14(d) of the Securities Exchange Act of 1934 (the "1934 Act"))
immediately after which such Person has "Beneficial Ownership" (within
the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20% or
more of the combined voting power of the Company's then outstanding
Voting Securities; provided, however, that in determining whether a
7
<PAGE> 8
Change in Control has occurred, Voting Securities which are acquired
in a "Non-Control Acquisition" (as hereinafter defined) shall not
constitute an acquisition which would cause a Change in Control. A
"Non-Control Acquisition" shall mean an acquisition by (1) an employee
benefit plan (or a trust forming a part thereof) maintained by (x) the
Company or (y) any corporation or other Person of which a majority of
its voting power or its equity securities or equity interest is owned
directly or indirectly by the Company (a "Subsidiary"), (2) the
Company or any Subsidiary, or (3) any Person in connection with a
"Non-Control Transaction" (as hereinafter defined).
(ii) The individuals who, as of the date of this Agreement, are
members of the Board (the "Incumbent Board") cease for any reason to
constitute at least two-thirds of the Board; provided, however, that
if the election, or nomination for election by the Company's
stockholders, of any new director was approved by a vote of at least
two-thirds of the Incumbent Board, such new director shall, for
purposes of this Agreement, be considered as a member of the Incumbent
Board; provided, further, however, that no individual shall be
considered a member of the Incumbent Board if such individual
initially assumed office as a result of either an actual or threatened
"Election Contest" (as described in Rule 14a-11 promulgated under the
1934 Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board (a "Proxy
Contest") including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest; or
(iii) Approval by stockholders of the Company of:
(A) (1) After the Initial Public Offering, a merger,
consolidation or reorganization involving the
Company, unless
(x) the stockholders of the Company, immediately
before such merger, consolidation or
reorganization, own, directly or indirectly,
immediately following such merger, consolidation
or reorganization, at least two-thirds of the
combined voting power of the outstanding voting
securities of the corporation resulting from such
merger or consolidation or reorganization (the
"Surviving Corporation") in substantially the same
proportion as their ownership of the Voting
Securities immediately before such merger,
consolidation or reorganization, and
(y) the individuals who were members of the Incumbent
Board immediately prior to the execution of the
agreement providing for such merger, consolidation
or reorganization constitute at least two-thirds
of the
9
<PAGE> 9
members of the board of directors of the Surviving
Corporation;
(A) transaction described in clauses (x) and (y) shall
herein be referred to as a "Non-Control Transaction"); or
(2) Prior to the Initial Public Offering, a merger,
consolidation or reorganization involving the Company,
unless the transaction is approved by the Required
Vote.
(B) A complete liquidation or dissolution of the Company; or
(C) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any
Person (other than a transfer to a Subsidiary), unless
such sale or disposition occurs prior to the Initial
Public Offering and is approved by the Required Vote.
(iv) Notwithstanding anything contained in this Agreement to the
contrary, if the Executive's employment is terminated prior to a
Change in Control and the Executive reasonably demonstrates that such
termination (A) was at the request of a third party who has indicated
an intention or taken steps reasonably calculated to effect a Change
in Control and who effectuates a Change in Control (a "Third Party")
or (B) otherwise occurred in connection with, or in anticipation of, a
Change in Control which actually occurs, then for all purposes of this
Agreement, the date of a Change in Control with respect to the
Executive shall mean the date immediately prior to the date of such
termination of the Executive's employment.
h. "Continuation Period" shall have the meaning ascribed to it in
Section 4(c)(iii).
i. "Disability" shall mean a physical or mental infirmity which
impairs the Executive's ability to substantially perform his duties with the
Company for a period of 180 consecutive days, as determined by an independent
physician selected with the approval of both the Company and the Executive.
j. "Notice of Termination" shall mean a written notice of termination
from the Company or the Executive which specifies an effective date of
termination, indicates the specific termination provision in this Agreement
relied upon, and sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated.
k. "Initial Public Offering" shall mean the closing of the first
public offering of the Company's Common Stock registered under the Act in which
aggregate proceeds to the
10
<PAGE> 10
Company, net of all underwriting discounts and commissions and other expenses of
issuance and distribution as stated in the prospectus relating to such offering,
are equal to at least $10,000,000.
l. "Pro Rata Bonus" shall mean an amount equal to the Bonus Amount
multiplied by a fraction the numerator of which is the number of days in the
fiscal year through the Termination Date and the denominator of which is 365.
m. Any action under this Agreement which requires a "Required Vote"
shall require approval of at least two-thirds of the members of the Board of
Directors.
n. "Successors and Assigns" shall mean a corporation or other entity
acquiring all or substantially all the assets and business of the Company
(including this Agreement), whether by operation of law or otherwise.
o. "Termination Date" shall mean, in the case of the Executive's
death, his date of death, and in all other cases, the date specified in the
Notice of Termination.
p. "Trade Secrets" shall mean any information, including but not
limited to technical or non-technical data, a formula, a pattern, a compilation,
a program, a device, a method, a technique, a drawing, a process, financial
data, financial plans, product plans, information on customers, or a list of
actual or potential customers or suppliers, which: (i) derives economic value,
actual or potential, from not being generally known to, and not being readily
ascertainable by proper means by, other persons who can obtain economic value
from its disclosure or use, and (ii) is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
and its seal to be affixed hereunto by its officers thereunto duly authorized,
and the Executive has signed and sealed this Agreement, effective as of the date
first above written.
TOWNE SERVICES, INC.
ATTEST:
By: /s/ Bruce F. Lowthers, Jr. By: /s/ Drew W. Edwards
------------------------------ ----------------------------------
Name: Bruce F. Lowthers, Jr. Name: Drew W. Edwards
Title: Chief Financial Officer Title: Chairman of the Board and
Chief Executive Officer
(CORPORATE SEAL)
EXECUTIVE
/s/ Henry M. Baroco
-------------------------------
HENRY M. BAROCO
11
<PAGE> 1
EXHIBIT 10.7
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is
made by and between TOWNE SERVICES, INC., a Georgia corporation (the "Company"),
and BRUCE LOWTHERS, an individual resident of Georgia (the "Employee"), this
18th day of May, 1998. This Agreement amends and restates that Employment
Agreement between the Company and Employee dated October 15, 1997, which became
effective on November 3, 1997 (the "Effective Date")
The Company employs the Employee as its Chief Financial Officer. The
Board of Directors of the Company (the "Board") desires to provide for the
employment of the Employee which the Board has determined will reinforce and
encourage the dedication of the Employee to the Company and will promote the
best interests of the Company and its shareholders. The Employee is willing to
serve the Company on the terms and conditions herein provided.
In consideration of the foregoing, the mutual covenants contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto, intending to be legally
bound, hereby agree that on the Effective Date:
ARTICLE I - EMPLOYMENT TERMS
1.1 Employment. The Company shall employ the Employee, and the
Employee shall serve the Company, as Chief Financial Officer upon the terms and
conditions set forth herein. The Employee shall have such authority and
responsibilities consistent with his position and which may be set forth in the
Company's bylaws or assigned by the Board from time to time. The Employee shall
devote his full business time, attention, skill and efforts to the performance
of his duties hereunder, except during periods of illness or periods of vacation
and leaves of absence consistent with Company policy. The Employee may devote
reasonable periods of time to serve as a director or advisor to other
organizations, to perform charitable and other community activities, and to
manage his personal investments; provided, however, that such activities do not
materially interfere with the performance of his duties hereunder and are not in
conflict or competitive with, or adverse to, the interests of the Company.
1.2 Term. Unless earlier terminated as provided herein, the
Employee's employment under this Agreement shall be for a continuing term (the
"Term") of one year, which shall be extended automatically (without further
action of the Company or the Employee) each day for an additional day so that
the remaining term shall continue to be one year; provided, however, that either
party may at any time, by written notice to the other, fix the Term to a finite
term of one year, without further automatic extension, commencing with the date
of such notice. Notwithstanding the foregoing, the term of employment hereunder
will end on the date the Employee attains the age of 65.
<PAGE> 2
1.3 Compensation and Benefits.
a. The Company shall pay the Employee a salary at a rate of
not less than $125,000 per annum in accordance with the salary payment practices
of the Company. The President and the Chief Executive Officer shall review the
Employee's salary at least annually and may increase the Employee's base salary
if they determine in their discretion that an increase is appropriate.
b. The Employee shall be eligible to participate in a
management incentive program and shall be eligible to receive bonus payments
(not more than once each quarter) based upon achievement of targeted levels of
performance and such other criteria as the President and the Chief Executive
Officer shall establish from time to time pursuant to that program. The
determination of any bonus amount shall be within the discretion of the
President and the Chief Executive Officer. In addition, the Board shall annually
consider the Employee's performance and determine if any additional bonus is
appropriate.
c. The Employee shall be granted options to acquire 300,000
shares of the common stock of the Company, at an exercise price of $1.00 per
share pursuant to the Company's 1996 Stock Option Plan (the "Plan"). Such
options shall vest, if at all, over a period beginning on the Effective Date and
continuing on each anniversary thereof for four (4) years thereafter, and shall
otherwise be subject to the terms and conditions of a stock option agreement and
the Plan, as the Board determines.
d. The Employee shall be entitled to participate in all
retirement, life and health insurance, disability and other similar benefit
plans or programs of the Company now or hereafter applicable to the Employee or
applicable generally to employees of the Company; provided, however, that during
any period during the Term that the Employee is disabled, and during the 120-day
period of physical or mental infirmity leading up to the Employee's Disability,
the amount of the Employee's compensation provided under this Section 1.3 shall
be reduced by the sum of the amounts, if any, paid to the Employee for the same
period under any disability benefit or pension plan of the Company or any of its
subsidiaries.
e. The Company shall reimburse the Employee for all reasonable
ordinary and necessary travel, seminar, and other expenses related to the
Employee's duties which are incurred and accounted for in accordance with the
historic practices of the Company.
f. Employee shall be entitled to three weeks paid vacation
annually during the Term of employment by the Company hereunder. Any vacation
not used during any calendar year shall be forfeited, except that one week's
unused vacation may be carried forward to the year following the year in which
such vacation entitlement accrued.
g. The Company shall provide to the Employee an automobile
owned or leased by the Company of a make and model appropriate to the
Executive's status or an automobile allowance of up to $450.00 per month, at the
Company's election. The Company shall also reimburse all reasonable expenses
incurred by the Executive in connection with the
2
<PAGE> 3
operation and maintenance of the automobile, including for gasoline, insurance,
tires and similar items.
ARTICLE II - COVENANTS OF EMPLOYEE
Section 2.1 Confidentiality. Employee recognizes the interest of the
Company in maintaining the confidential nature of its proprietary and other
business and commercial information. In connection therewith, Employee covenants
that during the term of his employment with Company under this Agreement, and
for a period of one (1) year thereafter, Employee shall not, directly or
indirectly, except as authorized by the Board of Directors, publish, disclose or
use for his own benefit or for the benefit of a business or entity other than
the Company or otherwise, any secret or confidential matter, or proprietary or
other information not in the public domain that was acquired by Employee during
his employment, relating to the Company's, or any of its subsidiaries'
businesses, operations, customers, suppliers, products, employees, financial
affairs or industry practices, technology, know-how or intellectual property or
other similar information (the "Proprietary Information").
Employee will abide by the Company's policies and regulations, as
established from time to time, for the protection of its Proprietary
Information. Employee acknowledges that all records, files, data, documents and
the like relating to suppliers, customers, costs, prices, systems, methods,
personnel, technology and other materials relating to the Company or its
affiliated entities shall be and remain the sole property of the Company and/or
such affiliated entity and shall, upon the request of the Company, turn over all
copies of such Proprietary Information to the Company (together with a written
statement certifying as to his compliance with the foregoing).
Section 2.2 Non-Solicitation of Customers. During the Term of his
employment with the Company, and for a period of one (1) year thereafter,
Employee shall not directly or indirectly, through one or more intermediaries or
otherwise, solicit, direct or appropriate, or attempt to solicit, direct or
appropriate any individual or entity which was, at the time of termination of
Employee's employment, a customer or client of the Company for the purpose of
providing a service or product to such customer or client which is the same type
of service or product offered or provided by the Company at the time of
termination of Employee's employment, with the Company; provided, that if
Employee is terminated by the Company without Cause (as defined below) or if the
Employee resigns with Good Reason (as defined below), the restrictive period of
this Section 2.2 shall be six (6) months.
Section 2.3 Non-Solicitation of Employees. During the Term of his
employment with the Company, and for a period of one (1) year thereafter,
Employee shall not, directly or indirectly, through one or more intermediaries
or otherwise, employ, induce, solicit for employment, or assist others in
employing, inducing or soliciting for employment any individual who is at any
time during such period an employee of the Company for the purpose of providing
services that are the same or similar to the types of services offered or
engaged in by the Company at the time of termination of Employee's employment
with the Company; provided, that if Employee is terminated by the Company
without Cause (as defined below) or if the Employee
3
<PAGE> 4
resigns with Good Reason (as defined below), the restrictive period of this
Section 2.3 shall be six (6) months.
Section 2.4 Trade Secrets. The Employee shall not, at any time, either
during the Term of his employment or after any termination of employment, use or
disclose any Trade Secrets (as defined under applicable law) of the Company or
its subsidiaries, except in fulfillment of his duties as the Employee during his
employment, for so long as the pertinent information or data remain Trade
Secrets, whether or not the Trade Secrets are in written or tangible form.
ARTICLE III - TERMINATION OF EMPLOYMENT
Section 3.1 Termination by Company. Employee's employment may be
terminated by the Company by giving notice during the term of this Agreement
upon the occurrence of one or more of the following events:
(a) Employee's death or disability which renders Employee
incapable of performing his duties for more than one hundred twenty (120)
calendar days (termination under this Section 3.1(a) shall be deemed termination
without Cause);
(b) for any reason following a determination by the Board of
Directors to terminate Employee's employment (termination under this Section
3.1(b) shall be deemed termination without Cause); or
(c) "for Cause", which for purposes of this Agreement shall
mean that the Employee shall have:
(i) committed an intentional act of fraud,
embezzlement or theft in connection with his duties or in the course of his
employment with the Company which has a material adverse effect upon the
Company;
(ii) inflicted intentional wrongful material damage
to any material asset of the Company or the Company;
(iii) intentionally and wrongfully violates this
Agreement, which violation has a material adverse effect upon the Company;
(iv) been convicted of a felony or any similar crime
carrying a prison term of at least one year (regardless of whether imprisonment
is actually imposed);
(v) a habitual and debilitating use of alcohol or
drugs; or
(vi) failed to meet performance expectations, as
determined and articulated by the Company's President and Chief Executive
Officer; provided, however, that in the event of this subsection (vi) being the
sole reason for a termination for Cause, Employee shall have the cure provisions
and rights provided for in Section 3.1(d) hereof.
4
<PAGE> 5
(d) In the event of a determination by the Company's President and
Chief Executive Officer that the Employee has failed to meet performance
expectations, the Company shall furnish to Employee in writing a notice of
proposed termination setting forth a specific statement of the deficiencies in
his performance. Employee shall then have a period of thirty (30) days after the
giving of such written notice of proposed termination by the Company in which to
attempt to effect a cure of the specified deficiencies. If at the end of such
thirty (30) day period no such cure has been effected to the reasonable
satisfaction of the Board of Directors of the Company, then Employee's
employment shall be terminated as of the end of such thirty (30) day period. The
Company shall be obligated to provide to Employee only one such notice of
proposed termination, and if subsequent to effecting a cure of specified
deficiencies the Employee is determined by the Board of Directors to have again
failed to meet performance expectations, then his employment may be terminated
immediately upon the Company's giving of a final notice of termination to
Employee.
Section 3.2 Good Reason. For purposes of this Agreement, "Good Reason"
shall mean, without the express written consent of Employee, the occurrence of
any of the following events unless such events are fully corrected within thirty
(30) days following written notification by Employee to the Company that he
intends to terminate his employment hereunder for one of the reasons set forth
below:
(a) a material breach by the Company of any material provision
of this Agreement, including, but not limited to, material adverse alteration
in the nature or status of Employee's responsibilities; or
(b) the relocation of Employee (at the Company's request) out
of Atlanta, Georgia and the surrounding areas.
Section 3.3 Severance. For purposes of this Agreement, Employee's
entitlement to any severance payments upon termination of his employment shall
be as set forth below:
(a) Termination Without Cause. If Employee is terminated
without Cause or resigns for Good Reason at any time, Employee shall be entitled
to severance pay at the Company's discretion, of either (i) a lump sum equal to
his then current annual salary; or (ii) twelve consecutive monthly payments of
one-twelfth (1/12) of his then current annual salary. If Employee is terminated
without cause, resigns for Good Reason or a Change in Control (as defined in the
Company's 1996 Stock Option Plan) occurs, the conditions to vesting of the
options granted to the Employee pursuant to Section 1.3(c) above shall lapse and
all such options shall immediately vest.
(b) Voluntary Termination. If Employee voluntarily resigns for
any reason other than Good Reason and otherwise complies with this Agreement,
Employee shall receive severance pay equal to one-half of his then current
annual salary, to be paid by the Company, as it selects, either in a lump sum
payment or in equal monthly payments for the duration of the applicable covenant
periods set forth in Article II. Employee shall provide a minimum of thirty (30)
days prior notice to the Chief Executive Officer and the President of his
resignation. In the
5
<PAGE> 6
event Employee shall provide thirty (30) days prior written notice of his intent
to resign, the Company may accept such resignation effective as of any date
during such thirty (30) day period as the Company deems appropriate, provided
that Employee shall receive from the Company his salary and be entitled to
participate at the Company's expense in any Company sponsored benefit programs
in which he was a participant as of the effective date of his resignation for
the duration of such thirty (30) day period.
(c) For Cause. Employee shall not be entitled to any severance
pay whatsoever if his employment is terminated "for Cause" pursuant to Section
3.1(c) of this Agreement, unless severance pay is approved by the Board of
Directors of the Company in its sole discretion, provided, however, that the
Employee shall receive such annual salary that is accrued but unpaid up to the
date of such termination for Cause
(d) Payments for Covenants. The severance payments provided
for in this Article III shall be made, in part, as consideration for the
Employee's covenants set forth in Article II.
(e) Termination. If the Employee's employment with the Company
is terminated prior to a Change in Control or prior to an initial public
offering of the Company's common stock with net proceeds to the Company of at
least ten million dollars ($10,000,000.00) for any reason other than the
Company's material breach of this Agreement, the Company shall be entitled to
repurchase from the Employee 100% of the stock, options and other securities of
the Company held or beneficially owned by the Employee at the greater of the
price the Employee paid for such securities or the then current fair market
value of such securities.
ARTICLE IV - GENERAL PROVISIONS
Section 4.1 Withholding of Taxes. The Company may withhold from any
amounts payable under this Agreement all federal, state, city or other taxes and
withholdings as shall be required pursuant to any applicable law, rule or
regulation.
Section 4.2 Notice. For purposes of this Agreement, all communications
including, without limitation, notices, consents, requests or approvals,
provided for herein shall be in writing and shall be deemed to have been duly
given when personally delivered or five (5) business days after having been
mailed by United States registered mail or certified mail, return receipt
requested, postage prepaid, addressed to the Company (to the attention of the
Secretary of the Company) at its principal Employee office or to Employee at his
principal residence, or to such other address as any party may have furnished to
the other in writing and in accordance herewith, except the notices of change of
address shall be effective only upon receipt.
Section 4.3 Validity. It is not the intent of any party hereto to
violate any public policy of any jurisdiction in which this Agreement may be
enforced. If any provision of this Agreement or the application of any provision
hereof to any person or circumstances is held invalid, unenforceable or
otherwise illegal, the remainder of this Agreement and the application of such
provision to any other person or circumstances shall not be affected, and the
provision so held to
6
<PAGE> 7
be invalid, unenforceable or otherwise illegal shall be reformed to the extent
(and only to the extent) necessary to make it valid, enforceable and legal;
provided, however, if the provision so held to be invalid, unenforceable or
otherwise illegal constituted a material inducement to a party's execution and
delivery of this Agreement, then such provision shall not be reformed unless
prior to any reformation that party agrees to be bound by the reformation.
Section 4.4 Entire Agreement. This Agreement supersedes any other
agreements, oral or written, between the parties with respect to the subject
matter hereof, and contains all of the agreements and understandings between the
parties with respect to the employment of Employee by the Company. Any waiver or
modification of any term of this Agreement shall be effective only if it is set
forth in a writing signed by both parties hereto.
Section 4.5 Successors and Binding Agreement.
(a) This Agreement shall be binding upon and inure to the
benefit of the Company and any Successor of or to the Company, but shall not
otherwise be assignable or delegable by the Company. "Successor" shall mean any
successor in interest, including, without limitation, any entity, individual or
group of persons acquiring directly or indirectly all or substantially all of
the business or assets of the Company, as the case may be, whether by sale,
merger, consolidation, reorganization or otherwise.
(b) The Company shall require any Successor to agree at the
time of becoming a Successor to perform this Agreement to the same extent as the
original parties would be required if no succession had occurred.
(c) This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives, executors,
administrators, heirs, distributee and legatees.
(d) This Agreement is personal in nature and neither of the
parties shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in this Section 4.5.
Section 4.6 Captions. The captions in this Agreement are solely for
convenience of reference and shall not be given any effect in the construction
or interpretation of this Agreement.
Section 4.7 Miscellaneous. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in a writing signed by Employee and the Company. No waiver by a party
hereto at any time of any breach by another party hereto or compliance with any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provision or conditions at the
same or at any prior or subsequent time.
Section 4.8 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same Agreement.
7
<PAGE> 8
Section 4.9 Modification and Waiver. No provisions of this Agreement
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing and signed by the Employee and the Company. No
waiver by any party hereto at any time of any breach by the other party hereto
of, or compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
Section 4.10 Governing Law; Arbitration. This Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of Georgia without giving effect to the conflict of laws principles thereof. Any
controversy, claim or dispute arising out of or relating to this Agreement, or
any breach thereof, including without limitation any dispute concerning the
scope of this arbitration clause, shall be settled by arbitration. The parties
indicate their acceptance of the foregoing arbitration requirement by initialing
below:
/s/ Drew Edwards /s/ Bruce F. Lowthers, Jr.
- -------------------------- --------------------------
For the Company Employee
Section 4.11 Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and its seal to be affixed hereunto by its officers thereunto duly
authorized, and the Employee has signed and sealed this Agreement, effective as
of the date first above written.
TOWNE SERVICES, INC.
ATTEST:
By: /s/ Henry M. Baroco By: /s/ Drew Edwards
---------------------------- --------------------------------
Name: Henry M. Baroco Name: Drew Edwards
Title: President and Chief Title: Chief Executive Officer
Operating Officer
(CORPORATE SEAL)
EMPLOYEE
/s/ Bruce F. Lowthers, Jr.
-----------------------------------
BRUCE LOWTHERS
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made by and between
TOWNE SERVICES, INC., a Georgia corporation (the "Company"), and CLEVE B.
SHULTZ, an individual resident of Georgia (the "Employee"), this 19th day of
May, 1998, and is to become effective as of May 19, 1998 (the "Effective
Date").
The Company desires to employ the Employee as its Executive Vice
President. The Board of Directors of the Company (the "Board") desires to
provide for the employment of the Employee which the Board has determined will
reinforce and encourage the dedication of the Employee to the Company and will
promote the best interests of the Company and its shareholders. The Employee is
willing to serve the Company on the terms and conditions herein provided.
In consideration of the foregoing, the mutual covenants contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto, intending to be legally
bound, hereby agree that on the Effective Date:
ARTICLE I - EMPLOYMENT TERMS
1.1 Employment. The Company shall employ the Employee, and the
Employee shall serve the Company, as Executive Vice President upon the terms and
conditions set forth herein. The Employee shall have such authority and
responsibilities consistent with his position and which may be set forth in the
Company's bylaws or assigned by the Board from time to time. The Employee shall
devote his full business time, attention, skill and efforts to the performance
of his duties hereunder, except during periods of illness or periods of vacation
and leaves of absence consistent with Company policy. The Employee may devote
reasonable periods of time to serve as a director or advisor to other
organizations, to perform charitable and other community activities and to
manage his personal investments; provided, however, that such activities do not
materially interfere with the performance of his duties hereunder and are not in
conflict or competitive with, or adverse to, the interests of the Company.
1.2 Term. Unless earlier terminated as provided herein, the
Employee's employment under this Agreement shall be for a continuing term (the
"Term") of one year, which shall be extended automatically (without further
action of the Company or the Employee) each day for an additional day so that
the remaining term shall continue to be one year; provided, however, that either
party may at any time, by written notice to the other, fix the Term to a finite
term of one year, without further automatic extension, commencing with the date
of such notice. Notwithstanding the foregoing, the term of employment hereunder
will end on the date the Employee attains the age of 65.
1.3 Compensation and Benefits.
a. The Company shall pay the Employee a salary at a rate of
not less than $90,000 per annum in accordance with the salary payment practices
of the Company. The
<PAGE> 2
President and the Chief Executive Officer shall review the Employee's salary at
least annually and may increase the Employee's base salary they determine in
their sole discretion that an increase is appropriate.
b. The Employee shall be eligible to participate in a
management incentive program and shall be eligible to receive bonus payments
(not more than once each quarter) based upon achievement of targeted levels of
performance and such other criteria as the President and the Chief Executive
Officer shall establish from time to time pursuant to that program. The
determination of any bonus amount shall be within the discretion of the
President and the Chief Executive Officer. In addition, the Board shall annually
consider the Employee's performance and determine if any additional bonus is
appropriate.
c. The Employee shall be entitled to participate in all
retirement, life and health insurance, disability and other similar benefit
plans or programs of the Company now or hereafter applicable to the Employee or
applicable generally to employees of the Company; provided, however, that during
any period during the Term that the Employee is disabled, and during the 120-day
period of physical or mental infirmity leading up to the Employee's Disability,
the amount of the Employee's compensation provided under this Section 1.3 shall
be reduced by the sum of the amounts, if any, paid to the Employee for the same
period under any disability benefit or pension plan of the Company or any of its
subsidiaries.
d. The Company shall reimburse the Employee for all reasonable
ordinary and necessary travel, seminar, and other expenses related to the
Employee's duties which are incurred and accounted for in accordance with the
historic practices of the Company.
e. Employee shall be entitled to two weeks paid vacation
annually during the Term of employment by the Company hereunder. Any vacation
not used during any calendar year shall be forfeited, except that one week's
unused vacation may be carried forward to the year following the year in which
such vacation entitlement accrued.
f. The Company shall provide to the Employee an automobile
owned or leased by the Company of a make and model appropriate to the
Executive's status or an automobile allowance of up to $450.00 per month, at the
Company's election. The Company shall also reimburse all reasonable expenses
incurred by the Executive in connection with the operation and maintenance of
the automobile, including for gasoline, insurance, tires and similar items.
ARTICLE II - COVENANTS OF EMPLOYEE
Section 2.1 Confidentiality. Employee recognizes the interest of the
Company in maintaining the confidential nature of its proprietary and other
business and commercial information. In connection therewith, Employee covenants
that during the term of his employment with Company under this Agreement, and
for a period of one (1) year thereafter, Employee shall not, directly or
indirectly, except as authorized by the Board of Directors, publish, disclose or
use for his own benefit or for the benefit of a business or entity other than
the
2
<PAGE> 3
Company or otherwise, any secret or confidential matter, or proprietary or
other information not in the public domain that was acquired by Employee during
his employment, relating to the Company's, or any of its subsidiaries'
businesses, operations, customers, suppliers, products, employees, financial
affairs or industry practices, technology, know-how or intellectual property or
other similar information (the "Proprietary Information").
Employee will abide by the Company's policies and regulations, as
established from time to time, for the protection of its Proprietary
Information. Employee acknowledges that all records, files, data, documents and
the like relating to suppliers, customers, costs, prices, systems, methods,
personnel, technology and other materials relating to the Company or its
affiliated entities shall be and remain the sole property of the Company and/or
such affiliated entity and shall, upon the request of the Company, turn over all
copies of such Proprietary Information to the Company (together with a written
statement certifying as to his compliance with the foregoing).
Section 2.2 Non-Solicitation of Customers. During the Term of his
employment with the Company, and for a period of one (1) year thereafter,
Employee shall not directly or indirectly, through one or more intermediaries or
otherwise, solicit, direct or appropriate, or attempt to solicit, direct or
appropriate any individual or entity which was, at the time of termination of
Employee's employment, a customer or client of the Company for the purpose of
providing a service or product to such customer or client which is the same type
of service or product offered or provided by the Company at the time of
termination of Employee's employment, with the Company; provided, that if
Employee is terminated by the Company without Cause (as defined below) or if the
Employee resigns with Good Reason (as defined below), the restrictive period of
this Section 2.2 shall be six (6) months.
Section 2.3 Non-Solicitation of Employees. During the Term of his
employment with the Company, and for a period of one (1) year thereafter,
Employee shall not, directly or indirectly, through one or more intermediaries
or otherwise, employ, induce, solicit for employment, or assist others in
employing, inducing or soliciting for employment any individual who is at any
time during such period an employee of the Company for the purpose of providing
services that are the same or similar to the types of services offered or
engaged in by the Company at the time of termination of Employee's employment
with the Company; provided, that if Employee is terminated by the Company
without Cause (as defined below) or if the Employee resigns with Good Reason (as
defined below), the restrictive period of this Section 2.3 shall be six (6)
months.
Section 2.4 Trade Secrets. The Employee shall not, at any time, either
during the Term of his employment or after any termination of employment, use or
disclose any Trade Secrets (as defined under applicable law) of the Company or
its subsidiaries, except in fulfillment of his duties as the Employee during his
employment, for so long as the pertinent information or data remain Trade
Secrets, whether or not the Trade Secrets are in written or tangible form.
3
<PAGE> 4
ARTICLE III - TERMINATION OF EMPLOYMENT
Section 3.1 Termination by Company. Employee's employment may be
terminated by the Company by giving notice during the term of this Agreement
upon the occurrence of one or more of the following events:
(a) Employee's death or disability which renders Employee
incapable of performing his duties for more than one hundred twenty (120)
calendar days (termination under this Section 3.1(a) shall be deemed termination
without Cause);
(b) for any reason following a determination by the Board of
Directors to terminate Employee's employment (termination under this Section
3.1(b) shall be deemed termination without Cause); or
(c) "for Cause", which for purposes of this Agreement shall
mean that the Employee shall have:
(i) committed an intentional act of fraud, embezzlement
or theft in connection with his duties or in the course of his employment with
the Company which has a material adverse effect upon the Company;
(ii) inflicted intentional wrongful material damage to
any material asset of the Company or the Company;
(iii) intentionally and wrongfully violated this
Agreement, which violation has a material adverse effect upon the Company;
(iv) been convicted of a felony or any similar crime
carrying a prison term of at least one year (regardless of whether imprisonment
is actually imposed);
(v) a habitual and debilitating use of alcohol or drugs;
or
(vi) failed to meet performance expectations, as
determined and articulated by the Company's President and Chief Executive
Officer; provided, however, that in the event of this subsection (vi) being the
sole reason for a termination for Cause, Employee shall have the cure provisions
and rights provided for in Section 3.1(d) hereof.
(d) In the event of a determination by the Company's President and
Chief Executive Officer that the Employee has failed to meet performance
expectations, the Company shall furnish to Employee in writing a notice of
proposed termination setting forth a specific statement of the deficiencies in
his performance. Employee shall then have a period of thirty (30) days after the
giving of such written notice of proposed termination by the Company in which to
attempt to effect a cure of the specified deficiencies. If at the end of such
thirty (30) day period no such cure has been effected to the reasonable
satisfaction of the Board of Directors of the Company, then Employee's
employment shall be terminated as of the end of such thirty (30) day period. The
4
<PAGE> 5
Company shall be obligated to provide to Employee only one such notice of
proposed termination, and if subsequent to effecting a cure of specified
deficiencies the Employee is determined by the Board of Directors to have again
failed to meet performance expectations, then his employment may be terminated
immediately upon the Company's giving of a final notice of termination to
Employee.
Section 3.2 Good Reason. For purposes of this Agreement, "Good Reason"
shall mean, without the express written consent of Employee, the occurrence of a
material breach by the Company of any material provision of this Agreement,
including, but not limited to, material adverse alteration in the nature or
status of Employee's responsibilities, unless such breach is fully corrected
within thirty (30) days following written notification by Employee to the
Company that he intends to terminate his employment hereunder due to such
breach.
Section 3.3 Severance. For purposes of this Agreement, Employee's
entitlement to any severance payments upon termination of his employment shall
be as set forth below:
(a) Termination Without Cause. If Employee is terminated
without Cause or resigns for Good Reason at any time, Employee shall be entitled
to severance pay, at the Company's discretion, of either (i) a lump sum equal to
one-half (1/2) of his then current annual salary; or (ii) six consecutive
monthly payments of one-twelfth (1/12) of his then current annual salary. If
Employee is terminated without cause, resigns for Good Reason or a Change in
Control (as defined in the Company's 1996 Stock Option Plan) occurs, the
conditions to vesting of the options granted to the Employee pursuant to Section
1.3(c) above shall lapse and all such options shall immediately vest.
(b) For Cause. Employee shall not be entitled to any severance
pay whatsoever if his employment is terminated "for Cause" pursuant to Section
3.1(c) of this Agreement, unless severance pay is approved by the Board of
Directors of the Company in its sole discretion, provided, however, that the
Employee shall receive such annual salary that is accrued but unpaid up to the
date of such termination for Cause.
(c) Payments for Covenants. The severance payments provided
for in this Article III shall be made, in part, as consideration for the
Employee's covenants set forth in Article II.
(d) Termination. If the Employee's employment with the Company
is terminated prior to a Change in Control or prior to an initial public
offering of the Company's common stock with net proceeds to the Company of at
least ten million dollars ($10,000,000.00) for any reason other than the
Company's material breach of this Agreement, the Company shall be entitled to
repurchase from the Employee 100% of the stock, options and other securities of
the Company held or beneficially owned by the Employee at the greater of the
price the Employee paid for such securities or the then current fair market
value of such securities.
5
<PAGE> 6
ARTICLE IV - GENERAL PROVISIONS
Section 4.1 Withholding of Taxes. The Company may withhold from any
amounts payable under this Agreement all federal, state, city or other taxes and
withholdings as shall be required pursuant to any applicable law, rule or
regulation.
Section 4.2 Notice. For purposes of this Agreement, all communications
including, without limitation, notices, consents, requests or approvals,
provided for herein shall be in writing and shall be deemed to have been duly
given when personally delivered or five (5) business days after having been
mailed by United States registered mail or certified mail, return receipt
requested, postage prepaid, addressed to the Company (to the attention of the
Secretary of the Company) at its principal Employee office or to Employee at his
principal residence, or to such other address as any party may have furnished to
the other in writing and in accordance herewith, except the notices of change of
address shall be effective only upon receipt.
Section 4.3 Validity. It is not the intent of any party hereto to
violate any public policy of any jurisdiction in which this Agreement may be
enforced. If any provision of this Agreement or the application of any provision
hereof to any person or circumstances is held invalid, unenforceable or
otherwise illegal, the remainder of this Agreement and the application of such
provision to any other person or circumstances shall not be affected, and the
provision so held to be invalid, unenforceable or otherwise illegal shall be
reformed to the extent (and only to the extent) necessary to make it valid,
enforceable and legal; provided, however, if the provision so held to be
invalid, unenforceable or otherwise illegal constituted a material inducement to
a party's execution and delivery of this Agreement, then such provision shall
not be reformed unless prior to any reformation that party agrees to be bound by
the reformation.
Section 4.4 Entire Agreement. This Agreement supersedes any other
agreements, oral or written, between the parties with respect to the subject
matter hereof, and contains all of the agreements and understandings between the
parties with respect to the employment of Employee by the Company. Any waiver or
modification of any term of this Agreement shall be effective only if it is set
forth in a writing signed by both parties hereto.
Section 4.5 Successors and Binding Agreement.
(a) This Agreement shall be binding upon and inure to the
benefit of the Company and any Successor of or to the Company, but shall not
otherwise be assignable or delegable by the Company. "Successor" shall mean any
successor in interest, including, without limitation, any entity, individual or
group of persons acquiring directly or indirectly all or substantially all of
the business or assets of the Company, as the case may be, whether by sale,
merger, consolidation, reorganization or otherwise.
(b) The Company shall require any Successor to agree at the
time of becoming a Successor to perform this Agreement to the same extent as the
original parties would be required if no succession had occurred.
6
<PAGE> 7
(c) This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives, executors,
administrators, heirs, distributee and legatees.
(d) This Agreement is personal in nature and neither of the
parties shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in this Section 4.5.
Section 4.6 Captions. The captions in this Agreement are solely for
convenience of reference and shall not be given any effect in the construction
or interpretation of this Agreement.
Section 4.7 Miscellaneous. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in a writing signed by Employee and the Company. No waiver by a party
hereto at any time of any breach by another party hereto or compliance with any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provision or conditions at the
same or at any prior or subsequent time.
Section 4.8 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same Agreement.
Section 4.9 Modification and Waiver. No provisions of this Agreement
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing and signed by the Employee and the Company. No
waiver by any party hereto at any time of any breach by the other party hereto
of, or compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
Section 4.10 Governing Law; Arbitration. This Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of Georgia without giving effect to the conflict of laws principles thereof. Any
controversy, claim or dispute arising out of or relating to this Agreement, or
any breach thereof, including without limitation any dispute concerning the
scope of this arbitration clause, shall be settled by arbitration. The parties
indicate their acceptance of the foregoing arbitration requirement by initialing
below:
/s/ Henry Baroco /s/ Cleve Shultz
- -------------------------- ---------------------
For the Company Employee
Section 4.11 Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
7
<PAGE> 8
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and its seal to be affixed hereunto by its officers thereunto duly
authorized, and the Employee has signed and sealed this Agreement, effective as
of the date first above written.
ATTEST: TOWNE SERVICES, INC.
By: /s/ Bruce F. Lowthers, Jr. By: /s/ Henry Baroco
------------------------------- ------------------------------
Name: Bruce F. Lowthers, Jr. Name: Henry Baroco
Title: Chief Financial Officer Title: President and Chief
Operating Officer
(CORPORATE SEAL)
EMPLOYEE
/s/ Cleve B. Shultz
---------------------------------
CLEVE B. SHULTZ
8
<PAGE> 1
EXHIBIT 10.9
TOWNE CREDIT BANK MARKETING AGREEMENT
among
Towne Services, Inc.
and
The "Bank":
------------------
------------------
------------------
Date:
Towne Services, Inc. ("TSI") operates an automated merchant point of
sale service which serves as a "virtual credit card" program for small and
medium size merchants selling goods or providing services on in-house accounts,
and the Bank desires to participate in the Towne Credit program and market the
program to its customers. Capitalized terms not defined in this Agreement shall
have the meaning set forth in the Uniform Commercial Code.
The Bank and TSI agree as follows:
SECTION 1. THE TOWNE CREDIT PROGRAM
1.1 MARKETING AND OPERATION OF THE TOWNE CREDIT PROGRAM. The Bank
hereby elects to participate in the Towne Credit program in accordance with the
guidelines issued from time to time by TSI. The Bank agrees to provide TSI with
a list of the Bank's customers which the Bank believes would be appropriate
candidates to process transactions through the Towne Credit program, and TSI
agrees to assist the Bank in marketing the Towne Credit program to these
customers. The Bank agrees to enter into a Towne Credit Merchant Processing
Agreement, in the form then used by TSI (a "Processing Agreement"), with TSI and
the merchants which agree to participate in the Towne Credit program through the
Bank. TSI will assist each merchant in the installation of, and will provide
maintenance and support for, the Towne Credit program and the point of sale
terminal and other materials used in connection with the program. TSI will also
notify the Bank of complementary services or products TSI may offer or provide
from time to time in connection with the Towne Credit program, such as the
ability to include advertisements or other information with the statements
mailed to the merchant's customer, and will offer the Bank the opportunity to
purchase such services or products at TSI's then current rates. The services and
products offered by TSI through the Towne Credit Program, and the fees charged
for such services and products, are set forth on Schedule A. TSI will update
Schedule A from time to time, but will provide the Bank with at least 30 days'
prior notice of any increase in fees.
1.2 DISPLAYING SYMBOLS, SERVICE MARKS, AND NAMES. Upon request, TSI
will sell or otherwise supply the Bank with a reasonable supply of advertising
displays, merchant decals, and other point-of-sale promotional materials bearing
the Towne Credit program symbol and name to be used by the Bank pursuant to this
Agreement. The Bank agrees to display the current signage, symbols, service
marks, and name of the Towne Credit program on promotional materials to inform
its customers that the Bank offers the Towne Credit program. The Bank's right to
use or display such items shall continue only so long as this Agreement or any
successor agreement is in effect. The Bank acknowledges that the trademark
"Towne Credit" and the corresponding logotype are the property of TSI. The Bank
shall not infringe upon the mark or logo, nor otherwise use the mark or logo in
such a manner as to create the impression that the Bank's services are
affiliated with or offered by TSI.
1.3 COMPLIANCE WITH LAWS AND INDEMNIFICATION. The Bank agrees to comply
with all federal, state, and local laws, regulations, and ordinances in
connection with its dealings with customers in the performance of its
obligations hereunder. The Bank agrees to indemnify and hold TSI harmless from
and against any and all liabilities, losses, costs, damages, attorneys' fees,
and expenses of whatever kind or nature (i) which TSI may sustain or incur by
reason of, or in consequence of, the Bank's failure to comply with such laws,
regulations, or ordinances, (ii) in connection with any disputes related to
sales transactions which are processed through the Towne Credit program, or
(iii) in connection with any applicable rule requiring that records of sales or
credit transactions be maintained by the Bank or TSI or any other person. The
Bank is responsible for making its own credit decisions
<PAGE> 2
and agrees to indemnify and hold TSI harmless against all claims, losses, or
damages relating thereto or relating to claims by its customers.
SECTION 2. GENERAL
2.1 EXCLUSIVE AGREEMENT; CONFIDENTIALITY. While this Agreement is in
effect, the Bank shall not enter into a merchant participation agreement for any
other product similar to Towne Credit. The Bank acknowledges that this Agreement
and the related materials provided by TSI pursuant to this Agreement (the
"Confidential Materials") consist of confidential information of TSI. The Bank
shall treat the Confidential Materials in confidence and shall not use, copy, or
disclose them, nor permit any of its personnel to use, copy, or disclose them,
for any purpose that is not specifically contemplated by this Agreement.
2.2 NOTICES. TSI may modify the prices and terms set forth on Schedule
A from time to time upon 30 days' prior written notice to the Bank. Any notice
required or permitted to be given may be given in writing by depositing such
notice in the United States mail, postage paid, addressed as indicated below or
to such other place or places as either party hereto shall designate by written
notice to the other.
2.3 LIMITATION OF LIABILITY. The Bank acknowledges that data conversion
is subject to likelihood of human and machine errors, omissions, delays, and
losses, including inadvertent mutilation of documents, which may give rise to
loss or damage. Accordingly, the Bank agrees that TSI shall not be liable on
account of any such errors, omissions, delays, or losses unless caused by its
gross negligence or willful misconduct. The Bank is responsible for adopting
reasonable measures to limit its exposure with respect to such potential losses
and damages, including (without limitation) examination and confirmation of
results prior to use thereof, provision for identification and correction of
errors and omissions, preparation and storage of backup data, replacement of
lost or mutilated documents, and reconstruction of data. The Bank is also
responsible for complying with all local, state, and federal laws pertaining to
the use and disclosure of any data and in connection with all agreements the
Bank enters into with its customers. The Bank acknowledges that any form of
agreement provided by TSI which the Bank may use with its customers is provided
by TSI solely for the Bank's benefit; the Bank is not obligated to use any such
agreement; and the Bank should consult its own legal and accounting advisers
with respect to the enforceability and accounting treatment thereof. The
cumulative liability of TSI to the Bank for all claims relating to the Towne
Credit program and this Agreement, including any cause of action sounding in
contract, tort, or strict liability, shall not exceed the total amount of all
fees paid to TSI hereunder. In no event shall TSI be liable for any loss of
profits; any incidental, special, exemplary, or consequential damages; or any
claims or demands brought against the Bank, even if TSI has been advised of the
possibility of such claims or demands. This limitation upon damages and claims
is intended to apply without regard to whether other provisions of this
Agreement have been breached or have proven ineffective.
2.4 GENERAL. This Agreement shall be governed by Georgia law. This
Agreement may be executed in one or more counterparts. Promptly upon request by
TSI, the Bank shall execute such other agreements or instruments and give all
assistance reasonably required to evidence more fully and otherwise give full
and proper effect to the Bank's and TSI's rights under this Agreement. If any
provision of this Agreement is held by a court of competent jurisdiction to be
contrary to law, the remaining provisions of this Agreement will remain in full
force and effect. The Bank and TSI are independent contractors and nothing
contained herein shall be deemed to constitute either the Bank or TSI as agent
for the other. This Agreement shall be binding upon the successors of the Bank
and TSI but may not be assigned by either party without the written consent of
the other, except that TSI may assign this Agreement to any subsidiary or
affiliate or pursuant to a merger, sale of substantially all its assets, or
similar transaction. This Agreement and its attachments constitute the entire
agreement between the parties with respect to the matters covered hereby and
supersede all prior agreements, oral or written, and all other communications
relating to the subject matter hereof (but any rental of a Towne Credit point of
sale terminal shall be made pursuant to and subject to the terms of a separate
rental agreement).
2.5 TERMINATION. The initial term of this Agreement is specified on the
signature page of the Agreement. The Agreement will be automatically renewed for
additional one year terms unless either party gives written notice to the other
party not to renew the Agreement at least 30 days prior to the scheduled
termination date. In addition, this Agreement may be terminated prior to the end
of the term by either party at any time upon 30 days' prior written notice to
the other setting forth the effective date of termination. From and after such
effective date the Bank shall cease processing sales through the Towne Credit
program, shall cease displaying the service marks, symbols, and names related to
the Towne Credit program, and shall promptly return to TSI all materials
relating to the Towne Credit program. All obligations of the Bank incurred or
existing under this Agreement as of the date of termination shall survive such
termination.
IN WITNESS WHEREOF, TSI and the Bank have executed this Agreement as of
the date set forth on the first page of this Agreement.
<PAGE> 3
THE BANK: TOWNE SERVICES, INC.:
------------------------------------
By: By:
------------------------------------- ----------------------------
Name: Name:
Title: Title:
MAILING ADDRESS: MAILING ADDRESS:
--------------------------- -------------------------------
--------------------------- -------------------------------
Initial Term of the Agreement: ____ years
<PAGE> 1
EXHIBIT 10.10
TOWNE FINANCE BANK MARKETING AGREEMENT
AMONG
TOWNE SERVICES, INC.
AND
THE "BANK":
-----------------------------------
-----------------------------------
-----------------------------------
Date:
Towne Services, Inc. ("TSI") operates an automated accounts receivable
financing service which serves as a "financing" program for businesses who sell
goods or provide services primarily to other businesses on terms, and the Bank
desires to participate in the Towne Finance program and market the program to
its customers. Capitalized terms not defined in this Agreement shall have the
meaning set forth in the Uniform Commercial Code.
The Bank and TSI agree as follows:
SECTION 1. THE TOWNE FINANCE PROGRAM
1.1 MARKETING AND OPERATION OF THE TOWNE FINANCE PROGRAM. The Bank
hereby elects to participate in the Towne Finance program in accordance with the
guidelines issued from time to time by TSI. The Bank agrees to provide TSI with
a list of the Bank's customers which the Bank believes would be appropriate
candidates to process transactions through the Towne Finance program, and TSI
agrees to assist the Bank in marketing the Towne Finance program to these
customers. The Bank agrees to enter into a Towne Finance Client Processing
Agreement, in the form then used by TSI (a "Processing Agreement"), with TSI and
the clients which agree to participate in the Towne Finance program through the
Bank. TSI will assist each client in the installation of, and will provide
maintenance and support for, the Towne Finance program and any computer
equipment and other materials used in connection with the program. TSI will also
notify the Bank of complementary services or products TSI may offer or provide
from time to time in connection with the Towne Finance program, such as the
ability to include advertisements or other information with the statements
mailed to the client's customer, and will offer the Bank the opportunity to
purchase such services or products at
<PAGE> 2
TSI's then current rates. The services and products offered by TSI through the
Towne Finance Program, and the fees charged for such services and products, are
set forth on Schedule A. TSI will update Schedule A from time to time, but will
provide the Bank with at least 30 days' prior notice of any increase in fees.
1.2 DISPLAYING SYMBOLS, SERVICE MARKS, AND NAMES. Upon request, TSI
will sell or otherwise supply the Bank with a reasonable supply of advertising
displays and other promotional materials bearing the Towne Finance program
symbol and name to be used by the Bank pursuant to this Agreement. The Bank
agrees to display the current signage, symbols, service marks, and name of the
Towne Finance program on promotional materials to inform its customers that the
Bank offers the Towne Finance program. The Bank's right to use or display such
items shall continue only so long as this Agreement or any successor agreement
is in effect. The Bank acknowledges that the trademark "Towne Finance" and the
corresponding logotype are the property of TSI. The Bank shall not infringe upon
the mark or logo, nor otherwise use the mark or logo in such a manner as to
create the impression that the Bank's services are affiliated with or offered by
TSI.
1.3 COMPLIANCE WITH LAWS AND INDEMNIFICATION. The Bank agrees to comply
with all federal, state, and local laws, regulations, and ordinances in
connection with its dealings with customers in the performance of its
obligations hereunder. The Bank agrees to indemnify and hold TSI harmless from
and against any and all liabilities, losses, costs, damages, attorneys' fees,
and expenses of whatever kind or nature (i) which TSI may sustain or incur by
reason of, or in consequence of, the Bank's failure to comply with such laws,
regulations, or ordinances, (ii) in connection with any disputes related to
sales transactions which are processed through the Towne Finance program, or
(iii) in connection with any applicable rule requiring that records of sales or
credit transactions be maintained by the Bank or TSI or any other person. The
Bank is responsible for making its own credit decisions and agrees to indemnify
and hold TSI harmless against all claims, losses, or damages relating thereto or
relating to claims by its customers.
SECTION 2. GENERAL
2.1 EXCLUSIVE AGREEMENT; CONFIDENTIALITY. While this Agreement is in
effect, the Bank shall not enter into a client participation agreement for any
other product similar to Towne Finance. The Bank acknowledges that this
Agreement and the related materials provided by TSI pursuant to this Agreement
(the "Confidential Materials") consist of confidential information of TSI. The
Bank shall treat the Confidential Materials in confidence and shall not use,
copy, or disclose them, nor permit any of its personnel to use, copy, or
disclose them, for any purpose that is not specifically contemplated by this
Agreement.
2.2 NOTICES. TSI may modify the prices and terms set forth on Schedule
A from time to time upon 30 days' prior written notice to the Bank. Any notice
required or permitted to be given may be given in writing by depositing such
notice in the United States mail, postage paid, addressed as indicated below or
to such other place or places as either party hereto shall designate by written
notice to the other.
- 2 -
<PAGE> 3
2.3 LIMITATION OF LIABILITY. The Bank acknowledges that data conversion
is subject to likelihood of human and machine errors, omissions, delays, and
losses, including inadvertent mutilation of documents, which may give rise to
loss or damage. Accordingly, the Bank agrees that TSI shall not be liable on
account of any such errors, omissions, delays, or losses unless caused by its
gross negligence or willful misconduct. The Bank is responsible for adopting
reasonable measures to limit its exposure with respect to such potential losses
and damages, including (without limitation) examination and confirmation of
results prior to use thereof, provision for identification and correction of
errors and omissions, preparation and storage of backup data, replacement of
lost or mutilated documents, and reconstruction of data. The Bank is also
responsible for complying with all local, state, and federal laws pertaining to
the use and disclosure of any data and in connection with all agreements the
Bank enters into with its customers. The Bank acknowledges that any form of
agreement provided by TSI which the Bank may use with its customers is provided
by TSI solely for the Bank's benefit; the Bank is not obligated to use any such
agreement; and the Bank should consult its own legal and accounting advisers
with respect to the enforceability and accounting treatment thereof. The
cumulative liability of TSI to the Bank for all claims relating to the Towne
Finance program and this Agreement, including any cause of action sounding in
contract, tort, or strict liability, shall not exceed the total amount of all
fees paid to TSI hereunder. In no event shall TSI be liable for any loss of
profits; any incidental, special, exemplary, or consequential damages; or any
claims or demands brought against the Bank, even if TSI has been advised of the
possibility of such claims or demands. This limitation upon damages and claims
is intended to apply without regard to whether other provisions of this
Agreement have been breached or have proven ineffective.
2.4 GENERAL. This Agreement shall be governed by Georgia law. This
Agreement may be executed in one or more counterparts. Promptly upon request by
TSI, the Bank shall execute such other agreements or instruments and give all
assistance reasonably required to evidence more fully and otherwise give full
and proper effect to the Bank's and TSI's rights under this Agreement. If any
provision of this Agreement is held by a court of competent jurisdiction to be
contrary to law, the remaining provisions of this Agreement will remain in full
force and effect. The Bank and TSI are independent contractors and nothing
contained herein shall be deemed to constitute either the Bank or TSI as agent
for the other. This Agreement shall be binding upon the successors of the Bank
and TSI but may not be assigned by either party without the written consent of
the other, except that TSI may assign this Agreement to any subsidiary or
affiliate or pursuant to a merger, sale of substantially all its assets, or
similar transaction. This Agreement and its attachments constitute the entire
agreement between the parties with respect to the matters covered hereby and
supersede all prior agreements, oral or written, and all other communications
relating to the subject matter hereof (but any rental of a Towne Finance
terminal shall be made pursuant to and subject to the terms of a separate rental
agreement).
2.5 TERMINATION. The initial term of this Agreement is specified on the
signature page of the Agreement. The Agreement will be automatically renewed for
additional one year terms unless either party gives written notice to the other
party not to renew the Agreement at
- 3 -
<PAGE> 4
least 30 days prior to the scheduled termination date. In addition, this
Agreement may be terminated prior to the end of the term by either party at any
time upon 30 days' prior written notice to the other setting forth the effective
date of termination. From and after such effective date the Bank shall cease
processing sales through the Towne Finance program, shall cease displaying the
service marks, symbols, and names related to the Towne Finance program, and
shall promptly return to TSI all materials relating to the Towne Finance
program. All obligations of the Bank incurred or existing under this Agreement
as of the date of termination shall survive such termination.
IN WITNESS WHEREOF, TSI and the Bank have executed this Agreement as of
the date set forth on the first page of this Agreement.
THE BANK: TOWNE SERVICES, INC.:
---------------------------
BY: BY:
--------------------------------- ------------------------------------
Name: Name: Drew W. Edwards
Title Title: Chairman/CEO
MAILING ADDRESS: MAILING ADDRESS:
Initial Term of the Agreement: ____ years
- 4 -
<PAGE> 1
EXHIBIT 10.11
TOWNE CREDIT MERCHANT PROCESSING AGREEMENT
among
Towne Services, Inc.
and
The "Bank": The "Merchant":
------------------ -----------------
------------------ -----------------
------------------ -----------------
Date:
The Bank is a participant in the Towne Credit program offered by Towne
Services, Inc. ("TSI"), which is an automated merchant point of sale service
which serves as a "virtual credit card" program for small and medium size
merchants selling goods or providing services on in-house accounts, and the
Merchant desires to participate in the Towne Credit program through the Bank.
Capitalized terms not defined in this Agreement shall have the meaning set forth
in the Uniform Commercial Code.
The Bank, the Merchant, and TSI agree as follows:
SECTION 1. THE TOWNE CREDIT PROGRAM
1.1 ELECTION TO PARTICIPATE IN THE TOWNE CREDIT PROGRAM. The Merchant
hereby elects to participate in the Towne Credit program in accordance with the
guidelines issued from time to time by TSI. Pursuant to the Towne Credit
program, the Merchant shall elect (by marking the appropriate box on Schedule A
to this Agreement) either to purchase or lease a point of sale cash register
system meeting the specifications required by TSI at the price or rate indicated
on Schedule A. TSI will assist the Merchant in the installation of, and will
provide maintenance and support for, the Towne Credit program and the point of
sale terminal and other materials used in connection with the Program.
1.2 OPERATION OF THE TOWNE CREDIT PROGRAM. The Merchant agrees to enter
its customer accounts on the Towne Credit point of sale terminal. The Merchant
also agrees to process its customers' transactions through the Towne Credit
point of sale terminal in accordance with the instructions provided by TSI. The
Merchant may elect to process each transaction through either (i) "Towne
Credit," pursuant to which the Merchant will offer to sell the resulting Account
to the Bank in accordance with Section 2 of this Agreement, or (ii) "Towne
Bill," which will not involve a sale of the resulting Account to the Bank.
TSI will process the transactions through electronic data interchange
on a regular basis and will send the Merchant an electronic file containing
payment and finance charge information on each customer. TSI will also handle
(either directly or through a third party) the Merchant's statements, payments,
finance charges, past due letters, and similar items. These services will be
provided for the fees in effect from time to time by TSI. The initial fees are
set forth on Schedule A, and TSI will provide the Merchant with at least 30
days' prior notice of any increase in such fees.
1.3 DISPLAYING SYMBOLS, SERVICE MARKS AND NAMES. Upon request, TSI will
sell or otherwise supply the Merchant with a reasonable supply of advertising
displays, merchant decals, and other point-of-sale promotional materials bearing
the Towne Credit program symbol and name to be used by the Merchant pursuant to
this Agreement. The Merchant agrees to display the current signage, symbols,
service marks, and name of the Towne Credit program on promotional materials to
inform its customers that the Merchant offers the Towne Credit program. The
Merchant's right to use or display such items shall continue only so long as
this Agreement or any successor agreement is in effect. The Merchant and the
Bank acknowledge that the trademark "Towne Credit" and the corresponding
logotype are the property of TSI. The Merchant and the Bank shall not infringe
upon the mark or logo, nor otherwise use the mark or logo in such a manner as to
create the impression that the Merchant's goods or services are affiliated with
or sold by TSI.
1.4 PROCESSING TRANSACTIONS. The Merchant shall only process through
the Towne Credit program valid transactions of sales of goods and services
between itself and its customers. In each transaction, the Merchant shall be
deemed to warrant the
<PAGE> 2
true identity of the customer as the purchaser of the Merchant's goods or
services. The Merchant shall not present records of transactions that it or its
employees know or should have known to be fraudulent or not authorized by the
customer. The Bank and TSI reserve the right to audit the Merchant's files and
records. The Merchant may not process through the Towne Credit program any
transaction representing the refinancing of an existing obligation of a
customer, including, but not limited to, obligations previously owed to the
Merchant (except where the refinancing results from conversion of the Merchant's
existing credit program to the Towne Credit program); obligations arising from
the dishonor of a customer's personal check; and obligations representing the
collection of any pre-existing indebtedness.
1.5 COMPLIANCE WITH LAWS AND INDEMNIFICATION. The Merchant agrees to
comply with all federal, state, and local laws, regulations, and ordinances in
connection with its dealings with customers in the performance of its
obligations hereunder. The Merchant agrees to indemnify and hold the Bank and
TSI harmless from and against any and all liabilities, losses, costs, damages,
attorneys' fees, and expenses of whatever kind or nature (i) which the Bank or
TSI may sustain or incur by reason of, or in consequence of, the Merchant's
failure to comply with such laws, regulations, or ordinances, (ii) in connection
with any disputes related to sales transactions of the Merchant which are
processed through the Towne Credit program, or (iii) in connection with any
applicable rule requiring that records of sales or credit transactions be
maintained by the Bank or TSI or any other person. Each of the Merchant and the
Bank is responsible for making its own credit decisions and each agrees to
indemnify and hold TSI harmless against all claims, losses, or damages relating
thereto or relating to claims by its customers.
1.6 RECORDS. The Merchant shall maintain documentation in compliance
with Regulation Z of any sales transaction between the Merchant and a customer
which is processed through the Towne Credit program and, upon request by the
Bank or TSI, the Merchant will promptly provide a copy of such documentation to
the Bank or TSI. The Merchant agrees that it will keep and preserve tangible
copies of confirmations of sales and credit transactions authorized and data
captured through and by the Towne Credit program for seven years from the date
of each such transaction. In the event regulations require that the Bank or TSI
maintain records of sales or credit transactions, the Merchant hereby agrees to
maintain such records on behalf of the Bank and TSI.
1.7 AUTHORIZATION FOR AUTOMATED CLEARING HOUSE TRANSACTIONS, DIRECT
DEPOSITS, ETC. The Merchant agrees to open a commercial deposit account with the
Bank upon execution of this Agreement if it does not currently have one. The
Merchant hereby authorizes the Bank to present automated clearing house ("ACH")
credit for the payment of deposits due from the Bank or TSI and to present ACH
debits or payment due the Bank or TSI for discounts, fees, purchases or
chargebacks of Accounts, purchase or lease payments for point of sale equipment,
and other charges or payments pursuant to The Towne Credit program, as well as
for any obligations due the Bank upon an Event of Default. The Merchant's ABA
Transit Routing Number, Federal Tax Identification Number, and Demand Deposit
Account Number with the Bank are as shown below the Merchant's signature at the
end of this Agreement, and a voided blank check or deposit slip for such account
is attached hereto. The authority granted in this Section 1.7 shall remain in
full force and effect until the Merchant has notified the Bank in writing of the
termination of such authorization, in such time and in such manner as to afford
the Bank a reasonable opportunity to act thereon, or until ten days after the
Bank shall have provided written notice to the Merchant of termination of such
ACH arrangement. The Merchant also agrees, at the request of the Bank, to
establish direct deposit and withdrawal and/or other arrangements for the
transfer of funds into and out of the Merchant's account with the Bank, and to
execute any forms requested by the Bank in connection therewith.
SECTION 2. PURCHASE OF ACCOUNTS BY THE BANK.
2.1 SALE OF ACCOUNTS TO THE BANK. Each transaction processed by the
Merchant through the "Towne Credit" option will constitute an offer by the
Merchant to sell the resulting Account to the Bank. The Bank reserves the right
to decline to purchase any or all of the Merchant's Accounts. The Bank will
purchase an Account by notifying the Merchant and advancing to the Merchant an
amount equal to the face amount of such Account, less any applicable fees,
discounts, or charges, multiplied by the advance rate percentage set forth on
Schedule A, and the Bank shall make such advance by crediting the Merchant's
primary account with the Bank. The Bank may also from time to time make other
advances to the Merchant in such amounts as may be mutually agreed. The Bank may
also retain (or pay into the Reserve Account described in Section 2.4) a reserve
from such advances, and in its discretion revise the amount thereof from time to
time, as security for the Merchant's obligations hereunder. The Bank may apply
any amounts received in connection with Accounts processed through the Towne
Credit or Towne Bill program to repay any outstanding advances and any interest
or other applicable fees or charges. After a purchased Account is collected in
full by the Bank, the Bank shall pay to the Merchant the purchase price for such
Account, less an amount equal to the amount previously advanced by the Bank with
respect to the Account and applicable fees and charges. The Bank shall make such
payments periodically by crediting the Merchant's primary account with the Bank.
Either the Bank or TSI will send monthly statements to the Merchant's customers
whose Accounts are purchased by the Bank, instructing such customers to make
their payments directly to the Bank.
2
<PAGE> 3
2.2 REPURCHASE OF ACCOUNTS. The Bank may require that the Merchant
repurchase any Account in its sole discretion. In addition, the Merchant shall
immediately repurchase all Accounts upon the termination of this Agreement, as
well as any portion of an Account which remains unpaid for more than 90 days
from the date on which the Account was created. The Merchant agrees to
repurchase all such Accounts and hereby authorizes the Bank to consummate all
such repurchases by debiting the Merchant's account as described in Section 1.7
or the Reserve Account or, if requested by the Bank, by payment to the Bank of
the unpaid face amount due on the repurchased Accounts.
2.3 SECURITY INTEREST. As collateral securing the Obligations, the
Merchant grants to the Bank a continuing first priority security interest in and
to all collateral (if any) specified on Schedule B to this Agreement (the
"Collateral"). The Bank shall also retain a security interest in any Account
which is repurchased by the Merchant, and title to the Account and to the goods,
if any, represented by a repurchased Account shall remain with the Bank until
all Obligations are paid in full. The Bank may also require additional
collateral or guarantees to secure the obligations. The Merchant shall execute
and deliver to the Bank such documents and instruments, including, without
limitation, Uniform Commercial Code financing statements, as the Bank may
request from time to time in order to evidence and perfect its security interest
in any Collateral securing the Obligations. Without the consent of the Bank, the
Merchant shall not allow any financing statements covering the Collateral to be
on file in any public office.
2.4 RESERVE ACCOUNT. At the beginning of each month during the term of
this Agreement, the Bank may deduct from any commercial deposit account of the
Merchant funds sufficient to establish and maintain a reserve account (the
"Reserve Account") in the Bank's name and/or benefit in an amount or percentage
specified from time to time by the Bank. The initial Reserve Account amount or
percentage is set forth on Schedule A. The Bank may also hold and pay into the
Reserve Account any funds received in payment for transactions processed through
the Towne Credit or Towne Bill program if necessary to maintain the Reserve
Account at the specified level. In addition, upon termination of this Agreement,
the Bank may deduct from any deposit accounts of the Merchant and pay into the
Reserve Account an amount equal to 100% of all Accounts purchased by the Bank
during the four immediately preceding calendar months. The Bank may charge the
Reserve Account for any repurchase of Accounts and any other charges and fees to
the Bank or TSI pursuant to this Agreement. The Bank shall have no duty to
invest the funds held in the Reserve Account nor to pay interest thereon. The
Reserve Account shall remain in existence for 180 days following the termination
of this Agreement unless the Bank determines at an earlier date that no further
repurchase of Accounts pursuant to this Agreement will occur. Upon the lapse of
180 days or at such earlier date as the Bank in its discretion may determine,
the Bank shall pay over to the Merchant any funds remaining in the Reserve
Account after deduction of all Account repurchases and other charges and fees
pursuant to this Agreement.
2.5 RIGHT OF SET-OFF. In addition to and not in conflict with the
above, the Merchant hereby acknowledges that the Bank has the right to charge or
set off against any deposit of the Merchant with the Bank any debts or
obligations owing by the Merchant to the Bank, whether direct or indirect,
secured or unsecured, absolute or contingent, joint or separate, due or to
become due, whether as maker, endorser, guarantor, or otherwise, now existing or
hereafter contracted or acquired by the Bank, and wherever payable, together
with the interest thereon and expenses, if any, which may be incurred by the
Bank in connection therewith (the "Obligations").
2.6 EVENTS OF DEFAULT. The following events will constitute an Event of
Default hereunder: (i) the Merchant defaults in the payment of any Obligations,
(ii) the Merchant or any guarantor of the Obligations becomes subject to any
debtor-relief proceedings, (iii) any such guarantor fails to perform or observe
any of its obligations to the Bank or notifies the Bank of its intention to
rescind, modify, terminate or revoke any guaranty of the Obligations, or any
such guaranty shall cease to be in full force and effect for any reason
whatever, or (iv) the Bank for any reason, in good faith, deems itself insecure
with respect to the prospect of repayment or performance of the Obligations.
Upon the occurrence of any Event of Default, in addition to any rights the Bank
has under this Agreement or applicable law, the Bank may immediately terminate
this Agreement, at which time all Obligations shall become immediately due and
payable without notice.
SECTION 3. GENERAL
3.1 COLLECTION OF ACCOUNTS. The Merchant hereby appoints and authorizes
TSI and the Bank, and the Bank hereby appoints TSI, to serve as its
attorney-in-fact in connection with the collection of Accounts from the
Merchant's customers. TSI and the Bank shall have the right on behalf of and as
agent for the Merchant, and TSI shall have the right on behalf of and as agent
for the Bank, (a) to receive, take, endorse, assign and deliver in the
Merchant's (or the Bank's) name any and all checks, drafts and other instruments
for the payment of money relating to the Accounts processed through the Towne
Credit program, and (b) to take or bring, in the name of the Merchant or the
Bank, all steps, suits, or proceedings deemed by TSI or the Bank to be desirable
to effect collection of or other realization upon the Accounts and other
Collateral, (c) after an Event of Default, extend the time of payment of, or
settle for cash, credit, or return of merchandise, all Accounts and other
Collateral which includes a monetary
3
<PAGE> 4
obligation, and release the customer or any other obligor, all upon such terms
and conditions as TSI or the Bank may deem appropriate and without affecting any
of the Obligations, and (d) execute in the name of the Merchant and file against
the Merchant in favor of the Bank financing statements or amendments with
respect to the Collateral. However, TSI does not by anything herein or in any
assignment or otherwise assume any of the Bank's or the Merchant's obligations
under this Agreement or otherwise, and TSI shall not be responsible in any way
for the performance by the Bank or the Merchant of any of the terms and
conditions thereof.
Payments by customers will be deemed made when collected funds are
received and processed by the Bank or TSI, and all payments received from or for
the account of a customer will be applied to the obligations of that customer.
If the Merchant receives any payment from a customer with respect to charges for
merchandise or services which are processed through the Towne Credit program,
the Merchant shall receive such remittances in trust for the Bank and shall
indicate receipt of such funds on the Towne Credit point of sale terminal. The
Bank may require that the Merchant remit the funds to the Bank, properly
endorsed, no later than the next banking day following such request. Absent such
a request, however, the funds may be retained by the Merchant as an advance by
the Bank as described in Section 2.1, and the Merchant's account will be debited
to reflect the advance. The Merchant will pay to the Bank any finance charges
incurred pursuant to a customer's credit agreement which is a result of delay on
the Merchant's part in delivering payments or credit memos to the Bank.
3.2 ACCOUNT DISPUTES. The Merchant shall promptly notify the Bank and
TSI of and, if requested by the Bank, will settle, at its sole cost and expense,
all disputes concerning any Accounts purchased by the Bank. However, the
Merchant shall not, without the Bank's prior written consent, compromise or
adjust any such Account.
3.3 NOTICES. TSI or the Bank may modify the terms set forth on Schedule
A from time to time upon 30 days' prior written notice to the Merchant, provided
that the Bank may increase or decrease the reserve amount or percentage for the
Reserve Account from time to time in its sole discretion and shall promptly
notify the Merchant of any such increase or decrease. Any notice required or
permitted to be given may be given in writing by depositing such notice in the
United States mail, postage paid, addressed as indicated below or to such other
place or places as any party hereto shall designate by written notice to the
others. The Merchant hereby waives notice of default or non-payment, protest or
notice of protest, demand for payment, and any other demands or notices in
connection with this Agreement or any sales or credit processed through the
Towne Credit program. The Merchant hereby consents to extensions of time
granted, or compromise made, with any customer liable on any sales processed
through the Towne Credit program without affecting any liability of the Merchant
thereon or hereunder.
3.4 LIMITATION OF LIABILITY. The Merchant acknowledges that data
conversion is subject to likelihood of human and machine errors, omissions,
delays, and losses, including inadvertent mutilation of documents, which may
give rise to loss or damage. Accordingly, the Merchant agrees that TSI shall not
be liable on account of any such errors, omissions, delays, or losses unless
caused by its gross negligence or willful misconduct. The Merchant is
responsible for adopting reasonable measures to limit its exposure with respect
to such potential losses and damages, including (without limitation) examination
and confirmation of results prior to use thereof, provision for identification
and correction of errors and omissions, preparation and storage of backup data,
replacement of lost or mutilated documents, and reconstruction of data. The
Merchant is also responsible for complying with all local, state, and federal
laws pertaining to the use and disclosure of any data and in connection with all
agreements the Merchant enters into with its customers. The Merchant
acknowledges that any form of agreement provided by TSI which the Merchant may
use with its customers is provided by TSI solely for the Merchant's benefit; the
Merchant is not obligated to use any such agreement; and the Merchant should
consult its own legal and accounting advisers with respect to the enforceability
and accounting treatment thereof. The cumulative liability of TSI to the
Merchant for all claims relating to the Towne Credit program and this Agreement,
including any cause of action sounding in contract, tort, or strict liability,
shall not exceed the total amount of all fees paid to TSI hereunder. In no event
shall TSI be liable for any loss of profits; any incidental, special, exemplary,
or consequential damages; or any claims or demands brought against the Merchant,
even if TSI has been advised of the possibility of such claims or demands. This
limitation upon damages and claims is intended to apply without regard to
whether other provisions of this Agreement have been breached or have proven
ineffective.
3.5 TERMINATION. This Agreement may be terminated by any party at any
time upon 30 days' prior written notice to the others setting forth the
effective date of termination. From and after such effective date the Merchant
shall cease processing sales through the Towne Credit program, shall cease
displaying the service marks, symbols, and names related to the Towne Credit
program, and shall promptly return to the Bank or TSI all materials relating to
the Towne Credit program. All obligations of the Merchant incurred or existing
under this Agreement as of the date of termination shall survive such
termination, including, without limitation, any continuing obligation with
respect to repurchases of Accounts.
3.6 GENERAL. This Agreement shall be governed by Georgia law. This
Agreement may be executed in one or more counterparts. Promptly upon request by
the Bank or TSI, the Merchant shall execute such other agreements or
instruments and
4
<PAGE> 5
give all assistance reasonably required to evidence more fully and otherwise
give full and proper effect to the Bank's and TSI's rights under this Agreement.
If any provision of this Agreement is held by a court of competent jurisdiction
to be contrary to law, the remaining provisions of this Agreement will remain in
full force and effect. The Bank, TSI, and the Merchant are independent
contractors and nothing contained herein shall be deemed to constitute either
the Bank, TSI, or the Merchant as agent for the others. This Agreement shall be
binding upon the successors of the Bank, TSI, and the Merchant, but may not be
assigned by any party without the written consent of the others, except that TSI
may assign this Agreement to any subsidiary or affiliate or pursuant to a
merger, sale of substantially all its assets, or similar transaction. While this
Agreement is in effect, the Merchant shall not enter into a merchant
participation agreement for any other product similar to Towne Credit. This
Agreement and its attachments constitute the entire agreement between the
parties with respect to the matters covered hereby and supersede all prior
agreements, oral or written, and all other communications relating to the
subject matter hereof (but any rental of a Towne Credit point of sale terminal
shall be made pursuant to and subject to the terms of a separate rental
agreement).
IN WITNESS WHEREOF, TSI, the Merchant, and the Bank have executed this
Agreement as of the date set forth on the first page of this Agreement.
THE BANK: THE MERCHANT:
--------------------- -------------------------
By: By:
--------------------------- ----------------------------------
Name: Name:
Title: Title:
MAILING ADDRESS: MAILING ADDRESS:
TOWNE SERVICES, INC.: ABA Transit Routing
No.:
-----------------------
By: DDA No.:
---------------------------- ------------------------
Name:
Title: (Please attach a voided check or
deposit slip)
MAILING ADDRESS: Federal Tax I.D. No.
----------------
5
<PAGE> 1
EXHIBIT 10.12
TOWNE FINANCE CLIENT PROCESSING AGREEMENT
among
Towne Services, Inc.
and
The "Bank": The "Client":
------------------ -----------------
------------------ -----------------
------------------ -----------------
Date:
The Bank is a participant in the Towne Finance program offered by Towne
Services, Inc. ("TSI"), which is an automated Accounts Receivable Management
service which serves as a financing program for businesses who sell goods or
provide services primarily to other businesses, and the Client desires to
participate in the Towne Finance program through the Bank. Capitalized terms not
defined in this Agreement shall have the meaning set forth in the Uniform
Commercial Code.
The Bank, the Client, and TSI agree as follows:
SECTION 1. THE TOWNE FINANCE PROGRAM
1.1 ELECTION TO PARTICIPATE IN THE TOWNE FINANCE PROGRAM. The Client
hereby elects to participate in the Towne Finance program in accordance with the
guidelines issued from time to time by TSI. Pursuant to the Towne Finance
program, the Client shall elect (by marking the appropriate box on Schedule A to
this Agreement) either to use existing PC equipment or to purchase or lease a
computer system meeting the specifications required by TSI at the price or rate
indicated on Schedule A. TSI will assist the Client in the installation of, and
will provide maintenance and support for, the Towne Finance program and any
purchased/leased equipment and other materials used in connection with the
Program.
1.2 OPERATION OF THE TOWNE FINANCE PROGRAM. The Client agrees to
electronically report and/or physically deliver its customer accounts on the
Towne Finance program. The Client also agrees to process its customers'
transactions through the Towne Finance program in accordance with the
instructions provided by TSI. The Client will process each sales transaction
through "Towne Finance," pursuant to which the Client will offer to sell the
resulting Account to the Bank in accordance with Section 2 of this Agreement.
TSI will process the transactions through electronic data interchange
on a regular basis and will provide the Client reporting containing payment and
finance charge information on each customer. TSI will also handle (either
directly or through a third party) the Client's statements, payments, finance
charges, past due letters, and similar items. These services will be provided
for the fees in effect from time to time by TSI. The initial fees are set forth
on Schedule A, and TSI will provide the Client with at least 30 days' prior
notice of any increase in such fees.
1.3 DISPLAYING SYMBOLS, SERVICE MARKS AND NAMES. The Client and the
Bank acknowledge that the trademark "Towne Finance" and the corresponding
logotype are the property of TSI. The Client and the Bank shall not infringe
upon the mark or logo, nor otherwise use the mark or logo in such a manner as to
create the impression that the Client's goods or services are affiliated with
or sold by TSI.
1.4 PROCESSING TRANSACTIONS. The Client shall only process through
the Towne Finance program valid transactions of sales of goods and services
between itself and its customers. In each transaction, the Client shall be
deemed to warrant the
<PAGE> 2
true identity of the customer as the purchaser of the Client's goods or
services. The Client shall not present records of transactions that it or its
employees know or should have known to be fraudulent or not authorized by the
customer. The Bank and TSI reserve the right to audit the Client's files and
records. The Client may not process through the Towne Credit program any
transaction representing the refinancing of an existing obligation of a
customer, including, but not limited to, obligations previously owed to the
Client (except where the refinancing results from conversion of the Client's
existing credit program to the Towne Credit program); obligations arising from
the dishonor of a customer's personal check; and obligations representing the
collection of any pre-existing indebtedness.
1.5 COMPLIANCE WITH LAWS AND INDEMNIFICATION. The Client agrees to
comply with all federal, state, and local laws, regulations, and ordinances in
connection with its dealings with customers in the performance of its
obligations hereunder. The Client agrees to indemnify and hold the Bank and
TSI harmless from and against any and all liabilities, losses, costs, damages,
attorneys' fees, and expenses of whatever kind or nature (i) which the Bank or
TSI may sustain or incur by reason of, or in consequence of, the Client's
failure to comply with such laws, regulations, or ordinances, (ii) in connection
with any disputes related to sales transactions of the Client which are
processed through the Towne Credit program, or (iii) in connection with any
applicable rule requiring that records of sales or credit transactions be
maintained by the Bank or TSI or any other person. Each of the Client and the
Bank is responsible for making its own credit decisions and each agrees to
indemnify and hold TSI harmless against all claims, losses, or damages relating
thereto or relating to claims by its customers.
1.6 RECORDS. The Client agrees that it will keep and preserve tangible
copies of confirmations of sales and credit transactions authorized and data
captured through and by the Towne Finance program for seven years from the date
of each such transaction. In the event regulations require that the Bank or TSI
maintain records of sales or credit transactions, the Client hereby agrees to
maintain such records on behalf of the Bank and TSI. Upon request by the Bank or
TSI, the Client will promptly provide a copy of such documentation to the Bank
or TSI.
1.7 AUTHORIZATION FOR AUTOMATED CLEARING HOUSE TRANSACTIONS, DIRECT
DEPOSITS, ETC. The Client agrees to open a commercial deposit account with the
Bank upon execution of this Agreement if it does not currently have one. The
Client hereby authorizes the Bank to present automated clearing house ("ACH")
credit for the payment of deposits due from the Bank or TSI and to present ACH
debits or payment due the Bank or TSI for discounts, fees, purchases or
chargebacks of Accounts, purchase or lease payments for any provided computer
equipment, and other charges or payments pursuant to The Towne Finance program,
as well as for any obligations due the Bank upon an Event of Default. The
Client's ABA Transit Routing Number, Federal Tax Identification Number, and
Demand Deposit Account Number with the Bank are as shown below the Client's
signature at the end of this Agreement, and a voided blank check or deposit slip
for such account is attached hereto. The authority granted in this Section 1.7
shall remain in full force and effect until the Client has notified the Bank in
writing of the termination of such authorization, in such time and in such
manner as to afford the Bank a reasonable opportunity to act thereon, or until
ten days after the Bank shall have provided written notice to the Client of
termination of such ACH arrangement. The Client also agrees, at the request of
the Bank, to establish direct deposit and withdrawal and/or other arrangements
for the transfer of funds into and out of the Client's account with the Bank,
and to execute any forms requested by the Bank in connection therewith.
SECTION 2. PURCHASE OF ACCOUNTS BY THE BANK.
2.1 SALE OF ACCOUNTS TO THE BANK. Each transaction processed by the
Client through the "Towne Finance" program will constitute an offer by the
Client to sell the resulting Account to the Bank as absolute owner, with full
recourse. Each Accounts Transmittal shall be accompanied by copies of the
invoices and/or such other documentation, supporting and evidencing the Account
as the Bank shall from time to time request. The Bank may at its sole
discretion, purchase any Account which does not deem to be Ineligible by
providing funding against such Accounts according to the asset valuation
percentages defined in Exhibit A. The Bank reserves the right to decline to
purchase any or all of the Client's Accounts. The Bank may, at its sole
discretion, purchase any Account which does not deem to be Ineligible by
providing funding against such Accounts according to the asset valuation
percentages defined in Appendix A. The Bank reserves the right to decline to
purchase any or all of the Client's Accounts. An Ineligible Account or Invoice
is or becomes ineligible as determined by the Bank in the exercise of its sole
credit or business judgment. The Bank may also from time to time make other
advances to the Client in such amounts as may be mutually agreed. The Bank may,
in its discretion, periodically revise the valuation percentages used to
determine the funding availability against the line of credit from time to time,
as security for the Client's obligation hereunder. The bank may apply any
amounts received in connection with Accounts processed through the Towne Finance
program to repay any outstanding advances and any interest or other applicable
fees or charges. After a purchased Account is collected by the Bank, the Bank
shall credit all collected funds to the outstanding loan Balance. The Bank shall
make advances upon the line of credit periodically by crediting the Client's
primary account with the Bank. TSI will send monthly statements to the Client's
customers whose Accounts are purchased by the Bank, itemizing their account
activity during proceeding billing period and instructing such customers to make
their payments directly to the remittance address provided by the Bank or by
TSI. Before sending any invoice evidencing an account to the account debtor, the
Client shall mark same with the notification set forth on schedule A, or such
other notification as bank shall have advised the Client in writing. Upon
written request of the Client, the Bank may elect not to send statements to
specified Client customers.
2
<PAGE> 3
2.2 REPURCHASE OF ACCOUNTS. The Bank may require that the Client
repurchase any Account in its sole discretion. In addition, the Client shall
immediately repurchase all Accounts upon the termination of this Agreement. The
Client agrees to repurchase all such Accounts and hereby authorizes the Bank to
consummate all such repurchases by debiting the Client's account as described in
Section 1.7 or, if requested by the Bank, by payment to the Bank of the
outstanding loan balance. At the Bank's request, the Client shall also execute
a master demand note and such other documents and instruments as the Bank may
request from time to time to evidence the Client's obligations hereunder and to
facilitate the collection thereof.
2.3 SECURITY INTEREST. As collateral securing the Obligations, the
Client grants to the Bank the security interest set forth in and to all
collateral (if any) specified on Schedule B to this Agreement (the
"Collateral"). The Bank shall also retain a security interest in any Account
which is repurchased by the Client, and title to the Account and to the goods,
if any, represented by a repurchased Account shall remain with the Bank until
all Obligations are paid in full. The Bank may also require additional
collateral or guarantees to secure the obligations. The Client shall execute and
deliver to the Bank such documents and instruments, including, without
limitation, a master demand note and Uniform Commercial Code financing
statements, as the Bank may request from time to time in order to evidence and
perfect its security interest in any Collateral securing the Obligations and to
facilitate the Bank's collection thereof. Without the consent of the Bank, the
Client shall not allow any financing statements covering the Collateral to be on
file in any public office.
2.4 RIGHT OF SET-OFF. In addition to and not in conflict with the
above, the Client hereby acknowledges that the Bank has the right to charge or
set off against any deposit of the Client with the Bank any debts or obligations
owing by the Client to the Bank, whether direct or indirect, secured or
unsecured, absolute or contingent, joint or separate, due or to become due,
whether as maker, endorser, guarantor, or otherwise, now existing or hereafter
contracted or acquired by the Bank, and wherever payable, together with the
interest thereon and expenses, if any, which may be incurred by the Bank in
connection therewith (the "Obligations").
2.5 EVENTS OF DEFAULT. The following events will constitute an Event of
Default hereunder: (i) the Client defaults in the payment of any Obligations,
(ii) the Client or any guarantor of the Obligations becomes subject to any
debtor-relief proceedings, (iii) any such guarantor fails to perform or observe
any of its obligations to the Bank or notifies the Bank of its intention to
rescind, modify, terminate or revoke any guaranty of the Obligations, or any
such guaranty shall cease to be in full force and effect for any reason
whatever, or (iv) the Bank for any reason, in good faith, deems itself insecure
with respect to the prospect of repayment or performance of the Obligations.
Upon the occurrence of any Event of Default, in addition to any rights the Bank
has under this Agreement or applicable law, the Bank may immediately terminate
this Agreement, at which time all Obligations shall become immediately due and
payable without notice. As provided in Section 3.5 below, all obligations of
the Client incurred or existing under this Agreement as of the date of such
termination shall survive termination, and this Agreement shall remain in effect
for purposes of the Bank's or TSI's pursuit of remedies hereunder, including
collection of such Obligations under this Agreement or pursuant to a master
demand note issued by the Client to the Bank.
SECTION 3. GENERAL
3.1 COLLECTION OF ACCOUNTS. The Client hereby appoints and authorizes
TSI and the Bank, and the Bank hereby appoints TSI, to serve as its
attorney-in-fact in connection with the collection of Accounts from the Client's
customers. TSI and the Bank shall have the right on behalf of and as agent for
the Client, and TSI shall have the right on behalf of and as agent for the Bank,
(a) to receive, take, endorse, assign and deliver in the Client's (or the
Bank's) name any and all checks, drafts and other instruments for the payment of
money relating to the Accounts processed through the Towne Credit program, and
(b) to take or bring, in the name of the Client or the Bank, all steps, suits,
or proceedings deemed by TSI or the Bank to be desirable to effect collection of
or other realization upon the Accounts and other Collateral, (c) after an Event
of Default, extend the time of payment of, or settle for cash, credit, or return
of merchandise, all Accounts and other Collateral which includes a monetary
3
<PAGE> 4
obligation, and release the customer or any other obligor, all upon such terms
and conditions as TSI or the Bank may deem appropriate and without affecting any
of the Obligations, and (d) execute in the name of the Client and file against
the Client in favor of the Bank financing statements or amendments with
respect to the Collateral. However, TSI does not by anything herein or in any
assignment or otherwise assume any of the Bank's or the Client's obligations
under this Agreement or otherwise, and TSI shall not be responsible in any way
for the performance by the Bank or the Client of any of the terms and
conditions thereof.
Payments by customers will be deemed made when collected funds are
received and processed by the Bank or TSI, and all payments received from or for
the account of a customer will be applied to the obligations of that customer.
If the Client receives any payment from a customer with respect to charges for
merchandise or services which are processed through the Towne Finance program,
the Client shall receive such remittances in trust for the Bank and shall
indicate receipt of such funds on the Towne Finance program by electronic and/or
written Account activity transmittal form. The Bank may require that the
Client remit the funds to the Bank, properly endorsed, no later than the next
banking day following such request. Absent such a request, however, the funds
may be retained by the Client as an advance by the Bank as described in
Section 2.1, and the Client's account will be debited to reflect the advance.
The Client will pay to the Bank any finance charges incurred pursuant to a
customer's credit agreement which is a result of delay on the Client's part in
delivering payments or credit memos to the Bank.
3.2 ACCOUNT DISPUTES. The Client shall promptly notify the Bank and
TSI of and, if requested by the Bank, will settle, at its sole cost and expense,
all disputes concerning any Accounts purchased by the Bank. However, the
Client shall not, without the Bank's prior written consent, compromise or
adjust any such Account.
3.3 NOTICES. TSI or the Bank may modify the terms set forth on Schedule
A from time to time upon 30 days' prior written notice to the Client, provided
that the Bank may increase or decrease the percentages for the Reserve Account
from time to time in its sole discretion and shall promptly notify the Client
of any such increase or decrease. Any notice required or permitted to be given
may be given in writing by depositing such notice in the United States mail,
postage paid, addressed as indicated below or to such other place or places as
any party hereto shall designate by written notice to the others. The Client
hereby waives notice of default or non-payment, protest or notice of protest,
demand for payment, and any other demands or notices in connection with this
Agreement or any sales or credit processed through the Towne Finance program.
The Client hereby consents to extensions of time granted, or compromise made,
with any customer liable on any sales processed through the Towne Finance
program without affecting any liability of the Client thereon or hereunder.
3.4 LIMITATION OF LIABILITY. The Client acknowledges that data
conversion is subject to likelihood of human and machine errors, omissions,
delays, and losses, including inadvertent mutilation of documents, which may
give rise to loss or damage. Accordingly, the Client agrees that TSI shall not
be liable on account of any such errors, omissions, delays, or losses unless
caused by its gross negligence or willful misconduct. The Client is
responsible for adopting reasonable measures to limit its exposure with respect
to such potential losses and damages, including (without limitation) examination
and confirmation of results prior to use thereof, provision for identification
and correction of errors and omissions, preparation and storage of backup data,
replacement of lost or mutilated documents, and reconstruction of data. The
Client is also responsible for complying with all local, state, and federal
laws pertaining to the use and disclosure of any data and in connection with all
agreements the Client enters into with its customers. The Client
acknowledges that any form of agreement provided by TSI which the Client may
use with its customers is provided by TSI solely for the Client's benefit; the
Client is not obligated to use any such agreement; and the Client should
consult its own legal and accounting advisers with respect to the enforceability
and accounting treatment thereof. The cumulative liability of TSI to the
Client for all claims relating to the Towne Finance program and this Agreement,
including any cause of action sounding in contract, tort, or strict liability,
shall not exceed the total amount of all fees paid to TSI hereunder. In no event
shall TSI be liable for any loss of profits; any incidental, special, exemplary,
or consequential damages; or any claims or demands brought against the Client,
even if TSI has been advised of the possibility of such claims or demands. This
limitation upon damages and claims is intended to apply without regard to
whether other provisions of this Agreement have been breached or have proven
ineffective.
3.5 TERMINATION. This Agreement may be terminated by any party at any
time upon 30 days' prior written notice to the others setting forth the
effective date of termination. From and after such effective date the Client
shall cease processing sales through the Towne Finance program, shall cease
displaying the service marks, symbols, and names related to the Towne Finance
program, and shall promptly return to the Bank or TSI all materials relating to
the Towne Finance program. All obligations of the Client incurred or existing
under this Agreement as of the date of termination shall survive such
termination, including, without limitation, any continuing obligation with
respect to repurchases of Accounts, and this Agreement shall remain in effect
for purposes of the Bank's or TSI's pursuit of remedies hereunder, including
collection of such Obligations under this Agreement or pursuant to a master
demand note issued by the Client to the Bank.
3.6 GENERAL. This Agreement shall be governed by Georgia law. This
Agreement may be executed in one or more counterparts. Promptly upon request by
the Bank or TSI, the Client shall execute such other agreements or
instruments and
4
<PAGE> 5
give all assistance reasonably required to evidence more fully and otherwise
give full and proper effect to the Bank's and TSI's rights under this Agreement.
If any provision of this Agreement is held by a court of competent jurisdiction
to be contrary to law, the remaining provisions of this Agreement will remain in
full force and effect. The Bank, TSI, and the Client are independent
contractors and nothing contained herein shall be deemed to constitute either
the Bank, TSI, or the Client as agent for the others. This Agreement shall be
binding upon the successors of the Bank, TSI, and the Client, but may not be
assigned by any party without the written consent of the others, except that TSI
may assign this Agreement to any subsidiary or affiliate or pursuant to a
merger, sale of substantially all its assets, or similar transaction. While this
Agreement is in effect, the Client shall not enter into a Client participation
agreement for any other product similar to Towne Finance. This Agreement and its
attachments constitute the entire agreement between the parties with respect to
the matters covered hereby and supersede all prior agreements, oral or written,
and all other communications relating to the subject matter hereof (but any
rental of a Towne Finance computer system shall be made pursuant to and subject
to the terms of a separate rental agreement).
IN WITNESS WHEREOF, TSI, the Client, and the Bank have executed this
Agreement as of the date set forth on the first page of this Agreement.
THE BANK: THE CLIENT:
--------------------- --------------------------
By: By:
--------------------------- ----------------------------------
Name: Name:
Title: Title:
MAILING ADDRESS: MAILING ADDRESS:
TOWNE SERVICES, INC.: ABA Transit Routing
No.:
-----------------------
By: DDA No.:
---------------------------- ------------------------
Name:
Title: (Please attach a voided check or
deposit slip)
MAILING ADDRESS: Federal Tax I.D. No.
----------------
5
<PAGE> 1
EXHIBIT 10.13
STOCK PURCHASE WARRANT
This Warrant is issued this 18 day of December, 1997, by TOWNE
SERVICES, INC., a Georgia corporation (the "Company"), to SIRROM INVESTMENTS,
INC., a Tennessee corporation (SIRROM INVESTMENTS, INC. and any subsequent
assignee or transferee hereof are hereinafter referred to collectively as
"Holder" or "Holders").
AGREEMENT:
1. ISSUANCE OF WARRANT; TERM. For and in consideration of Sirrom
Investments, Inc. making a loan to the Company in an amount of One Million Five
Hundred Thousand and no/100ths Dollars ($1,500,000) pursuant to the terms of a
secured promissory note of even date herewith (the "Note") and related loan
agreement of even date herewith (the "Loan Agreement"), and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company hereby grants to Holder the right to purchase 308,982
shares of the Company's common stock (the "Common Stock"), which the Company
represents to equal 2% of the shares of capital stock outstanding on the date
hereof, calculated on a fully diluted basis and assuming exercise of this
Warrant ("Base Amount"), provided that in the event that any portion of the
indebtedness evidenced by the Note is outstanding on the following dates, the
Base Amount shall be increased to the corresponding number set forth below:
<TABLE>
<CAPTION>
DATE BASE AMOUNT
- ----------------------------- --------------------------------------------
<S> <C> <C>
January 1, 2000 549,124 shares, which the Company
represents to equal 3.5% of the shares of
the Company's capital stock outstanding on
the date hereof calculated on a fully
diluted basis after exercise of this Warrant
January 1, 2001 796,849 shares, which the Company
represents to equal 5.0% of the shares of
the Company's capital stock outstanding on
the date hereof calculated on a fully
diluted basis after exercise of this Warrant
January 1, 2002 1,052,522 shares, which the Company
represents to equal 6.5% of the shares of
the Company's capital stock outstanding on
the date hereof calculated on a fully
diluted basis after exercise of this Warrant
</TABLE>
The shares of Common Stock issuable upon exercise of this Warrant are
hereinafter referred to as the "Shares." This Warrant shall be exercisable at
any time and from time to time from the date hereof until January 31, 2003. In
the event that the Company does not receive an additional $1.5
<PAGE> 2
million in equity capital by June 30, 1998, the Base Amount and the
corresponding ratchets for the years 2000, 2001, and 2002 will be increased to
5.0%, 6.5%, 8.0% and 9.5%, respectively.
2. EXERCISE PRICE. The exercise price (the "Exercise Price") per share
for which all or any of the Shares may be purchased pursuant to the terms of
this Warrant shall be One Cent ($.01).
3. EXERCISE. This Warrant may be exercised by the Holder hereof (but
only on the conditions hereinafter set forth) as to all or any increment or
increments of One Hundred (100) Shares (or the balance of the Shares if less
than such number), upon delivery of written notice of intent to exercise to the
Company at the following address: 6621 Bay Circle, Suite 170, Norcross, Georgia
20071 or such other address as the Company shall designate in a written notice
to the Holder hereof, together with this Warrant and payment to the Company of
the aggregate Exercise Price of the Shares so purchased. The Exercise Price
shall be payable, at the option of the Holder (pursuant to documentation
satisfactory to the Company), (i) by certified or bank check, (ii) by the
surrender of the Note or portion thereof having an outstanding principal balance
equal to the aggregate Exercise Price or (iii) by the surrender of a portion of
this Warrant where the Shares subject to the portion of this Warrant that is
surrendered have a fair market value equal to the aggregate Exercise Price. Upon
exercise of this Warrant as aforesaid, the Company shall as promptly as
practicable, and in any event within fifteen (15) days thereafter, execute and
deliver to the Holder of this Warrant (or instruct its transfer agent to do so)
a certificate or certificates for the total number of whole Shares for which
this Warrant is being exercised in such names and denominations as are requested
by such Holder. If this Warrant shall be exercised with respect to less than all
of the Shares, the Holder shall be entitled to receive a new Warrant covering
the number of Shares in respect of which this Warrant shall not have been
exercised, which new Warrant shall in all other respects be identical to this
Warrant. The Company covenants and agrees that it will pay when due any and all
state and federal issue taxes which may be payable in respect of the issuance of
this Warrant or the issuance of any Shares upon exercise of this Warrant.
4. COVENANTS AND CONDITIONS. The above provisions are subject to the
following:
(a) Neither this Warrant nor the Shares have been registered
under the Securities Act of 1933, as amended ("Securities Act") or any
state securities laws ("Blue Sky Laws"). This Warrant has been acquired
for investment purposes and not with a view to distribution or resale
and may not be sold or otherwise transferred without (i) an effective
registration statement for such Warrant under the Securities Act and
such applicable Blue Sky Laws, or (ii) an opinion of counsel, which
opinion and counsel shall be reasonably satisfactory to the Company and
its counsel, that registration is not required under the Securities Act
or under any applicable Blue Sky Laws (the Company hereby acknowledges
that Caldwell & Caldwell, P.C. is acceptable counsel to render such
opinion). Transfer of the shares issued upon the exercise of this
Warrant shall be restricted in the same manner and to the same extent
as the Warrant and the certificates representing such Shares shall bear
substantially the following legend:
2
<PAGE> 3
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAW
AND MAY NOT BE TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT
UNDER THE ACT AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL
HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) IN THE
OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY, REGISTRATION
UNDER SUCH SECURITIES ACTS AND SUCH APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH
PROPOSED TRANSFER.
The Holder hereof and the Company agree to execute such other documents
and instruments as counsel for the Company reasonably deems necessary
to effect the compliance of the issuance of this Warrant and any shares
of Common Stock issued upon exercise hereof with applicable federal and
state securities laws.
(b) The Company covenants and agrees that all Shares which may
be issued upon exercise of this Warrant will, upon issuance and payment
therefor, be legally and validly issued and outstanding, fully paid and
nonassessable, free from all taxes, liens, charges and preemptive
rights imposed by the Company, if any, with respect thereto or to the
issuance thereof. The Company shall at all times reserve and keep
available for issuance upon the exercise of this Warrant such number of
authorized but unissued shares of Common Stock as will be sufficient to
permit the exercise in full of this Warrant.
(c) The Company covenants and agrees that it shall not sell
any shares of the Company's capital stock at a price per share below
the fair market value of such shares, without the prior written consent
of the Holder hereof. In the absence of an established public market
for the shares of stock sold by the Company, fair market value shall be
established by the Company's board of directors in a commercially
reasonable manner. The basis for determination shall be provided in
writing to the Holder hereof. In the event that the Company sells
shares of the Company's capital stock in violation of this Section
4(c), the number of shares issuable upon exercise of this Warrant shall
be equal to the product obtained by multiplying the number of shares
issuable pursuant to this Warrant prior to such sale by the quotient
obtained by dividing (i) the fair market value of the shares issued in
violation of this Section 4(c) by (ii) the price at which such shares
were sold.
5. TRANSFER OF WARRANT. Subject to the provisions of Section 4 hereof,
this Warrant may not be transferred, in whole or in part, to any person or
business entity without prior written consent of the Company, provided that the
Holder may transfer this Warrant to an affiliate, its lenders, or in connection
with the sale of a substantial part of its assets, any such permitted transfer
to be accomplished by presentation of the Warrant to the Company with written
instructions for such
3
<PAGE> 4
transfer (and other documentation reasonably required by the Company). Upon such
presentation for transfer, the Company shall promptly execute and deliver a new
Warrant or Warrants in the form hereof in the name of the assignee or assignees
and in the denominations specified in such instructions. The Company shall pay
all expenses incurred by it in connection with the preparation, issuance and
delivery of Warrants under this Section.
6. WARRANT HOLDER NOT SHAREHOLDER; RIGHTS OFFERING; PREEMPTIVE RIGHTS.
Except as otherwise provided herein, this Warrant does not confer upon the
Holder, as such, any right whatsoever as a shareholder of the Company.
Notwithstanding the foregoing, if the Company should offer to all of the
Company's shareholders the right to purchase any stock of the Company (other
than options to purchase stock granted to employees of the Company or pursuant
to the Company's stock option plans), then all shares of Common Stock that are
subject to this Warrant shall be deemed to be outstanding and owned by the
Holder and the Holder shall be entitled to participate in such rights offering.
The Company shall not grant any preemptive rights to its current shareholders
without the prior written consent of the Holder which shall not be unreasonably
withheld or delayed unless such rights are also granted to Holder.
7. OBSERVATION RIGHTS. The Holder of this Warrant shall receive notice
of and be entitled to attend or may send a representative to attend all meetings
of the Company's Board of Directors in a non-voting observation capacity and
shall receive a copy of all correspondence and information delivered to the
Company's Board of Directors, from the date hereof until such time as the
indebtedness evidenced by the Note has been paid in full. Holder acknowledges
that the relationship between it and the Company places Holder in a position to
learn confidential information, both written and oral, about the Company's
business operations, financial condition, assets and affairs. For purposes of
this agreement, all such information to be provided, together with any other
information regarding the Company that has already been provided to Holder or
its representative and employees, is hereinafter collectively referred to as the
"Sensitive Material." Holder acknowledges that it is aware, and that it will
advise its officers, directors, employees, advisors and other representatives
that federal and state securities laws prohibit any person who has received from
an issuer material, non-public information about the issuer and matters which
are the subject of this Agreement from purchasing or selling securities of such
issuer or from communicating such information to any other person under
circumstances in which it is reasonably foreseeable that such person is likely
to purchase or sell such securities. Neither the Company nor its affiliates nor
their representatives, agents, employees or other related persons will have any
liability to Holder, its employees, agents or representatives or any third
parties resulting from the use of the Sensitive Material by Holder or which
Holder acknowledges to be the Company's property, to itself and agrees not to
use, reveal, transfer, copy or disclose such Sensitive Material, directly or
indirectly, to any other person for any purpose without the prior written
consent of Company. Holder agrees to execute any additional confidentiality
agreement required by the Company in connection with any Sensitive Material.
4
<PAGE> 5
8. ADJUSTMENT UPON CHANGES IN STOCK.
(a) If all or any portion of this Warrant shall be exercised
subsequent to any stock split, stock dividend, recapitalization,
combination of shares of the Company, or other similar event, occurring
after the date hereof, then the Holder exercising this Warrant shall
receive, for the aggregate price paid upon such exercise, the aggregate
number and class of shares which such Holder would have received if
this Warrant had been exercised immediately prior to such stock split,
stock dividend, recapitalization, combination of shares, or other
similar event. If any adjustment under this Section 8(a), would create
a fractional share of Common Stock or a right to acquire a fractional
share of Common Stock, such fractional share shall be disregarded and
the number of shares subject to this Warrant shall be the next higher
number of shares, rounding all fractions upward. Whenever there shall
be an adjustment pursuant to this Section 8(a), the Company shall
forthwith notify the Holder or Holders of this Warrant of such
adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated.
(b) If all or any portion of this Warrant shall be exercised
subsequent to any merger, consolidation, exchange of shares,
separation, reorganization or liquidation of the Company, or other
similar event, occurring after the date hereof, as a result of which
shares of Common Stock shall be changed into the same or a different
number of shares of the same or another class or classes of securities
of the Company or another entity, or the holders of Common Stock are
entitled to receive cash or other property, then the Holder exercising
this Warrant shall receive, for the aggregate price paid upon such
exercise, the aggregate number and class of shares, cash or other
property which such Holder would have received if this Warrant had been
exercised immediately prior to such merger, consolidation, exchange of
shares, separation, reorganization or liquidation, or other similar
event. If any adjustment under this Section 8(b) would create a
fractional share of Common Stock or a right to acquire a fractional
share of Common Stock, such fractional share shall be disregarded and
the number of shares subject to this Warrant shall be the next higher
number of shares, rounding all fractions upward. Whenever there shall
be an adjustment pursuant to this Section 8(b), the Company shall
forthwith notify the Holder or Holders of this Warrant of such
adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated.
9. PUT AGREEMENT.
(a) The Company hereby irrevocably grants and issues to Holder
the right and option to sell to the Company (the "Put") this Warrant
(to the extent not previously exercised) for a period of 30 days after
maturity of the Note, at a purchase price (the "Purchase Price") equal
to the Fair Market Value (as hereinafter defined) of the shares of
Common Stock issuable to Holder upon exercise of this Warrant.
5
<PAGE> 6
(b) The Company shall pay to the Holder, in cash or
certified or cashier's check, the Purchase Price in exchange for the
delivery to the Company of this Warrant within thirty (30) days of the
receipt of written notice, addressed as set forth in Section 3 hereto,
from the Holder of its intention to exercise the Put and all other
documentation reasonably required by the Company.
(c) The Fair Market Value of the shares of Common Stock
of the Company issuable pursuant to this Warrant shall be determined as
follows:
(i) If after an initial public offering of the
Common Stock, the average of the closing bid and ask prices
for the Common Stock (as quoted on a national exchange) shall
be the fair market value. If prior to a public offering, the
Company and the Holder shall each appoint an independent,
experienced appraiser who is a member of a recognized
professional association of business appraisers. The two
appraisers shall determine the value of the shares of Common
Stock which would be issued upon the exercise of the Warrant,
assuming that the sale would be between a willing buyer and a
willing seller, both of whom have full knowledge of the
financial and other affairs of the Company, and neither of
whom is under any compulsion to sell or to buy.
(ii) If the higher of the two appraisals is not
more than 10% more than the lower of the appraisals, the Fair
Market Value shall be the average of the two appraisals. If
the higher of the two appraisals is 10% or more than the lower
of the two appraisals, then a third appraiser shall be
appointed by the two appraisers, and if they cannot agree on a
third appraiser, the American Arbitration Association shall
appoint the third appraiser. The third appraiser, regardless
of who appoints him or her, shall have the same qualifications
as the first two appraisers.
(iii) The Fair Market Value after the appointment
of the third appraiser shall be the mean of the three
appraisals.
(iv) The fees and expenses of the appraisers
shall be paid one-half by the Company and one-half by the
Holder.
6
<PAGE> 7
10. REGISTRATION.
(a) The Company and the holders of the Shares agree that
if at any time after the date hereof the Company shall propose to file
a registration statement with respect to any of its Common Stock on a
form S-3 or similar short form registration statement, it will give
notice in writing to such effect to the registered holder(s) of the
Shares at least thirty (30) days prior to such filing, and, at the
written request of any such registered holder, made within ten (10)
days after the receipt of such notice, will include therein at the
Company's cost and expense, including the reasonable fees and expenses
of a single counsel to such holder(s), but excluding underwriting
discounts, commissions and filing fees attributable to the Shares
included therein) such of the Shares as such holder(s) shall request;
provided, however, that if the offering being registered by the Company
is underwritten and if the representative of the underwriters certifies
in writing that the inclusion therein of the Shares would materially
and adversely affect the sale of the securities to be sold by the
Company thereunder, then the Company shall be required to include in
the offering only that number of securities, including the Shares,
which the underwriters determine in their sole discretion will not
jeopardize the success of the offering (the securities so included to
be apportioned pro rata among all selling shareholders according to the
total amount of securities entitled to be included therein owned by
each selling shareholder). The obligations of the Company under this
paragraph 10 shall terminate with respect to a Holder of Shares when
such Shares become eligible for resale in accordance with Rule 144
under the Securities Act of 1933 within a three month period without
restrictions as to volume.
7
<PAGE> 8
(b) Whenever the Company undertakes to effect the
registration of any of the Shares, the Company shall, as expeditiously
as reasonably possible:
(i) Prepare and file with the Securities and
Exchange Commission (the "Commission") a registration
statement covering such Shares and use its best efforts to
cause such registration statement to be declared effective by
the Commission as expeditiously as possible and to keep such
registration effective until the earlier of (A) the date when
all Shares covered by the registration statement have been
sold or (B) two hundred seventy (270) days from the effective
date of the registration statement; provided, that before
filing a registration statement or prospectus or any amendment
or supplements thereto, the Company will furnish to each
Holder of Shares covered by such registration statement and
the underwriters, if any, copies of all such documents
proposed to be filed (excluding exhibits, unless any such
person shall specifically request exhibits), which documents
will be subject to the review of such Holders and
underwriters, and the Company will not file such registration
statement or any amendment thereto or any prospectus or any
supplement thereto (including any documents incorporated by
reference therein) with the Commission if (A) the
underwriters, if any, shall reasonably object to such filing
or (B) if information in such registration statement or
prospectus concerning a particular selling Holder has changed
and such Holder or the underwriters, if any, shall reasonably
object. If a Holder objects to the filing of the Registration
Statement (which objection must be delivered to the Company in
writing), the Company may remove such Holder's Shares from the
offering and proceed to file with no further obligation to
such Holder hereunder.
(ii) Prepare and file with the Commission such
amendments and post-effective amendments to such registration
statement as may be necessary to keep such registration
statement effective during the period referred to in Section
10(b)(i) and to comply with the provisions of the Securities
Act with respect to the disposition of all securities covered
by such registration statement, and cause the prospectus to be
supplemented by any required prospectus supplement, and as so
supplemented to be filed with the Commission pursuant to Rule
424 under the Securities Act.
(iii) Furnish to the selling Holder(s) such
numbers of copies of such registration statement, each
amendment thereto, the prospectus included in such
registration statement (including each preliminary
prospectus), each supplement thereto and such other documents
as they may reasonably request in order to facilitate the
disposition of the Shares owned by them.
(iv) Use its best efforts to register and qualify
under such other securities laws of such jurisdictions as
shall be reasonably requested by any selling Holder and do any
and all other acts and things which may be reasonably
necessary or advisable
8
<PAGE> 9
to enable such selling Holder to consummate the disposition of
the Shares owned by such Holder, in such jurisdictions;
provided, however, that the Company shall not be required in
connection therewith or as a condition thereto to qualify to
transact business or to file a general consent to service of
process in any such states or jurisdictions.
(v) Promptly notify each selling Holder of the
happening of any event as a result of which the prospectus
included in such registration statement contains an untrue
statement of a material fact or omits any fact necessary to
make the statements therein not misleading and, at the request
of any such Holder, the Company will prepare a supplement or
amendment to such prospectus so that, as thereafter delivered
to the purchasers of such Shares, such prospectus will not
contain an untrue statement of a material fact or omit to
state any fact necessary to make the statements therein not
misleading.
(vi) Provide a transfer agent and registrar for
all such Shares not later than the effective date of such
registration statement.
(vii) Enter into such customary agreements
(including underwriting agreements in customary form for a
primary offering) and take all such other actions as the
underwriters, if any, reasonably request in order to expedite
or facilitate the disposition of such Shares (including,
without limitation, effecting a stock split or a combination
of shares).
(viii) Make available for inspection by any selling
Holder or any underwriter participating in any disposition
pursuant to such registration statement and any attorney,
accountant or other agent retained by any such selling Holder
or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause
the officers, directors, employees and independent accountants
of the Company to supply all information reasonably requested
by any such seller, underwriter, attorney, accountant or agent
in connection with such registration statement.
(ix) Promptly notify the selling Holder(s) and
the underwriters, if any, of the following events and (if
requested by any such person) confirm such notification in
writing: (A) the filing of the prospectus or any prospectus
supplement and the registration statement and any amendment or
post-effective amendment thereto and, with respect to the
registration statement or any post-effective amendment
thereto, the declaration of the effectiveness of such
documents, (B) any requests by the Commission for amendments
or supplements to the registration statement or the prospectus
or for additional information, (C) the issuance or threat of
issuance by the Commission of any stop order suspending the
effectiveness of the registration statement or the initiation
of any proceedings for that purpose and (D) the receipt by
9
<PAGE> 10
the Company of any notification with respect to the suspension
of the qualification of the Shares for sale in any
jurisdiction or the initiation or threat of initiation of any
proceeding for such purposes.
(x) Make every reasonable effort to prevent the
entry of any order suspending the effectiveness of the
registration statement and obtain at the earliest possible
moment the withdrawal of any such order, if entered.
(xi) Cooperate with the selling Holder(s) and the
underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing the Shares to be sold
and not bearing any restrictive legends, and enable such
Shares to be in such lots and registered in such names as the
underwriters may request at least two (2) business days prior
to any delivery of the Shares to the underwriters.
(xii) Provide a CUSIP number for all the Shares
not later than the effective date of the registration
statement.
(xiii) Prior to the effectiveness of the
registration statement and any post-effective amendment
thereto and at each closing of an underwritten offering, (A)
make such representations and warranties to the selling
Holder(s) and the underwriters, if any, with respect to the
Shares and the registration statement as are customarily made
by issuers to selling shareholders in primary underwritten
offerings; (B) use its best efforts to obtain "cold comfort"
letters and updates thereof from the Company's independent
certified public accountants addressed to the selling Holders
and the underwriters, if any, such letters to be in customary
form and covering matters of the type customarily covered in
"cold comfort" letters by underwriters in connection with
primary underwritten offerings; (C) deliver such documents and
certificates as may be reasonably requested (1) by the holders
of a majority of the Shares being sold, and (2) by the
underwriters, if any, to evidence compliance with clause (A)
above and with any customary conditions contained in the
underwriting agreement or other agreement entered into by the
Company; and (D) obtain opinions of counsel to the Company and
updates thereof (which counsel and which opinions shall be
reasonably satisfactory to the underwriters, if any), covering
the matters customarily covered in opinions requested in
underwritten offerings and such other matters as may be
reasonably requested by the selling Holders and underwriters
or their counsel. Such counsel shall also state that no facts
have come to the attention of such counsel which cause them to
believe that such registration statement, the prospectus
contained therein, or any amendment or supplement thereto, as
of their respective effective or issue dates, contains any
untrue statement of any material fact or omits to state any
material fact necessary to make the statements therein not
misleading (except that no statement need be made with respect
to any financial statements, notes thereto or other financial
data or other expertized material contained therein). If for
any reason the Company's counsel is
10
<PAGE> 11
unable to give such opinion, the Company shall so notify the
Holders of the Shares and shall use its best efforts to remove
expeditiously all impediments to the rendering of such
opinion.
(xiv) Otherwise use its best efforts to comply
with all applicable rules and regulations of the Commission,
and make generally available to its security holders earnings
statements satisfying the provisions of Section 11(a) of the
Securities Act, no later than forty-five (45) days after the
end of any twelve-month period (or ninety (90) days, if such
period is a fiscal year) (A) commencing at the end of any
fiscal quarter in which the Shares are sold to underwriters in
a firm or best efforts underwritten offering, or (B) if not
sold to underwriters in such an offering, beginning with the
first month of the first fiscal quarter of the Company
commencing after the effective date of the registration
statement, which statements shall cover such twelve-month
periods.
(c) After the date hereof, the Company shall not grant to
any holder of securities of the Company any registration rights which
have a priority greater than those granted to Holders pursuant to this
Warrant without the prior written consent of the Holder(s).
(d) The Company's obligations under Section 10(a) above
with respect to each holder of Shares are expressly conditioned upon
such holder's furnishing to the Company in writing such information
concerning such holder and the terms of such holder's proposed offering
as the Company shall reasonably request for inclusion in the
registration statement. If any registration statement including any of
the Shares is filed, then the Company shall indemnify each holder
thereof (and each underwriter for such holder and each person, if any,
who controls such underwriter within the meaning of the Securities Act)
from any loss, claim, damage or liability arising out of, based upon or
in any way relating to any untrue statement of a material fact
contained in such registration statement or any omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except for any such
statement or omission based on information furnished in writing by such
holder of the Shares expressly for use in connection with such
registration statement; and such holder shall indemnify the Company
(and each of its officers and directors who has signed such
registration statement, each director, each person, if any, who
controls the Company within the meaning of the Securities Act, each
underwriter for the Company and each person, if any, who controls such
underwriter within the meaning of the Securities Act) and each other
such holder against any loss, claim, damage or liability arising from
any such statement or omission which was made in reliance upon
information furnished in writing to the Company by such holder of the
Shares expressly for use in connection with such registration
statement.
(e) For purposes of this Section 10, all of the Shares
shall be deemed to be issued and outstanding.
11
<PAGE> 12
11. CERTAIN NOTICES. In case at any time the Company shall propose
to:
(a) declare any cash dividend upon its Common Stock;
(b) declare any dividend upon its Common Stock payable in
stock or make any special dividend or other distribution to the holders
of its Common Stock;
(c) offer for subscription to the holders of any of all of its
Common Stock any additional shares of stock in any class or other
rights;
(d) reorganize, or reclassify the capital stock of the
Company, or consolidate, merge or otherwise combine with, or sell of
all or substantially all of its assets to, another corporation;
(e) voluntarily or involuntarily dissolve, liquidate or wind
up of the affairs of the Company; or
(f) redeem or purchase any shares of its capital stock or
securities convertible into its capital stock;
then, where notice to or the consent of the Company's Shareholders is
required, in any one or more of said cases, the Company shall give to
the Holder of the Warrant, by certified or registered mail, (i) at
least ten (10) business days' prior written notice of the date on which
the books of the Company shall close or a record shall be taken for
such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up,
and (ii) in the case of such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at
least ten (10) business days' prior written notice of the date when the
same shall take place. Any notice required by clause (i) shall also
specify, in the case of any such dividend, distribution or subscription
rights, the date on which the holders of Common Stock shall be entitled
thereto, and any notice required by clause (ii) shall specify the date
on which the holders of Common Stock shall be entitled to exchange
their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be.
12
<PAGE> 13
12. RIGHTS OF CO-SALE. Prior to the completion of an Qualified
Public Offering of the Company's Common Stock, the following shall apply:
(a) Co-Sale Right. None of Drew Edwards, Cleve Shultz or Henry
Baroco (the "Management Shareholders") shall enter into any transaction
that would result in the sale by it of any Common Stock now or
hereafter owned by it, unless prior to such sale such Management
Shareholder shall give notice to Holder of its intention to effect such
sale in order that Holder may exercise its rights under this Section 12
as hereinafter described. Such notice shall set forth (i) the number of
shares to be sold by such Management Shareholder, (ii) the principal
terms of the sale, including the price at which the shares are intended
to be sold, and (iii) an offer by such Management Shareholder to use
his best efforts to cause to be included with the shares to be sold by
it in the sale, on a share-by-share basis and on the same terms and
conditions, the Shares issuable or issued to Holder pursuant this
Warrant.
(b) Rejection of Co-Sale Offer. If Holder has not accepted
such offer in writing within a period of ten (10) days from the date of
receipt of the notice, then such Management Shareholder shall
thereafter be free for a period of ninety (90) days to sell the number
of shares specified in such notice, at a price no greater than the
price set forth in such notice and on otherwise no more favorable terms
to such Management Shareholder than as set forth in such notice,
without any further obligation to Holder in connection with such sale.
In the event that such Management Shareholder fails to consummate such
sale within such ninety-day period, the shares specified in such notice
shall continue to be subject to this Section.
(c) Acceptance of Co-Sale Offer. If Holder accepts such offer
in writing within ten (10) day period, such acceptance shall be
irrevocable unless such Management Shareholder shall be unable to cause
to be included in his sale the number of Shares of stock held by Holder
and set forth in the written acceptance. In that event, such Management
Shareholder and Holder shall participate in the sale equally, with such
Management Shareholder and Holder each selling half the total number of
such shares to be sold in the sale. For the purposes of this Article
12, a "Qualified Public Offering" shall be deemed to have occurred if
the Company has received gross proceeds of $15.0 million and its shares
are traded on Nasdaq or a United States securities exchange.
13. ARTICLE AND SECTION HEADINGS. Numbered and titled article and
section headings are for convenience only and shall not be construed as
amplifying or limiting any of the provisions of this Warrant.
14. NOTICE. Any and all notices, elections or demands permitted or
required to be made under this Warrant shall be in writing, signed by the party
giving such notice, election or demand and shall be delivered personally,
telecopied, telexed, or sent by certified mail or overnight via nationally
recognized courier service (such as Federal Express), to the other party at the
address set
13
<PAGE> 14
forth below, or at such other address as may be supplied in writing and of which
receipt has been acknowledged in writing. The date of personal delivery or
telecopy or three (3) business days after the date of mailing (or the next
business day after delivery to such courier service), as the case may be, shall
be the date of such notice, election or demand. For the purposes of this
Warrant:
The Address of Holder is: Sirrom Investments, Inc.
Suite 200
500 Church Street
Nashville, TN 37219
Attention: Kathy Harris
Telecopy No. 615/726-1208
with a copy to: Caldwell & Caldwell
Suite 200
500 Church Street
Nashville, TN 37219
Attention: Maria-Lisa Caldwell, Esq.
Telecopy No. 615/256-9958
The Address of Company is: Towne Services, Inc.
6621 Bay Circle, Suite 170
Norcross, GA 30071
Attention: Chief Executive Officer and
Chief Financial Officer
Telecopy No. 770/734-2682
with a copy to: Nelson, Mullins, Riley & Scarborough, L.L.P.
First Union Plaza
999 Peachtree Street, NE
Suite 1400
Atlanta, GA 30309
Attention: Glenn W. Sturm, Esq.
Telecopy No. 404/817-6224
15. SEVERABILITY. If any provisions(s) of this Warrant or the
application thereof to any person or circumstances shall be invalid or
unenforceable to any extent, the remainder of this Warrant and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
16. ENTIRE AGREEMENT. This Warrant between the Company and Holder
represents the entire agreement between the parties concerning the subject
matter hereof, and all oral discussions and prior agreement are merged herein.
14
<PAGE> 15
17. GOVERNING LAW AND AMENDMENTS. This Warrant shall be construed
and enforced under the laws of the State of Tennessee applicable to contracts to
be wholly performed in such State. No amendment or modification hereof shall be
effective except in a writing executed by each of the parties hereto.
18. COUNTERPARTS. This Warrant may be executed in any number of
counterparts and be different parties to this Warrant in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same Warrant.
19. JURISDICTION AND VENUE. The Company and each Holder hereby
consents to the jurisdiction of the courts of the State of Tennessee and the
United States District Court for the Middle District of Tennessee, as well as to
the jurisdiction of all courts from which an appeal may be taken from such
courts, for the purpose of any suit, action or other proceeding arising out of
any of its obligations arising under this Agreement or with respect to the
transactions contemplated hereby, and expressly waives any and all objections it
may have as to venue in any of such courts.
20. EQUITY PARTICIPATION. This Warrant is issued in connection
with the Loan Agreement. It is intended that this Warrant constitute an equity
participation under and pursuant to T.C.A. ss.47-24-101, et seq. and that equity
participation be permitted under said statutes and not constitute interest on
the Note. If under any circumstances whatsoever, fulfillment of any obligation
of this Warrant, the Loan Agreement, or any other agreement or document executed
in connection with the Loan Agreement, shall violate the lawful limit of any
applicable usury statue or any other applicable law with regard to obligations
of like character and amount, then the obligation to be fulfilled shall be
reduced to such lawful limit, such that in no event shall there occur, under
this Warrant, the Loan Agreement, or any other document or instrument executed
in connection with the Loan Agreement, any violation of such lawful limit, but
such obligation shall be fulfilled to the lawful limit. If any sum is collected
in excess of the lawful limit, such excess shall be applied to reduce the
principal amount of the Note.
15
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
date first above written.
COMPANY: TOWNE SERVICES, INC.,
a Georgia corporation
By: /s/ Drew W. Edwards
--------------------------------
Title: Chief Executive Officer
---------------------------
HOLDER: SIRROM INVESTMENTS, INC.,
a Tennessee corporation
By: /s/ Kathy Harris
--------------------------------
Title: Vice President
---------------------------
16
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Warrant to be executed as of the date first above written for the purpose of
agreeing to the terms and conditions of Section 12 hereof.
MANAGEMENT SHAREHOLDERS: /s/ Drew Edwards
-----------------------------------
DREW EDWARDS
/s/ Cleve Shultz
-----------------------------------
CLEVE SHULTZ
/s/ Henry Baroco
-----------------------------------
HENRY BAROCO
<PAGE> 1
EXHIBIT 10.14
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
TOWNE SERVICES, INC.
AND
CAPITAL APPRECIATION PARTNERS, L.P.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 1 PURCHASE AND SALE OF SHARES.............................................................................1
1.1 Purchase and Sale...............................................................................1
1.2 Purchase Price..................................................................................1
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY...........................................................1
2.1 Organization and Good Standing; Governing Documents.............................................2
2.2 Authority.......................................................................................2
2.3 No Conflict or Breach...........................................................................2
2.4 Consents and Approvals..........................................................................3
2.5 Capitalization..................................................................................3
2.6 Subsidiaries; Investments.......................................................................4
2.7 Minute and Stock Transfer Books.................................................................4
2.8 Financial Statements............................................................................4
2.9 Books and Records...............................................................................5
2.10 Title to Assets; Liens..........................................................................5
2.11 Tangible Personal Property......................................................................6
2.12 Contracts.......................................................................................6
2.13 Receivables.....................................................................................7
2.14 Intellectual Property...........................................................................7
2.15 Major Suppliers and Customers...................................................................8
2.16 Litigation......................................................................................8
2.17 Compliance with Instruments, Decrees and Laws...................................................8
2.18 Permits.........................................................................................9
2.19 Taxes...........................................................................................9
2.20 Environmental Matters...........................................................................9
2.21 Insurance......................................................................................10
2.22 Labor and Employment Matters...................................................................10
2.23 Benefit Plans..................................................................................10
2.24 Absence of Certain Changes.....................................................................11
2.25 Product Warranties.............................................................................12
2.26 Related Party Transactions.....................................................................13
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
2.27 Names..........................................................................................13
2.28 Private Sale...................................................................................13
2.29 Broker.........................................................................................13
2.30 Year 2000 Compliance...........................................................................13
2.31 Disclosure.....................................................................................13
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF INVESTOR.............................................................14
3.1 Organization and Good Standing.................................................................14
3.2 Authority......................................................................................14
3.3 No Conflict or Breach..........................................................................14
3.4 Governmental Approvals.........................................................................14
3.5 Investment Representations; Legends............................................................15
3.6 Broker.........................................................................................16
3.7 Disclosure.....................................................................................16
ARTICLE 4 COVENANTS OF THE COMPANY...............................................................................16
4.1 Annual and Monthly Financial Statements........................................................16
4.2 Inspection.....................................................................................17
4.3 Key Executive and Other Insurance..............................................................17
4.4 Prompt Payment of Taxes........................................................................18
4.5 Conduct of Business; Compliance with Laws......................................................18
4.6 Maintenance of Properties......................................................................18
4.7 Accounts and Reports...........................................................................18
4.8 Conflicts......................................................................................18
4.9 Year 2000 Compliance...........................................................................18
4.10 Election of Director Designated by Investor....................................................19
4.11 Travel Expenses................................................................................19
4.12 Material Change; Litigation; Breach of Covenant................................................19
4.13 Use of Proceeds................................................................................19
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
4.14 PIK Dividends..................................................................................19
4.15 Additional Shares of Series A Preferred........................................................19
ARTICLE 5 OTHER COVENANTS........................................................................................20
5.1 Mutual Covenants...............................................................................20
(a) Best Efforts..........................................................................20
(b) Confidentiality.......................................................................20
5.2 Investor's Covenant............................................................................20
5.3 Amended and Restated Articles..................................................................21
5.5 No Other Solicitations.........................................................................21
ARTICLE 6 CONDITIONS PRECEDENT TO INVESTOR'S OBLIGATIONS.........................................................21
6.1 Representations and Warranties.................................................................21
6.2 Compliance with Covenants......................................................................22
6.3 Absence of Litigation..........................................................................22
6.4 Absence of Change..............................................................................22
6.5 Consents and Approvals.........................................................................22
6.6 Terms of Series A Preferred....................................................................22
6.7 Legal Opinion..................................................................................22
6.8 Satisfaction of Warrant Condition..............................................................22
6.9 Registration Rights Agreement..................................................................22
6.10 Co-Sale Agreement..............................................................................23
6.11 Sirrom Investments, Inc. Consents..............................................................23
ARTICLE 7 CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS......................................................23
7.1 Representations and Warranties.................................................................23
7.2 Compliance with Covenants......................................................................23
7.3 Absence of Litigation..........................................................................23
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C> <C>
7.4 Consents and Approvals.........................................................................23
7.5 Amended and Restated Articles..................................................................23
ARTICLE 8 CLOSING................................................................................................24
8.1 Closing........................................................................................24
8.2 Deliveries by the Company......................................................................24
8.3 Deliveries by Investor.........................................................................24
ARTICLE 9 TERMINATION............................................................................................25
9.1 Termination....................................................................................25
9.2 Effect on Obligations..........................................................................25
ARTICLE 10 MISCELLANEOUS.........................................................................................26
10.1 Survival of Representations....................................................................26
10.2 Expenses.......................................................................................26
10.3 Publicity......................................................................................26
10.4 Commercially Reasonable Efforts................................................................26
10.5 Notices........................................................................................26
10.6 Counterparts...................................................................................27
10.7 Assignment.....................................................................................27
10.8 Third Party Beneficiaries......................................................................28
10.9 Headings.......................................................................................28
10.10 Recitals.......................................................................................28
10.11 Amendments.....................................................................................28
10.12 Governing Law..................................................................................28
10.13 Jurisdiction: Service of Process...............................................................28
10.14 Intentionally Omitted. .......................................................................28
10.15 Remedies.......................................................................................28
10.16 Severability...................................................................................28
10.17 Entire Agreement...............................................................................29
10.18 Construction...................................................................................29
</TABLE>
iv
<PAGE> 6
INDEX OF DEFINITIONS
<TABLE>
<CAPTION>
DEFINED TERMS DEFINED IN
- ------------- ----------
<S> <C>
ACM Section 2.20
Act Section 2.28
Agreement Introduction
Amended and Restated Articles Section 2.2
Articles of Amendment Section 2.2
Audited Balance Sheet Date Section 2.8(a)
Certificate of Designations Section 2.2
Claims Section 2.16
Closing Section 8.1
Closing Date Section 8.1
Co-Sale Agreements Section 2.2
Code Section 2.19
Common Stock Section 2.5
Company Introduction
Contracts Section 2.12
Conversion Shares Section 2.2
Copyright Registrations Section 2.14
Copyrights Section 2.14
ERISA Section 2.23(b)
Financial Statements Section 2.8(a)
Hazardous Materials Section 2.20
Intellectual Property Section 2.14
Interim Financial Statements Section 3.28(a)
Investor Introduction
Key Employee Section 2.22
Liens Section 2.10(a)
Marks Section 2.14
Material Adverse Change Section 2.24(a)
Material Adverse Effect Section 2.3(c)
Patents Section 2.14
Permit Section 2.18
Plans Section 2.23(b)
Purchase Price Section 1.2
Receivables Section 2.13
Registration Agreement Section 2.2
Regulation D Section 3.5(c)
Representatives Section 5.1(b)
Required Consents Section 2.4
Rules Section 2.17
Securities Section 3.5(a)
Series A Preferred Section 2.5
</TABLE>
<PAGE> 7
<TABLE>
<S> <C>
Series A Preferred Recitals
Shares Recitals
Stock Purchase Warrant Article 4
Systems Section 2.30
Tangible Property Section 2.11
Trade Secrets Section 2.14
Trademark Registrations Section 2.14
Transaction Agreements Section 2.2
Unaudited Balance Sheet Date Section 2.8(a)
SCHEDULES
Schedule 2.1 Jurisdictions Where Qualified
Schedule 2.4 Consents and Approvals
Schedule 2.5 Share Owners
Schedule 2.6 Owned Real Property
Schedule 2.7 Officers and Directors
Schedule 2.10 Liens
Schedule 2.12 Contracts; Major Suppliers and Customers
Schedule 2.14 Intellectual Property
Schedule 2.16 Litigation
Schedule 2.21 Insurance Policies
Schedule 2.23 Benefits Plans
Schedule 2.24 Certain Changes
Schedule 2.25 Product Warranties
Schedule 2.26 Related Party Transactions
Schedule 2.30 Year 2000 Compliance
Schedule 4.13 Use of Proceeds
EXHIBITS
Exhibit A Articles of Incorporation of the Company
Exhibit B Bylaws of the Company
Exhibit C Registration Rights Agreement
Exhibit D Co-Sale Agreement
Exhibit E Legal Opinion of Counsel to the Company
</TABLE>
<PAGE> 8
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (together with all Schedules and
Exhibits, this "Agreement"), dated as of March 13, 1998, is entered into by and
between TOWNE SERVICES, INC., a Georgia corporation (the "Company"), and CAPITAL
APPRECIATION PARTNERS, L.P., a Georgia limited partnership ("Investor").
RECITALS:
The Company desires to sell and Investor desires to purchase 15,000
shares (the "Shares") of the Company's Series A Convertible Preferred Stock (the
"Series A Preferred") on the terms and conditions set forth in this Agreement.
The parties therefore agree as follows:
ARTICLE 1
PURCHASE AND SALE OF SHARES
1.1 Purchase and Sale. The Company agrees to sell to Investor, and
Investor agrees to buy from the Company, at the Closing (as defined below) all,
and not less than all, of the Shares.
1.2 Purchase Price. The purchase price to be paid for the Shares shall
be $100 per share, for a total of $1,500,000 (the "Purchase Price"), payable by
certified check, or by wire transfer of immediately available funds to an
account designated by the Company, against delivery to Investor of a certificate
or certificates (as requested by Investor) representing the Shares.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Investor as follows:
1
<PAGE> 9
2.1 Organization and Good Standing; Governing Documents. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Georgia. The Company has all requisite power and authority
to own, operate and lease its properties and to carry on its business as now
being conducted. The Company is duly qualified to do business as a foreign
corporation and is in good standing in all other jurisdictions in which the
character of the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification necessary, and such
jurisdictions are listed on Schedule 2.1. True and complete copies of the
Articles of Incorporation and Bylaws of the Company, as amended through the date
of this Agreement and, in the case of the Articles of Incorporation, as proposed
to be amended in accordance with Section 2.2, are attached to this Agreement as
Exhibits A and B, respectively.
2.2 Authority. The Company has noticed a shareholders meeting to be
held on March ___, 1998 for the purpose of approving, and the Board of Directors
of the Company has recommended that the shareholders approve, an amendment to
the Company's Articles of Incorporation authorizing the issuance of up to
1,000,000 preferred shares of the Company (the "Amended and Restated Articles"),
a copy of which is included as a part of Exhibit A. The Board of Directors has
adopted resolutions and a Certificate of Designations in accordance with Section
14-2-602 of the Georgia Business Corporation Code to provide for the
establishment of the Series A Preferred (the "Certificate of Designations").
Subject to the filing of the Amended and Restated Articles and Articles of
Amendment containing the Certificate of Designations (the "Articles of
Amendment"), in accordance with the Georgia Business Corporation Code, the
Company has all requisite power and authority to execute, deliver and perform
this Agreement and the Registration Rights Agreement, dated as of the date of
this Agreement, between the Company and Investor in the form attached as Exhibit
C (the "Registration Agreement" and, together with this Agreement, the
"Transaction Agreements"), and to consummate the transactions contemplated by
the Transaction Agreements. The execution and delivery of the Transaction
Agreements have been, and following shareholder approval of the Amended and
Restated Articles, the performance of the Transaction Agreements and the
consummation of the transactions contemplated thereby, including the issuance
and delivery of the Series A Preferred under this Agreement and the shares of
Common Stock issuable upon conversion of the Series A Preferred (the "Conversion
Shares"), will have been, duly and validly authorized by all necessary corporate
and shareholder action on the part of the Company. Each of the Transaction
Agreements has been duly executed and delivered by the Company and constitutes a
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms, subject to bankruptcy, insolvency, reorganization,
moratorium and other laws applicable to creditors' rights and the application of
general equitable principles.
2.3 No Conflict or Breach. The execution, delivery and performance
of the Transaction Agreements do not and on the Closing Date will not:
(a) conflict with or constitute a violation of the Articles of
Incorporation or Bylaws of the Company;
2
<PAGE> 10
(b) conflict with or constitute a violation of any law,
statute, judgment, order, decree or regulation of any legislative body,
court, administrative agency, governmental authority or arbitrator
applicable to or relating to the Company or its assets;
(c) except as disclosed in Schedule 2.4, conflict with,
constitute a default under, result in a breach or acceleration of or
require notice to or the consent of any third party under any contract,
agreement, commitment, mortgage, note, license or other instrument or
obligation to which the Company is party or by which it is bound or by
which its assets are affected, except such conflicts, defaults,
breaches, accelerations or failures to give notice or obtain consent
that would not, individually or in the aggregate, have a material
adverse effect on the business, assets, operations, financial or other
condition or business prospects of the Company (a "Material Adverse
Effect"); or
(d) result in the creation or imposition of any lien, charge
or encumbrance of any nature whatsoever on any of the assets of the
Company or on the Shares.
2.4. Consents and Approvals. Schedule 2.4 describes (a) each
consent, approval, authorization, registration or filing with any federal, state
or local judicial or governmental authority or administrative agency, and (b)
each consent, approval, authorization of or notice to any other third party,
which is required in connection with the valid execution and delivery by the
Company of the Transaction Agreements or the consummation by the Company of the
transactions contemplated by the Transaction Agreements (the items described in
clauses (a) and (b) being referred to collectively as the "Required Consents").
2.5. Capitalization. The authorized capital stock of the Company
consists of 50,000,000 common shares (the "Common Stock"), of which 11,906,768
shares are issued and outstanding. Upon the filing of the Amended and Restated
Articles with the Secretary of State of Georgia in accordance with the Georgia
Business Corporation Code, the authorized capital stock of the Company also
shall consist of 1,000,000 preferred shares (the "Preferred Stock"). Upon the
filing of the Articles of Amendment in accordance with the Georgia Business
Corporation Code, 25,000 shares of the Preferred Stock will have been designated
Series A Convertible Preferred Stock (the "Series A Preferred"). All of the
outstanding shares of Common Stock are validly issued, fully paid and
nonassessable and are free from, and were not issued in violation of, any
preemptive rights. The Conversion Shares have been duly reserved for issuance
upon conversion of the Series A Preferred. The Series A Preferred and the
Conversion Shares, upon issuance in accordance with this Agreement and the
Amended and Restated Articles, respectively, shall be validly issued, fully paid
and nonassessable, shall not be subject to or issued in violation of any
preemptive rights, and shall be free and clear of all liens, charges,
encumbrances, restrictions and claims imposed by or through the Company except
as set forth in the Articles of Incorporation, the Registration Agreement and
the Co-Sale Agreement among Investor and Henry Baroco, Lynn Boggs, Thomas Bryan,
Drew W. Edwards and Cleve B. Schultz, dated as of the date of this Agreement, in
the form attached as Exhibit D (the "Co-Sale Agreement"). As of the date of this
Agreement, there are outstanding options to purchase 3,544,361 shares of Common
Stock and outstanding warrants to purchase
3
<PAGE> 11
309,186 shares of Common Stock, and no other rights to purchase Common Stock are
outstanding. Schedule 2.5 sets forth the names of the persons or entities that
are the record owners of the outstanding shares of Common Stock, together with
the number of shares owned by each holder and the percentage of the outstanding
shares of Common Stock held by such holder. Schedule 2.5 also sets forth the
names of each holder of each outstanding or authorized option, warrant, right,
contract, call, put, right to subscribe, conversion right or other agreement or
commitment to which the Company is a party or which is binding upon the Company
providing for the issuance, disposition or acquisition of any of its capital
stock (other than this Agreement), together with the number of shares of Common
Stock that may be acquired by such holder upon exercise of such option, warrant
or right and the percentage of outstanding Common Stock represented by such
shares. For the purpose of computing such percentage for a specific holder, the
option, warrant or right of such holder shall be deemed to have been exercised,
but options, warrants or rights of other holders shall be deemed not to have
been exercised. Except as disclosed on Schedule 2.5, (a) there are no
outstanding or authorized stock appreciation, phantom stock or similar rights
with respect to the Company, (b) there are no voting trusts, proxies or any
other agreements or understandings with respect to the voting of the capital
stock of the Company and (c) the Company is not subject to any obligation
(contingent or otherwise) to repurchase or otherwise acquire or retire any of
its capital stock. Except as disclosed in Schedule 2.5, the Company has not
granted any holder of its capital stock the right to have such capital stock
registered for offer and sale under federal or state securities laws.
2.6 Subsidiaries; Investments. Except as disclosed in Schedule
2.6, the Company does not own or hold any shares of stock or any other security
or interest in any other entity, or any rights to acquire any such security or
interest. Except as disclosed in Schedule 2.6, the Company has never owned or
held a direct or indirect majority interest in an operating entity.
2.7 Minute and Stock Transfer Books. The minute books of the
Company are true, correct, complete and current in all material respects and
contain accurate and complete records of all material actions taken by its
shareholders, its Board of Directors and each committee of its Board of
Directors, and all signatures contained in such minute books are the true
signatures of the persons whose signatures they purport to be. The stock
transfer books of each Company are true, correct, complete and current in all
material respects. Schedule 2.7 to this Agreement sets forth a true, correct and
complete list of the names and titles of all officers and directors of the
Company.
2.8 Financial Statements.
(a) The Company has previously delivered to Investor true and
complete copies of (i) the audited balance sheet of the Company as of
December 31, 1996 (the "Audited Balance Sheet Date") and the related
statement of operations, changes in shareholders' equity and cash flows
for the fiscal years then ended, including the footnotes to such
statements, additional or supplemental information supplied therewith
and the report prepared in connection therewith by the independent
certified public accountants reviewing such financial statements and
(ii) interim unaudited balance sheets and related statements of
4
<PAGE> 12
operations for each month since the Audited Balance Sheet Date up to
and including December 31, 1997 (the "Unaudited Balance Sheet Date")
prepared by management of the Company without an independent audit (the
"Interim Financial Statements"). The financial statements described
above (collectively, the "Financial Statements") are in accordance with
the books and records of the Company, present fairly the assets,
liabilities and financial condition of the Company as of the respective
dates of the Financial Statements, and the results of operations for
the periods then ended and have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved, except that the Interim Financial
Statements do not contain footnote disclosures and are subject to
normal year-end adjustments which individually and in the aggregate
shall not be material.
(b) The Company has no liability or obligation, whether
accrued, absolute, or contingent, that is not reflected or reserved
against in the financial statements as of and for the period ended on
the Unaudited Balance Sheet Date, except for those that are not
required by generally accepted accounting principles to be included on
such financial statements. Any items of income or expense which are
unusual or of a nonrecurring nature are separately disclosed in the
Financial Statements.
2.9 Books and Records. The books and records of the Company are
true, accurate and complete in all material respects and have been maintained in
accordance with generally accepted accounting principles applied on a consistent
basis.
2.10 Title to Assets; Liens
(a) The Company has good and marketable title to all of the
properties and assets (real or personal, tangible or intangible) owned
by it (including, without limitation, those properties and assets shown
on the financial statements as of and for the period ended on the
Unaudited Balance Sheet Date), and a valid leasehold or other
possessory interest in all other properties and assets used, operated
or occupied by it, located on its premises or otherwise shown on the
financial statements as of and for the period ended on the Unaudited
Balance Sheet Date, except for tangible personal property sold or
disposed of in the ordinary course of business of the Company and
consistent with past practice. With respect to any property the Company
leases, all such leases are valid, subsisting and effective in
accordance with their terms and there does not exist thereunder any
default or event or condition which, after notice or lapse of time or
both, would constitute a material default thereunder. All of the
Company's properties and assets (whether real or personal, tangible or
intangible, owned, leased or otherwise acquired) are free and clear of
any liens, claims, charges, security interests, mortgages, pledges or
other encumbrances or restrictions of any nature whatsoever
(collectively, "Liens"), other than:
5
<PAGE> 13
(i) easements of record affecting the Company's
real property ownership interests that do not affect the full
use and enjoyment of such real property for the purposes for
which it is currently used or detract from its value;
(ii) Liens for taxes, assessments and other
governmental charges not yet due and payable;
(iii) purchase money Liens; and
(iv) Liens (including but not limited to Liens in
favor of Sirrom Investments, Inc.) described on Schedule 2.10.
(b) There are no existing breaches or defaults under, and
no events or circumstances have occurred which, with or without notice
or lapse of time or both, would constitute a breach of or a default
under, any instrument, agreement or other document to which the Company
is a party that creates, evidences or constitutes any such Lien or that
evidences, secures or governs the terms of any indebtedness or
obligation secured by any such Lien (any such instrument, agreement or
other document being referred to herein as a "Lien Instrument"), except
for such breaches or defaults that individually or in the aggregate
would not have a Material Adverse Effect. The sale of the Shares to
Investor will not, with respect to any Lien Instrument, (i) constitute
a breach thereof or a default thereunder, (ii) permit (with or without
notice, lapse of time or both), cause or result in (A) the acceleration
of any indebtedness or other obligation evidenced, secured or governed
thereby or (B) the foreclosure or other enforcement of any such Lien,
(iii) permit or cause the terms thereof to be renegotiated, or (iv)
require the consent of the holder of any such indebtedness or
obligation or any third party except as disclosed in Schedule 2.4.
2.11 Tangible Personal Property. The Company owns or leases all
buildings, machinery, equipment and other tangible assets necessary for the
conduct of its business (the "Tangible Property"). Each item of Tangible
Property is in good operating order, condition and repair, ordinary wear and
tear excepted, is suitable for immediate use in the ordinary course of business
of the Company, is free from defects (latent and patent), is merchantable and is
of a quality and quantity presently usable in the ordinary course of business of
the Company. No item of Tangible Property is in need of repair or replacement
other than as part of routine maintenance in the ordinary course of business.
2.12 Contracts. Schedule 2.12 lists all contracts (including but
not limited to program agreements, participation and servicing agreements and
marketing agreements), commitments, agreements (including agreements for the
borrowing of money or the extension of credit), leases (including terminal
leases), licenses, understandings and obligations, whether written or oral, to
which the Company is party or by which the Company is bound or affected, (a)
that involve the expenditure by any party to such contract, commitment,
agreement, lease, license, understanding or obligation of more than $25,000 or
(b) that are otherwise material to the operation of the Company's business (the
"Contracts"). The Company has delivered to Investor true and complete copies of
all
6
<PAGE> 14
written Contracts and true and complete memoranda of all oral Contracts,
including any and all amendments and other modifications to such Contracts. Each
of the Contracts is valid, binding and enforceable in accordance with its terms
and is in full force and effect. No Contract will result in a loss upon
completion of performance, and no purchase commitments are in excess of the
normal requirements for the Company's business or at excessive prices. There are
no set-offs, counterclaims or disputes asserted with respect to any of the
Contracts, and there are no existing defaults, and no events or circumstances
have occurred which, with or without notice or lapse of time or both, would
constitute defaults, under any of the Contracts. The consummation of the
transactions contemplated by the Transaction Documents will not, with respect to
any Contract, constitute a default thereunder, require the consent of any person
or party, except for the Required Consents, or affect the continuation, validity
and effectiveness of any Contract or the terms of any Contract.
2.13 Receivables. All accounts receivable and trade accounts
reflected on the financial statements as of and for the period ended on the
Unaudited Balance Sheet Date (less any such receivables collected since such
date) and all accounts receivable and trade accounts presently owing and to be
owing to the Company on the Closing Date (collectively, the "Receivables"), in
each case net of the reserves established and reflected on the financial
statements as of and for the period ended on the Unaudited Balance Sheet Date),
are, and on the Closing Date will be, legal, valid and binding obligations, and
are and will be collectible in full at face value (net of the reserves
established and reflected in the financial statements as of and for the period
ended on the Unaudited Balance Sheet Date. All such Receivables were and will be
created in the ordinary course of business of the Company. There are no material
set-offs, counterclaims or disputes asserted with respect to any Receivable, and
no discount or allowance from any Receivable has been or will be made or agreed
to, except discounts for prompt payment granted in the ordinary course of
business and reflected in documents evidencing such account. The reserves
established for doubtful or uncollected accounts as shown on the financial
statements as of and for the period ended on the Unaudited Balance Sheet Date,
as adjusted for the passage of time through the Closing Date in accordance with
the past practice of the Company, are consistent in amount to those historically
established with respect to the accounts receivable of the Company.
2.14 Intellectual Property. Schedule 2.14 sets forth a list of all
trademarks, service marks, trade names, logos and other designations owned or
used by the Company (the "Marks"), a list of the goods or services with which
each Mark is used, the dates of first use of each Mark and all United States,
foreign and state registrations relating to any of the Marks (the "Trademark
Registrations"). Each of the Marks has been in continuous use since the date of
first use stated on Schedule 2.14, and each of the Marks is now in use in
interstate or intrastate commerce, in each case as stated on Schedule 2.14, on
or in connection with all of the goods or services set forth on such Schedule.
Schedule 2.14 also sets forth (a) a list of all copyrighted works owned by the
Company (the "Copyrights") and all registrations issued by the United States
Copyright Office or the office of any foreign jurisdiction for any of the
Copyrights (the "Copyright Registrations"); (b) a list of all inventions owned
or used by the Company which are the subject of United States or foreign letters
patent or applications therefor, together with the applicable patent number,
application number, application date and issue date (the "Patents"); and (c) a
brief description of all confidential or proprietary processes, formulas,
technical data, and other similar information that is of commercial
7
<PAGE> 15
value to the Company ("Trade Secrets"). (The Marks and Trademark Registrations,
the Copyrights and Copyright Registrations, Patents and Trade Secrets are
referred to collectively as the "Intellectual Property.") The Company has not
disclosed any Trade Secrets to any third party except pursuant to a valid
non-disclosure agreement. Each party who has gained or been granted access to
Trade Secrets is identified in Schedule 2.14, and a copy of the applicable
non-disclosure agreement has been delivered to Investor. All employees or agents
of the Company who have knowledge of or access to Trade Secrets are also subject
to valid non-disclosure agreements, and copies of such non-disclosure agreements
have also been delivered to Investor. The Company has no knowledge of any third
parties who have knowledge of or have made use of any Trade Secrets. The Company
owns all right, title and interest in and to each item included in the
Intellectual Property, free and clear of any Liens or licenses. The Company is
the record owner of each of the Trademark Registrations, the Copyright
Registrations and the Patents, each of which is in full force and effect, and
all required maintenance filings, tax payments, annuities and maintenance fee
payments have been timely completed with respect to each. The Company has not
licensed any of the Intellectual Property to any third party, and no third party
has any right to use any of the Intellectual Property. The Intellectual Property
consists of all of the intellectual property rights necessary to conduct the
Business. There are no claims or suits pending or, to the knowledge of the
Company, threatened against the Company challenging the Company's ownership of
or unencumbered right to use any of the Intellectual Property, nor does there
exist any basis therefor. There are no claims or suits pending or, to the
knowledge of the Company, threatened against the Company alleging that any of
the Intellectual Property infringes any rights of any third parties, nor does
there exist any basis therefor.
2.15 Major Suppliers and Customers. Each supplier of goods or
services to whom the Company paid more than $25,000 in the aggregate, during the
12 months ended on December 31, 1997, and each customer who paid the Company
more than $25,000, in the aggregate, during such period, is disclosed on
Schedule 2.12 (relating to Contracts), which Schedule reflects in each case the
amounts so paid. The Company is not engaged in any dispute with any of such
suppliers or customers. The Company has no reason to believe that the sale of
the Shares hereunder will have any adverse effect on the business relationship
of any such suppliers or customers.
2.16 Litigation. Except as disclosed in Schedule 2.16, there are no
claims, actions, suits, inquiries, hearings or investigations ("Claims") pending
or, to the knowledge of the Company, threatened, against the Company, and no
Claims have been brought within the last two years against the Company. No
Claim, either individually or in the aggregate with other Claims, if resolved
adversely to the Company, will have a Material Adverse Effect. To the knowledge
of the Company, there are no facts or circumstances which could serve as the
basis for any Claim against the Company, or, by virtue of the execution,
delivery and performance of the Transaction Agreements, against Investor.
2.17 Compliance with Instruments, Decrees and Laws. The Company is
not in violation of any provisions of its Articles of Incorporation or Bylaws.
There is not outstanding or, to the knowledge of the Company, threatened, any
order, writ, injunction or decree of any court,
8
<PAGE> 16
governmental agency or arbitration tribunal against or involving the Company.
The Company is currently, and has been at all times, in material compliance with
all laws, statutes, rules, regulations, orders and licensing requirements of
federal, state, local and foreign agencies and authorities applicable to the
business and properties of the Company (including, without limitation, those
relating to antitrust and trade regulation, civil rights, environment, labor and
employment discrimination, affirmative action, safety and health) ("Rules"). To
the Company's knowledge, there has been no allegation of any violation of any
Rules and no investigation or review by any federal, state or local body or
agency is pending, threatened or planned with respect to the Company.
2.18 Permits. The Company has obtained all permits, authorizations,
certificates, approvals, licenses, exemptions and classifications required for
the conduct of its business and the ownership and operation of its assets (each,
a "Permit"). The Company is not in material violation of any Permit, and no
proceedings to revoke or limit any Permit are pending or, to the knowledge of
the Company, threatened.
2.19 Taxes. The Company has timely filed all tax returns that it
was required to file before the Closing Date, and such tax returns were correct
and complete in all respects. All taxes required to be withheld or paid by the
Company (whether or not shown on any tax return) have been withheld and paid,
other than those being contested in good faith. The Company currently is not the
beneficiary of any extension of time within which to file any tax return and has
not waived any statute of limitations in respect of taxes or agreed to any
extension of time with respect to a tax assessment or deficiency. There is no
pending or, to the knowledge of the Company, threatened dispute or claim
concerning any tax liability of the Company. The Company has no liability for
taxes except (a) as shown on the reserve for tax liability (excluding any
reserve for deferred taxes established to reflect timing differences between
book and tax income) set forth on the face of the balance sheet (rather than in
any notes thereto) included in the Interim Financial Statements and (b) as of
the Closing Date, as will be shown in the reserve as adjusted for the passage of
time through the Closing Date in accordance with the past custom and practice of
the Company in filing its tax returns. The Company has never been a member of an
affiliated group within the meaning of Section 1504(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), filing a consolidated tax return and has
never entered into a tax sharing or tax allocation agreement.
2.20. Environmental Matters. To the Company's knowledge, the Company
is not in violation of, and has not violated, any applicable federal, state,
county or local statutes, laws, regulations, rules, ordinances, codes, licenses
or permits of any governmental authorities relating to environmental matters,
including by way of illustration and not by way of limitation the Comprehensive
Environmental Response, Compensation and Liability Act, the Resource
Conservation Recovery Act, the Clean Air Act, the Clean Water Act, the
Occupational Safety and Health Act, the Toxic Substances Control Act, any
"Superfund" or "Superlien" law, or any other federal, state or local statute,
law, ordinance, code, rule, regulation, order, decree or guideline (whether
published or unpublished) regulating, relating to or imposing liability or
standards of conduct concerning Hazardous Materials, in each case as amended
from time to time, except for violations which, either individually or in the
aggregate, will not have a Material Adverse Effect.
9
<PAGE> 17
For purposes of this Agreement, "Hazardous Materials" includes but is not
necessarily limited to asbestos, asbestos containing materials ("ACM"),
polychlorinated biphenyls, lead-based paints, any petroleum, petroleum
by-product (including, but not limited to, crude oil, diesel oil, fuel oil,
gasoline, lubrication oil, oil refuse, used motor oil, oil mixed with other
waste, oil sludge, and all other liquid hydrocarbons, regardless of specific
gravity), natural or synthetic gas, or other hazardous or toxic substances,
materials, wastes, pollutants or contaminants defined under or regulated by the
Environmental Laws.
2.21 Insurance. Schedule 2.21 describes all insurance policies
maintained by the Company with respect to the business of the Company. Such
policies are valid, binding and enforceable in accordance with their terms and
are in full force and effect, and all premiums due thereon have been paid and
will be paid through the Closing Date.
2.22 Labor and Employment Matters. No employees of the Company have
been or are represented by a union or other labor organization or covered by any
collective bargaining agreement. There is no unfair labor practice complaint,
labor organizational effort (as to which the Company has received notice),
strike, slowdown or similar labor matter pending or, to the knowledge of the
Company, threatened against or affecting the Company or its business. The
Company is in compliance with all federal, state and local laws and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours, and there is no unfair labor practice charge or
complaint or charge of employment discrimination or retaliation against the
Company pending or, to the knowledge of the Company, threatened or planned. Each
of the officers of the Company, each other employee the loss of whose services
may have a Material Adverse Effect (a "Key Employee") and each other employee
now employed by the Company or employed by the Company at any time since its
organization who has or had access to confidential information of the Company
has executed a nondisclosure agreement substantially in the form provided to
Investor and such agreements are in full force and effect. No officer or Key
Employee of the Company has advised the Company (orally or in writing) that he
intends to terminate employment with the Company, and the Company has no reason
to believe that any such termination is imminent.
2.23 Benefit Plans.
(a) Schedule 2.23 sets forth (i) a list of the name, age,
position, rate of compensation and any incentive compensation
arrangements, bonuses or commissions or fringe or other benefits of
each person who is a director, officer or Key Employee of the Company
and (ii) a summary of all other retirement, health, welfare or other
employee benefits paid or provided to the Company's employees
(indicating in each case the category of employee to which the plan or
benefit is applicable). Except as set forth on Schedule 2.23, there are
no Plans, as defined below, contributed to, maintained or sponsored by
the Company, to which the Company is obligated to contribute or with
respect to which the Company has any liability or potential liability,
whether direct or indirect, including all Plans contributed to,
maintained or sponsored by each member of the controlled group of
10
<PAGE> 18
companies, within the meaning of Section 414(b), 414(c), and 414(m) of
the Code, of which the Company is a member to the extent the Company
has any potential liability with respect to such Plans.
(b) For purposes of this Agreement, the term "Plans" shall
mean: (i) employee benefit plans as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
whether or not funded and whether or not terminated, (ii) employment
agreements, and (iii) personnel policies or fringe benefit plans,
policies, programs and arrangements, whether or not subject to ERISA,
whether or not funded, and whether or not terminated, including without
limitation, stock bonus, deferred compensation, pension, severance,
bonus, vacation, travel, incentive, and health, disability and welfare
plans.
2.24 Absence of Certain Changes. Except as disclosed on Schedule
2.24, since the Unaudited Balance Sheet Date, the Company has conducted its
operations and business only in the ordinary course, and has not:
(a) suffered a material adverse change in the business,
assets, operations, financial or other condition or business prospects
of the Company, including but not limited to the Company's customer,
supplier, employee and sales representative relations (a "Material
Adverse Change");
(b) redeemed or repurchased, directly or indirectly, any
shares of capital stock or declared, set aside or paid any dividends or
made any other distributions with respect to any shares of its capital
stock;
(c) issued, sold or transferred any notes, bonds or other debt
securities or any equity securities, securities convertible,
exchangeable or exercisable into equity securities, or warrants,
options or other rights to acquire equity securities, of the Company;
(d) borrowed any amount or incurred or become subject to any
liabilities, except liabilities incurred in the ordinary course of
business;
(e) discharged or satisfied any Lien or paid any obligation or
liability, other than liabilities paid in the ordinary course of
business, or prepaid any amount of indebtedness for borrowed money;
(f) subjected any portion of its properties or assets to any
Lien except as disclosed on Schedule 2.10;
(g) sold, leased, assigned or transferred (including without
limitation transfers to any employees or affiliates of the Company) a
portion of its tangible assets, except in the
11
<PAGE> 19
ordinary course of business, or canceled without fair consideration any
debts or claims owing to or held by it;
(h) suffered any extraordinary losses or waived any rights of
value in excess of $25,000, whether or not in the ordinary course of
business or consistent with past custom and practice;
(i) entered into, amended or terminated any lease, contract,
agreement or commitment, or taken any other action or entered into any
other transaction other than in the ordinary course of business and in
accordance with past custom and practice, or entered into any
transaction with any employee, officer or director of the Company;
(j) entered into any other transaction in the ordinary course
of business with commitments in excess of $25,000, or entered into any
other material transaction not in the ordinary course of business, or
materially changed any business practice;
(k) except as disclosed in Schedule 2.24, made or granted any
bonus or any wage, salary or compensation increase to any director,
officer, or other employee or any consultant except in the usual and
ordinary course of business in accordance with past custom and
practice, or made or granted any increase in any employee benefit plan
or arrangement, or amended or terminated any existing employee benefit
plan or arrangement or adopted any new employee benefit plan or
arrangement;
(l) incurred intercompany charges or conducted its cash
management customs and practices and accounting methods other than in
the usual and ordinary course of business in accordance with past
custom and practice;
(m) made any capital expenditures or commitments for capital
expenditures that aggregate in excess of $25,000].
(n) made any loans or advances to, or guarantees for the
benefit of, any person or entity;
(o) entered into any lease of capital equipment or real estate
involving rental in excess of $25,000 per annum; or
(p) changed or authorized any change in its Articles of
Incorporation (except as reflected in the Amended and Restated Articles
and the Articles of Amendment) or Bylaws.
2.25 Product Warranties. Each product manufactured or sold by the
Company has been in conformity with all applicable contractual commitments and
express warranties, all of which are described on Schedule 2.25, as well as with
all warranties implied by law.
12
<PAGE> 20
2.26 Related Party Transactions. Except as disclosed in Schedule
2.26, the Company's real property leases and the Contracts do not include any
agreement with, or any other commitment to, (a) any officer, director or Key
Employee of the Company; (b) any person related by blood or marriage to any such
officer, director or Key Employee; or (c) any corporation, partnership, trust or
other entity in which the Company or any such officer, director or Key Employee
or related person has greater than a 10% equity or participating interest.
2.27 Names. During the term of its existence, the Company has not
been known by or conducted business under any other name other than E.B.B.
Holdings, Inc. and C-Net, Inc.
2.28 Private Sale. Subject to the timely filing of any notice, if
required, under the Securities Act of 1933, as amended (the "Act"), and any
notice, if required, under applicable state securities laws, and assuming the
accuracy of the representations of Investor in Section 3.5 hereof, the issuance
and sale of the Series A Preferred and the Conversion Shares will be exempt from
the registration requirements of the Act and any applicable state securities
laws.
2.29 Broker. No finder, broker, agent or other intermediary has
acted for or on behalf of the Company in connection with the offer or sale of
the Series A Preferred or the Conversion Shares and the Company hereby agrees to
indemnify and hold Investor harmless from and against any claims for brokerage
commissions, finder's fee or similar payments.
2.30 Year 2000 Compliance. Except as disclosed in Schedule 2.30,
(a) all Systems (as defined below) and all components thereof will function in
accordance with applicable specifications, documentation and warranties prior
to, during and after the calendar year 2000; (b) prior to, during and after the
calendar year 2000, each of the Systems will accept date-related records and
information for the years 2000 and following and perform computations respecting
or based on such date-related information in a correct and appropriate manner;
and (c) no change in any calendar year shall adversely affect the performance of
any Systems nor cause any Systems or any of their components to operate in a
manner not in accordance with applicable specifications, documentation or
warranties. For the purpose of this Agreement, "Systems" includes all
proprietary and third-party software and automated machines or systems of any
kind (including but not limited to point-of-sale communication and similar
systems), whether constituting all or a part of a product the Company sells in
the ordinary course of its business or used by the Company in the operation of
its business or facilities or otherwise (including but not limited to systems
relating to the operation of buildings and facilities such as elevators,
escalators, manufacturing control systems, automated HVAC systems).
2.31 Disclosure. No representation, warranty or statement made by
the Company in this Agreement, or any document furnished or to be furnished to
Investor pursuant to this Agreement, contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material fact
necessary to make the statements contained in this Agreement or such other
document not misleading. The fact that the Company has delivered copies of
certain documents to Investor shall not alone constitute disclosure of facts
required to be disclosed on any Schedule to this
13
<PAGE> 21
Agreement, unless such document is expressly referenced in such Schedule.
Receipt by Investor of such documents and notice of their contents (other than
by reference on a Schedule) shall in no way limit the Company's other
obligations or Investor's other rights under this Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Investor represents and warrants to the Company as follows:
3.1 Organization and Good Standing. Investor is a limited
partnership duly organized, validly existing and in good standing under the laws
of the State of Georgia.
3.2 Authority. Investor has all requisite power and authority to
execute, deliver and perform the Transaction Agreements and to consummate the
transactions contemplated thereby. The execution, delivery and performance of
the Transaction Agreements, and the consummation of the transactions
contemplated thereby, have been duly and validly authorized by all necessary
action on the part of Investor. This Agreement has been duly executed and
delivered by Investor and constitutes a valid and binding obligation of
Investor, enforceable against Investor in accordance with its terms.
3.3 No Conflict or Breach. The execution, delivery and performance
of the Transaction Agreements do not and will not (a) conflict with or
constitute a violation of the limited partnership agreement of Investor or (b)
conflict with or constitute a violation of any statute, judgment, order, decree
or regulation of any court, administrative agency, governmental authority or
arbitrator applicable to or relating to Investor.
3.4 Governmental Approvals. No consent, approval, authorization,
registration or filing with any federal, state or local judicial or governmental
authority or administrative agency is required in connection with the valid
execution and delivery by Investor of the Transaction Agreements or the
consummation by Investor of the transactions contemplated thereby.
14
<PAGE> 22
3.5 Investment Representations; Legends.
(a) This Agreement is made by the Company with Investor in
reliance upon Investor's representation to the Company, which by the
acceptance hereof Investor hereby confirms, that the Shares and the
Conversion Shares (collectively, the "Securities") will be acquired for
investment for its own account, not as a nominee or agent, and not with
a view to the sale or distribution of all or any part thereof absent
the registration of the Securities under the Act, or pursuant to a
valid exemption from such registration requirements, and Investor has
no present intention of selling, granting participation in, or
otherwise distributing the same. By executing this Agreement, Investor
further represents that it does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participation to such person, or to any third person, with respect to
any of the Securities.
(b) Investor understands that the Shares are not, and any
Conversion Shares at the time of issuance may not be, registered under
the Act on the ground that the sale provided for in this Agreement and
the issuance of the Securities hereunder is being made in reliance upon
an exemption from the registration requirements of the Act pursuant to
Section 4(2) thereof, and Regulation D of the Securities and Exchange
Commission thereunder ("Regulation D"), as a transaction by an issuer
not involving a public offering or pursuant to Section 3(b) thereof,
and is similarly exempt under any other applicable securities laws, and
that the Company's reliance on such exemption is predicated on
Investor's representations set forth herein.
(c) Investor represents that it is an "accredited investor" as
defined in Regulation D, is experienced in evaluating and investing in
recently organized companies such as the Company, is able to fend for
itself in the transactions contemplated by this Agreement, has such
knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of its investment, and has
the ability to bear the economic risks of its investment. Investor
further represents that it has had access, during the course of the
transaction and prior to the purchase of the Securities, to information
concerning the Company and that it has had during the course of the
transaction and prior to the purchase of the Securities the opportunity
to ask questions of, and receive answers from, the Company concerning
the terms of the Securities and the Company's business, management and
financial affairs, and to obtain additional information (to the extent
the Company possessed such information or could acquire it without
unreasonable effort or expense) necessary to verify the accuracy of any
information furnished to it or to which had access.
(d) Investor acknowledges that all certificates evidencing the
Securities shall bear a legend substantially to the following effect
until such legend is no longer required or appropriate under the Act:
15
<PAGE> 23
"These securities have not be registered under the
Securities Act of 1933, as amended, or any applicable
state securities laws. They may not be sold, offered
for sale, pledged, hypothecated or otherwise disposed
of absent registration of such securities under such
Act and laws unless the Company receives an opinion
of counsel satisfactory to the Company that such
registration is not required."
(e) Investor acknowledges that all certificates evidencing the
Securities shall bear a legend substantially to the following effect
until consummation of a Qualifying Public Offering (as such term is
defined in the Articles of Incorporation):
"These securities are subject to the terms and
conditions of a Co-Sale Agreement among Capital
Appreciation Partners, L.P., Henry Baroco, Lynn
Boggs, Thomas Bryan, Drew W. Edwards and Cleve B.
Schultz, dated as of February __, 1998, a copy of
which is on file with the Secretary of Towne
Services, Inc.
3.6 Broker. No finder, broker, agent or other intermediary has
acted for or on behalf of Investor in connection with the offer or sale of the
Series A Preferred or the Conversion Shares, and Investor hereby agrees to
indemnify and hold the Company harmless from and against any claims for
brokerage commissions, finder's fee or similar payments.
3.7 Disclosure. No representation, warranty or statement made by
Investor in this Agreement, or any document furnished or to be furnished to
Investor pursuant to this Agreement, contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material fact
necessary to make the statements contained in this Agreement or such other
document not misleading.
ARTICLE 4
COVENANTS OF THE COMPANY
The Company covenants and agrees that until such time as the earliest
to occur of (a) a Qualifying Public Offering (as such term is defined in the
Articles of Incorporation), (b) consummation by the Company of the sale of all
or substantially all of the Company's assets, or (c) consummation of a merger in
which the shareholders of the Company own, immediately following such merger,
less than 50% of the equity securities of the surviving corporation, the Company
shall comply with all the provisions of this Article 4 and will cause each of
its subsidiaries, if any, to do so.
4.1 Annual and Monthly Financial Statements. The Company shall
deliver to Investor:
16
<PAGE> 24
(a) Within 120 days after the end of each fiscal year of the
Company, a consolidated balance sheet and statement of operations,
changes in shareholders' equity and cash flows of the Company as of the
last day of and for such fiscal year, certified by Arthur Andersen LLP
or another firm of independent public accountants of recognized
national standing selected by the Company;
(b) Within 45 days after the close of each calendar month, a
consolidated balance sheet and statement of operations, changes in
shareholders' equity and cash flows of the Company as of the last day
of and for such month, all prepared in accordance with generally
accepted accounting principles consistently applied (except that
footnote disclosures need not be presented) unless otherwise disclosed,
and certified as being fairly presented in all material respects by the
Company's President or its Chief Financial Officer; and
(c) As soon as available, and in any event at least 10 days
prior to the end of the Company's fiscal year, an annual budget and
plan for the Company for the next succeeding fiscal year, which shall
include a three-year projection of financial condition, results of
operations, cash flows, capital requirements and market and competitive
conditions.
4.2 Inspection. The Company shall permit Investor at Investor's
expense to visit and inspect the Company's properties, to examine the Company's
books of account and records and to discuss the Company's affairs, finances and
accounts with its officers, all at such reasonable times as may be requested by
Investor and upon not less than two business days notice (which notice
requirement may be waived orally by the Company); provided, however, that the
Company shall not be obliged pursuant to this Section 4.2 to provide any
information that it reasonably considers to be a trade secret or to contain
confidential information without first obtaining a confidentiality agreement of
Investor in a form reasonably satisfactory to the Company.
4.3 Key Executive and Other Insurance. Without Investor's consent
(which shall not unreasonably be withheld, conditioned or delayed), the Company
shall not cause or permit assignment or change in beneficiary and shall not
borrow against any key executive life insurance policies. If requested by
Investor, the Company shall add one designee of Investor as a notice party for
such policies and shall request that the issuer of such policies provide such
designee with 10 days notice before any of such policies are terminated (for
failure to pay premiums or otherwise) or assigned or before any change is made
in the beneficiary thereof. The Company shall also obtain or maintain after the
Closing from financially sound and responsible insurers and keep in effect
insurance policies with extended coverage against loss or damage caused by fire,
explosions, sprinklers, business interruption, and all other hazards and risks
that its Board of Directors determines the Company should be insured against in
amounts as shall be satisfactory to its Board of Directors. The Company shall
also obtain or maintain after the Closing from financially sound and responsible
insurers and keep in effect general liability insurance policies in such
amounts, with such deductibles and with coverage against such losses, as shall
be satisfactory to the Company's Board of Directors.
17
<PAGE> 25
4.4 Prompt Payment of Taxes. The Company shall promptly pay and
discharge, or cause to be paid and discharged, prior to the earliest date on
which any penalty or interest is incurred or begins to accrue all lawful taxes,
assessments and governmental charges or levies imposed upon any of its income,
profits, property or business; provided, however, that any such tax, assessment,
charge or levy need not be paid if the validity thereof shall currently be
contested in good faith by appropriate proceedings and if the Company shall have
set aside on its books adequate reserves with respect thereto; and provided,
further, that the Company will pay all such taxes, assessments, charges or
levies promptly to avoid foreclosure of any Lien which may have attached as
security therefor or with respect thereto.
4.5 Conduct of Business; Compliance with Laws. The Company shall
keep in full force and effect its corporate existence and all rights, permits,
licenses, franchises and Intellectual Property now held by the Company that are
necessary for the conduct of its business, and will acquire and keep in full
force and effect any additional rights, permits, licenses, franchises and
intellectual property of the type described in Section 2.14 as from time to time
may be necessary or appropriate in connection with the conduct of its business.
The Company shall comply with all applicable laws and regulations where failure
to comply would have a Material Adverse Effect. The Company shall pay all wages,
salaries and the like due to its employees, agents or servants within a
reasonable time unless the Board of Directors and any such person agree to defer
such payments.
4.6 Maintenance of Properties. The Company shall maintain all its
properties necessary for the conduct of its business in good repair, working
order and condition, normal wear and tear excepted.
4.7 Accounts and Reports. The Company shall keep true records and
books of account in which full and correct entries will be made of all dealings
or transactions in relation to its business and affairs in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved. The Company shall take no action with respect to its records
and books of account that would cause the opinion from its independent public
accountants in connection with financial statements to be furnished to Investor
pursuant to Section 4.1(a) to be qualified in any material respect.
4.8 Conflicts. Neither the Company nor any of its subsidiaries
shall enter into any transaction or dealings with any one or more of its
directors or shareholders, or any entity with which any director or shareholder
is affiliated, either as director, officer, employee, trustee, shareholder,
beneficiary, partner, venturer or otherwise, or any member of the immediate
family of any such person, involving the payment or receipt of property or
services of a value of more than $5,000 per transaction or dealing unless
approved in advance by a majority of the Company's disinterested directors.
4.9 Year 2000 Compliance. The Company shall use all commercially
reasonable efforts to ensure that by December 31, 1998, its Systems, including
its point-of-sale communications systems, will function in accordance with
applicable specifications, documentation and warranties
18
<PAGE> 26
prior to, during and after the calendar year 2000 and that its Systems otherwise
will comply with the representations and warranties set forth in Section 2.30
(disregarding for this purpose Schedule 2.30).
4.10 Election of Director Designated by Investor. The Company shall
take such steps as are necessary to cause Frank W. Brown or Jon R. Burke, as
selected by Investor, to be duly elected or appointed to the Board of Directors
of the Company effective immediately following the Closing.
4.11 Travel Expenses. The Company shall pay the reasonable travel
and other expenses incurred by the members of its Board of Directors in
connection with their attendance at Board or Board committee meetings.
4.12 Material Change; Litigation; Breach of Covenant. The officers
of the Company shall promptly advise Investor and the Board of Directors, so
long as Investor owns any shares of Series A Preferred, of (a) any change in the
business, assets, operations, financial or other condition or business prospects
of the Company which may have a Material Adverse Effect and (b) each suit or
proceeding commenced or threatened against the Company which, if adversely
determined, may have a Material Adverse Effect. So long as Investor owns any
shares of Series A Preferred, the Company will also promptly advise Investor of
the occurrence of any event that constitutes a material breach of any covenant
contained herein.
4.13 Use of Proceeds. The Company shall apply the proceeds from the
issuance and sale of the Series A Preferred only for the purposes identified on
Schedule 4.13;
4.14 PIK Dividends. The Company shall take all actions that are
necessary or appropriate under the Georgia Business Corporation Code or
otherwise to declare the PIK dividends (as such term is defined in the Articles
of Amendment) on a quarterly basis on the Series A Preferred Stock in accordance
with paragraph 3(a) of the Certificate of Designations.
4.15 Additional Shares of Series A Preferred. The Company shall
take all actions that are necessary or appropriate under the Georgia Business
Corporation Code to amend Section A of the Certificate of Designations to
authorize additional shares of Series A Preferred if the issuance of such shares
is necessary in accordance with other provisions of the Certificate.
19
<PAGE> 27
ARTICLE 5
OTHER COVENANTS
5.1 Mutual Covenants. Each of Investor and the Company covenants
and agrees with the other as follows:
(a) Best Efforts. Each of Investor and the Company shall use
its best efforts to make or obtain all consents, approvals,
authorizations, registrations and filings with all federal, state or
local judicial or governmental authorities or administrative agencies
as are required in connection with the consummation of the transactions
contemplated by this Agreement.
(b) Confidentiality. In recognition of the confidential nature
of certain of the information which will be provided to each party by
the others, each of Investor and the Company agrees to retain in
confidence, and to require its directors, officers, employees,
consultants, professional representatives and agents (collectively, its
"Representatives") to retain in confidence, all confidential
information transmitted or disclosed to it by another party to this
Agreement, and further agrees that it will not use for its own benefit
and will not use or disclose to any third party, or permit the use or
disclosure to any third party of, any confidential information obtained
from or revealed by the other, except that each of Investor and the
Company may disclose the information to those of its Representatives
who need the information for the proper performance of their assigned
duties with respect to the consummation of the transactions
contemplated by this Agreement. In making such information available to
its Representatives, each of Investor and the Company shall take any
and all precautions necessary to ensure that its Representatives use
the information only as permitted by this Agreement. Notwithstanding
anything to the contrary in the foregoing provisions, such information
may be disclosed (a) where it is required by any regulatory authorities
or governmental agencies, (b) if it is required by court order or
decree or applicable law, (c) if it is obtained from public or
published information, (d) if it is received from a third party not
known to the recipient to be under an obligation to keep such
information confidential, or (e) if the recipient can demonstrate that
such information was in its possession prior to disclosure of the
information in connection with this Agreement. If any party shall be
required to make disclosure of any such information by operation of
law, such disclosing party shall give the party from whom such
information was received prior notice of the making of such disclosure
and shall use all reasonable efforts to afford such other party an
opportunity to contest the making of such disclosure. In the event that
the Closing shall not occur, each of Investor and the Company shall
immediately deliver, or cause to be delivered, to the party from whom
such information was received (without retaining any copies) any and
all documents, statements or other written information obtained from
the other that contain confidential information.
5.2 Investor's Covenant. In exercise of Investor's voting rights
with respect to the Series A Preferred provided for in the Articles of
Incorporation, Investor shall vote its shares of Series A
20
<PAGE> 28
Preferred to elect Frank W. Brown or Jon R. Burke to serve as a director, or
such other person as Investor shall designate, subject to the approval of a
majority of the Board of Directors (which approval shall not be unreasonably
withheld).
5.3 Amended and Restated Articles. The Board of Directors shall
not withdraw its recommendation that the shareholders approve the Amended and
Restated Articles and shall cause the Amended and Restated Articles and the
Articles of Amendment to be filed with the Secretary of State of Georgia in
accordance with the Georgia Business Corporation Code promptly after approval of
the Amended and Restated Articles by the shareholders of the Company.
5.4 Conduct of Business. Between the date of this Agreement and
the Closing Date, the Company shall:
(a) Conduct its operations in the normal and customary manner
in the ordinary course of business;
(b) Promptly advise Investor of any Material Adverse Change;
(c) Promptly advise Investor of the occurrence of any event or
circumstance which affects the consummation of the transactions
contemplated by this Agreement or which, if in existence on the date of
this Agreement, would have been required to have been disclosed in a
Schedule to this Agreement; and
(d) Not take any affirmative action, or fail to take any
reasonable action within the Company's control, as a result of which
any of the changes or events listed in Section 2.24 is likely to occur.
5.5 No Other Solicitations. Until the earlier of the Closing Date
or the termination of this Agreement, the Company and its management and
representatives shall not solicit or encourage any offer, proposal or inquiry
from, or engage in any discussions or negotiations with, any person regarding
equity-based financing on terms substantially similar to those set forth in this
Agreement.
ARTICLE 6
CONDITIONS PRECEDENT TO INVESTOR'S OBLIGATIONS
The obligations of Investor to consummate the transactions contemplated
by this Agreement are subject to the satisfaction of the following conditions on
or before the Closing Date, unless specifically waived in writing by Investor
prior to the Closing Date:
6.1 Representations and Warranties. The representations and
warranties of the Company contained in this Agreement shall have been true and
correct on the date of this Agreement and shall
21
<PAGE> 29
be true and correct on the Closing Date (as defined in Section 8.1) as though
made on and as of the Closing Date.
6.2 Compliance with Covenants. The Company shall have duly
performed and complied with all covenants, agreements and obligations required
by this Agreement to be performed or complied with by each on or prior to the
Closing.
6.3 Absence of Litigation. No action or proceeding shall be
pending or, in the reasonable opinion of Investor, threatened by or before any
court or other governmental body or agency seeking to restrain, prohibit or
invalidate the transactions contemplated by this Agreement or which would
materially and adversely affect the right of Investor to own the Shares.
6.4 Absence of Change. Between the date of this Agreement and the
Closing, no Material Adverse Change shall have occurred including, with respect
to the assets of the Company, any material casualty loss or destruction of, or
damage to, such assets, whether or not insured.
6.5 Consents and Approvals. All (a) Required Consents, (b)
licenses, (c) other orders or notifications of, or registrations, declarations
or filings with, or expiration of waiting periods imposed by, any applicable
governmental or judicial authority and (d) consents, approvals, authorizations
or notifications of any other third parties, all as required in connection with
consummation of the transactions contemplated by this Agreement shall have been
made or obtained or shall have occurred.
6.6 Terms of Series A Preferred. Prior to the Closing, the Company
shall have duly adopted, executed and filed with the Secretary of State of
Georgia the Articles of Amendment in the form included as a part of Exhibit A
hereto, which Articles of Amendment shall be in full force and effect.
6.7 Legal Opinion. Investor shall have received from Nelson
Mullins Riley & Scarborough, L.L.P., counsel to the Company, an opinion, dated
the Closing Date, in the form of Exhibit E.
6.8 Satisfaction of Warrant Condition. Investor shall have
received the written acknowledgment of Sirrom Investments, Inc. that the
issuance and sale of the Series A Preferred pursuant to this Agreement
constitutes receipt by the Company of equity capital in the amount of $1.5
million in satisfaction of the condition set forth in the last sentence of
Section 1 of the Stock Purchase Warrant.
6.9 Registration Rights Agreement. The Company shall have executed
and delivered the Registration Agreement in the form attached as Exhibit C.
22
<PAGE> 30
6.10 Co-Sale Agreement. The Company and Henry Baroco, Lynn Boggs,
Thomas Bryan, Drew W. Edwards and Cleve B. Schultz, shall have executed and
delivered the Co-Sale Agreement in the form attached as Exhibit D.
6.11 Sirrom Investments, Inc. Consents. Sirrom Investments, Inc.
shall have provided to the Company, and to Henry Baroco, Drew W. Edwards and
Cleve B. Schultz, its written consents to the execution, delivery and
performance by them of the Registration Agreement and the Co-Sale Agreement,
respectively.
ARTICLE 7
CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATION
The obligations of the Company to consummate the transactions
contemplated by this Agreement are subject to the satisfaction of each of the
following conditions on or before the Closing Date, unless specifically waived
in writing by the Company prior to the Closing:
7.1 Representations and Warranties The representations and
warranties of Investor contained in this Agreement shall have been true and
correct on the date of this Agreement, and shall be true and correct on the
Closing Date as though made on and as of the Closing Date.
7.2 Compliance with Covenants. Investor shall have duly performed
and complied with all covenants, agreements and obligations required by this
Agreement to be performed or complied with by it on or before the Closing Date.
7.3 Absence of Litigation. No action or proceeding shall be
pending by or, in the reasonable opinion of the Company, threatened by or before
any court or other governmental body or agency seeking to restrain, prohibit or
invalidate the transactions contemplated by this Agreement or which would
materially and adversely affect the right of the Company to issue the Series A
Preferred to Investor.
7.4 Consents and Approvals. All Required Consents shall have been
obtained prior to or at the Closing.
7.5 Amended and Restated Articles. The holders of a majority of
the Common Stock shall have approved the Amended and Restated Articles, and the
Amended and Restated Articles and the Articles of Amendment thereto shall have
been filed with the Secretary of State of Georgia, all in accordance with the
Georgia Business Corporation Code.
23
<PAGE> 31
ARTICLE 8
CLOSING
8.1 Closing. The closing of the sale of the Shares (the "Closing")
shall take place at the offices of Womble Carlyle Sandridge & Rice, PLLC, 1275
Peachtree Street, NE, Atlanta, Georgia 30309, at 1:00 p.m., local time, on March
11, 1998, or such other date as may be mutually agreed upon by the parties to
this Agreement; provided, however, as follows: (a) if one or more conditions to
this Agreement is not satisfied by such date, the party benefitting from such
condition may elect, in its sole discretion, one or more postponements of the
Closing for the purpose of enabling such condition to be satisfied; and (b)
notwithstanding the provisions of the preceding clause (a), in no event may the
Closing be postponed beyond March 31, 1998. The date of the Closing is referred
to as the "Closing Date."
8.2 Deliveries by the Company. At the Closing, the Company shall
deliver or cause to be delivered to Investor the following:
(a) stock certificates representing the Shares registered and
reflecting denominations as requested by Investor;
(b) a certificate signed by the Company confirming the
satisfaction of the conditions set forth in Sections 6.1 and 6.2 above
as to representations, warranties and covenants and Section 6.4 above
as to absence of changes;
(c) a copy of all corporate resolutions authorizing the
execution, delivery and performance of this Agreement by the Company,
and the consummation of the transactions contemplated in this
Agreement, accompanied by the certification of the Secretary of the
Company to the effect that such resolutions are in full force and
effect and have not been amended, modified or rescinded;
(d) the Company's good standing certificates from the
Secretary of State of the state of the Company's incorporation and each
of the states listed on Schedule 2.1, and certificates from the
applicable departments of revenue or taxation of each such jurisdiction
stating that all required taxes have been paid by the Company in full;
(e) the legal opinion referred to in Section 6.7;
(f) evidence of that all Required Consents have been obtained
or satisfied; and
(g) reimbursement of Investor's out-of-pocket expenses in
connection with Investor's purchase of the Series A Preferred,
including but not limited to legal fees and expenses, in an amount not
to exceed $40,000.
8.3. Deliveries by Investor. At the Closing, Investor shall deliver
or cause to be delivered to the Company the following:
24
<PAGE> 32
(a) a certificate of Capital Appreciation Management Company,
L.L.C., as General Partner of Investor, confirming the satisfaction of
the conditions set forth in Sections 7.1 and 7.2 as to representations,
warranties and covenants;
(b) a certificate of good standing for Investor issued by the
Secretary of State of Georgia; and
(c) the Purchase Price, payable as provided in Section 1.2.
ARTICLE 9
TERMINATION
9.1. Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) By the mutual written consent of the Company and Investor;
(b) By the Company (if the Company is not then in breach of
any term of this Agreement), if Investor shall (i) fail to perform its
agreements contained in this Agreement required to be performed on or
prior to the Closing Date, or (ii) breach any of its representations or
warranties contained in this Agreement, which failure or breach is not
cured within ten days after the Company has notified Investor of its
intent to terminate this Agreement pursuant to this subparagraph;
(c) By Investor (if Investor is not then in breach of any term
of this Agreement), if the Company shall (i) fail to perform its
agreements contained in this Agreement required to be performed on or
prior to the Closing Date, or (ii) breach any of its representations or
warranties contained in this Agreement , which failure or breach is not
cured within ten days after Investor has notified the Company of its
intent to terminate this Agreement pursuant to this subparagraph;
(d) By the Company or by Investor, if there shall be any
order, writ, injunction or decree of any court or governmental or
regulatory agency binding on the Company, or on Investor, which
prohibits or restrains any party from consummating the transactions
contemplated by this Agreement; or
(e) By the Company or by Investor, if the Closing has not
occurred by March 31, 1998 for any reason other than delay or
nonperformance of the party seeking such termination.
9.2. Effect on Obligations. Termination of this Agreement pursuant
to this Article shall terminate all obligation of the parties hereunder, except
for the obligations under Sections 10.2 (with respect to expenses), 10.3 (with
respect to publicity) and 5.1(b) (with respect to confidentiality);
25
<PAGE> 33
provided, however, that termination pursuant to subparagraphs (b) or (c) of
Section 9.1 shall not relieve the defaulting or breaching party from any
liability to the other party to this Agreement.
ARTICLE 10
MISCELLANEOUS
10.1 Survival of Representations. All representations and
warranties of the parties contained in this Agreement or otherwise made in
writing in connection with the transactions contemplated by this Agreement shall
survive the execution and delivery of this Agreement.
10.2 Expenses. Except as otherwise provided in Section 8.2(g), all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated by this Agreement shall be paid by the party incurring
such expense, whether or not the sale of the Shares is consummated.
10.3 Publicity. Each of the Company and Investor agrees it will not
make any press releases or other announcements prior to the Closing with respect
to the transactions contemplated by this Agreement, except as required by
applicable law, without the prior approval of the other party.
10.4 Commercially Reasonable Efforts. Each party to this Agreement
agrees to use all commercially reasonable efforts to satisfy the conditions to
the Closing set forth in this Agreement and otherwise to consummate the
transactions contemplated by this Agreement.
10.5 Notices. All notices, demands and other communications made
hereunder shall be in writing and shall be given either by personal delivery, by
nationally recognized overnight courier (with charges prepaid) or by telecopy
(with telephone confirmation), and shall be deemed to have been given or made
when personally delivered, the day of guaranteed delivery by such overnight
courier service or when transmitted to the specified telecopy number and
confirmed by telephone, addressed to the respective parties at the following
addresses (or such other address for a party as shall be specified by like
notice):
If to the Company:
Towne Services, Inc.
3295 River Exchange Drive
Suite 350
Norcross, Georgia 30092
Attention: Drew Edwards
Telephone: 770-734-2680
Telecopy:770-734-2682
26
<PAGE> 34
With a copy (which shall not constitute notice) to:
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, N.E.
First Union Plaza
Suite 1400
Atlanta, Georgia 30309
Attention: Susan Spencer
Telephone: 404-817-6165
Telecopy: 404-817-6224
If to Investor:
Capital Appreciation Partners, L.P.
One Buckhead Plaza, Suite 1585
3060 Peachtree Road
Atlanta, Georgia 30305
Attention: Frank W. Brown
Telephone: 404-364-2092
Telecopy: 404-364-2058
With a copy (which shall not constitute notice) to:
Womble Carlyle Sandridge & Rice, PLLC
1275 Peachtree Street, N.E.
Atlanta, Georgia 30309
Attention: Steven S. Dunlevie
Telephone: 404-888-7401
Telecopy: 404-870-4828
10.6 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.7 Assignment. This Agreement shall be binding upon and inure to
the benefit of the parties to this Agreement and their respective successors and
permitted assigns. Neither this Agreement nor any of the rights, interest or
obligations hereunder shall be assigned by any of the parties to this Agreement
without the prior written consent of all other parties to this Agreement, and
any purported assignment without such consent shall be void.
27
<PAGE> 35
10.8 Third Party Beneficiaries. None of the provisions of this
Agreement or any document contemplated by this Agreement is intended to grant
any right or benefit to any person or entity which is not a party to this
Agreement.
10.9 Headings. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of this
Agreement and shall not in any way affect the meaning or interpretation of this
Agreement.
10.10 Recitals. The recitals set forth at the beginning of this
Agreement are incorporated by reference in, and made a part of, this Agreement.
10.11 Amendments. Any waiver, amendment, modification or supplement
of or to any term or condition of this Agreement shall be effective only if in
writing and signed by all parties hereto, and the parties to this Agreement
waive the right to amend the provisions of this Section orally.
10.12 Governing Law. This Agreement shall be governed by the laws of
the State of Georgia, without regard to conflicts of laws principles.
10.13 Jurisdiction: Service of Process. Each of the parties to this
Agreement submits to the jurisdiction of any state or federal court sitting in
Georgia, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of such action or proceeding may
be heard and determined in any such court. Each of the parties to this Agreement
waives any defense of inconvenient forum to the maintenance of any action or
proceeding so brought and waives any bond, surety or other security that may be
required of any party with respect thereto. Any party may make service on any
other party by sending or delivering a copy of the process to the party to be
served at the address and in a manner provided in Section 10.5 above; provided,
however, that nothing in this Section 10.13 will affect the right of any party
to serve legal process in any other manner permitted by law or at equity. Each
party agrees that a final judgment in any action or proceeding so brought shall
be conclusive and may be enforced by suit on the judgment or in any other manner
provided by law or at equity.
10.14 Intentionally Omitted.
10.15 Remedies. In the event litigation shall be necessary to
enforce, interpret or rescind the provisions of this Agreement or any related
matter, the prevailing party shall be entitled to recover from the adverse
party, in addition to any other relief, the prevailing party's reasonable
attorneys' fees for services before trial, at trial, and on any subsequent
appeal by the adverse party.
10.16 Severability. In the event that any provision in this
Agreement shall be determined to be invalid, illegal or unenforceable in any
respect, the remaining provisions of this Agreement shall not be in any way
impaired, and the illegal, invalid or unenforceable provision shall be fully
28
<PAGE> 36
severed from this Agreement and there shall be automatically added a replacement
provision as similar in terms and intent to such severed provision as may be
legal, valid and enforceable.
10.17 Entire Agreement. This Agreement and the Schedules and
Exhibits to this Agreement, together with the documents and instruments
delivered pursuant to this Agreement, constitute the entire contract between the
parties to this Agreement pertaining to the subject matter of this Agreement,
and supersede all prior and contemporaneous agreements and understandings
between the parties with respect to such subject matter including without
limitation the letter of intent dated February 16, 1998, which are expressly
terminated.
10.18 Construction. Each party to this Agreement and its counsel
have reviewed and revised this Agreement. The normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement or of any amendments,
schedules or exhibits to this Agreement. Any reference to any federal, state or
local statute or law shall be deemed also to refer to all rules and regulations
promulgated under such statute or rule, unless the context requires otherwise.
The word "including" shall mean including without limitation. The parties to
this Agreement intend that each representation, warranty and covenant in this
Agreement shall have independent significance. If any party has breached any
representation, warranty or covenant in any respect, the fact that there exists
another representation, warranty or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the party has not
breached shall not detract from or mitigate the fact that the party is in breach
of the first representation, warranty or covenant.
29
<PAGE> 37
Each of the parties has signed this Agreement, or has caused this
Agreement to be signed by its duly authorized officer, as of the date first
above written.
TOWNE SERVICES, INC.
By: /s/ Bruce F. Lowthers, Jr.
---------------------------------------
Name: Bruce F. Lowthers, Jr.
Title: Chief Financial Officer
CAPITAL APPRECIATION PARTNERS, L.P.
By: CAPITAL APPRECIATION MANAGEMENT
COMPANY, L.L.C., Its General Partner
By: /s/ Frank W. Brown
------------------------------
Name: Frank W. Brown
Title: Managing Member
30
<PAGE> 1
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of March 13,
1998, is entered into by and between TOWNE SERVICES, INC., a Georgia corporation
(the "Company"), and CAPITAL APPRECIATION PARTNERS, L.P., a Georgia limited
partnership ("Investor").
RECITALS:
The Company and Investor have entered into a Stock Purchase
Agreement, dated as of March 13, 1998 (the "Purchase Agreement"), that provides
for the sale by the Company to Investor of 15,000 shares of Series A Preferred
Stock of the Company (the "Series A Preferred"), which shares are convertible
into shares of common stock of the Company (the "Common Stock"), and in
connection therewith Investor is to receive certain registration rights in
respect of the Common Stock issuable upon conversion of the Series A Preferred.
The execution of this Agreement is a condition to the Closing under the Purchase
Agreement.
In consideration of the foregoing and the mutual terms and
provisions of this Agreement, the parties hereby agree as follows:
1. Definitions. For purposes of this Agreement, the following
terms shall have the following respective meanings:
(a) "Act" shall mean the Securities Act of 1933, as amended,
or any similar federal statute enacted hereafter, and the rules and regulations
of the Commission thereunder, all as the same shall be in effect from time to
time;
(b) "Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Act;
(c) The terms "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Act and the declaration or ordering of
effectiveness of such registration statement by the Commission;
(d) "Registrable Securities" shall mean (i) shares of Common
Stock issued or issuable upon conversion of the Series A Preferred, (ii) shares
of Common Stock held of record by Investor, and (iii) any Common Stock issued as
a dividend or other distribution with respect to, or in exchange or in
replacement of, the foregoing;
<PAGE> 2
(e) "Holder" shall mean Investor if Investor holds Registrable
Securities and any other person holding Registrable Securities to whom these
registration rights have been transferred pursuant to Section 14 of this
Agreement; provided, however, that any person who acquires any of the
Registrable Securities in a distribution pursuant to a registration statement
filed by the Company under the Act or pursuant to a sale under Rule 144 under
the Act shall not be considered a Holder;
(f) "1934 Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal statute enacted hereafter, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect
from time to time; and
(g) All other capitalized terms used herein but not otherwise
defined shall have the meanings ascribed to them in the Purchase Agreement.
2. Demand Registration. If the Company shall receive a written
request (specifying that it is being made pursuant to this Section 2) from the
Holders of at least fifty percent (50%) of the Registrable Securities that the
Company file a registration statement under the Act covering the registration
for offer and sale of at least 25% of the Registrable Securities, and provided
the Company has completed a public offering of the Common stock registered with
the Commission on Form S-1, SB-1 or SB-2 or any successor form (an "Initial
Public Offering"), then the Company shall promptly notify in writing all other
Holders of such request. Within 20 calendar days after such notice has been sent
by the Company, any other Holder may give written notice to the Company of its
intent to include its Registrable Securities in the registration, which notice
shall specify the number of shares to be included. As soon as practicable after
the expiration of such 20-day period, the Company shall use its best efforts to
cause all Registrable Securities that Holders have requested be registered to be
registered under the Act.
3. Piggyback Registration. Subject to Section 9, if at any
time the Company proposes to register any of its securities under the Act,
either for its own account or for the account of other holders of Common Stock,
in connection with the public offering of such securities solely for cash, on a
registration form that would also permit the registration of Registrable
Securities, the Company shall, with respect to any registration, including an
Initial Public Offering, promptly give each Holder written notice of such
proposal. Upon the written request of any Holder given within 20 days after
mailing of any such notice by the Company, the Company shall use its best
efforts to cause to be included in such registration under the Act all the
Registrable Securities that each such Holder has requested be registered.
4. [Intentionally Omitted.]
<PAGE> 3
5. Obligations of the Company. Whenever required under this
Agreement to use its best efforts to effect the registration of any Registrable
Securities, the Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the Commission a registration
statement covering such Registrable Securities and use its best efforts to cause
such registration statement to be declared effective by the Commission as
expeditiously as possible and to keep such registration effective until the
earlier of (i) the date when all Registrable Securities covered by the
registration statement have been sold or (ii) 180 days from the effective date
of the registration statement; provided, that before filing a registration
statement or prospectus or any amendments or supplements thereto, the Company
will furnish to each Holder of Registrable Securities covered by such
registration statement and the underwriters, if any, copies of all such
documents proposed to be filed (excluding exhibits, unless any such person shall
specifically request exhibits), which documents will be subject to the review of
such Holders and underwriters, and the Company will not file such registration
statement or any amendment thereto or any prospectus or any supplement thereto
(including any documents incorporated by reference therein) with the Commission
if (i) the Holders of a majority of the Registrable Securities covered by such
registration statement or the underwriters, if any, shall reasonably object to
such filing or (ii) information in such registration statement or prospectus
concerning a particular selling Holder has changed and such Holder or the
underwriters, if any, shall reasonably object.
(b) Prepare and file with the Commission such amendments and
post-effective amendments to such registration statement as may be necessary to
keep such registration statement effective during the period referred to in
Section 5(a) and to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement, and cause
the prospectus to be supplemented by any required prospectus supplement, and as
so supplemented to be filed with the Commission pursuant to Rule 424 under the
Act.
(c) Furnish to the selling Holders such numbers of copies of
such registration statement, each amendment thereto, the prospectus included in
such registration statement (including each preliminary prospectus), each
supplement thereto and such other documents as they may reasonably request in
order to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the
Registrable Securities under such other securities laws of such jurisdictions as
shall be reasonably requested by any selling Holder and do any and all other
acts and things which may be reasonably necessary or advisable to enable such
selling Holder to consummate the disposition of the Registrable Securities owned
by such Holder in such jurisdictions; provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to
transact business or to file a general consent to service of process in any such
states or jurisdictions; and provided further that (anything in this Agreement
to the contrary notwithstanding with respect to the bearing of
<PAGE> 4
expenses) if any jurisdiction in which the Registrable Securities shall be
qualified shall require that expenses incurred in connection with the
qualification of the Registrable Securities in that jurisdiction be borne by
selling shareholders, then such expenses shall be payable by the selling Holders
pro rata, to the extent required by such jurisdiction.
(e) Promptly notify each selling Holder of such Registrable
Securities at any time when a prospectus relating thereto is required to be
delivered under the Act of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading and, at the request of any such Holder, the Company will prepare
a supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such Registrable Securities, such prospectus will not contain
an untrue statement of a material fact or omit to state any fact necessary to
make the statements therein not misleading.
(f) Provide a transfer agent and registrar for all such
Registrable Securities not later than the effective date of such registration
statement.
(g) Enter into such customary agreements (including
underwriting agreements in customary form for a primary offering) and take all
such other actions as the Holders of a majority of the Registrable Securities
being sold or the underwriters, if any, reasonably request in order to expedite
or facilitate the disposition of such Registrable Securities (including, without
limitation, effecting a stock split or a combination of shares).
(h) Make available for inspection by any selling Holder of
Registrable Securities, any underwriter participating in any disposition
pursuant to such registration statement and any attorney, accountant or other
agent retained by any such selling Holder or underwriter, all financial and
other records, pertinent corporate documents and properties of the Company, and
cause the officers, directors, employees and independent accountants of the
Company to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such registration
statement.
(i) Promptly notify the Holders of Registrable Securities and
the underwriters, if any, of the following events and (if requested by any such
person) confirm such notification in writing: (i) the filing of the prospectus
or any prospectus supplement and the registration statement and any amendment or
post-effective amendment thereto and, with respect to the registration statement
or any post-effective amendment thereto, the declaration of the effectiveness of
such documents, (ii) any requests by the Commission for amendments or
supplements to the registration
<PAGE> 5
statement or the prospectus or for additional information, (iii) the issuance or
threat of issuance by the Commission of any stop order suspending the
effectiveness of the registration statement or the initiation of any proceedings
for that purpose and (iv) the receipt by the Company of any notification with
respect to the suspension of the qualification of the Registrable Securities for
sale in any jurisdiction or the initiation or threat of initiation of any
proceeding for such purpose.
(j) Make every reasonable effort to prevent the entry of any
order suspending the effectiveness of the registration statement and obtain at
the earliest possible moment the withdrawal of any such order, if entered.
(k) If reasonably requested by any underwriter or a selling
Holder of Registrable Securities in connection with any underwritten offering,
promptly incorporate in a prospectus supplement or post-effective amendment such
information as the underwriters and the Holders of a majority of the Registrable
Securities being sold agree should be included therein relating to the sale of
the Registrable Securities, including, without limitation, information with
respect to the number of Registrable Securities being sold to such underwriters,
the purchase price being paid therefor by such underwriters and any other terms
of the underwritten (or best efforts underwritten) offering of the Registrable
Securities to be sold in such offering, and make all required filings of such
prospectus supplement or post-effective amendment promptly after being notified
of the matters to be incorporated in such prospectus supplement or
post-effective amendment.
(l) Prior to the filing of any document which is to be
incorporated by reference into the registration statement or the prospectus
(after the initial filing of the registration statement with the Commission),
(i) promptly provide copies of such document to counsel for the selling Holders
of the Registrable Securities and the counsel for the underwriters, if any, (ii)
make representatives of the Company available for discussion of such document
and (iii) make such changes in such document prior to the filing thereof as
counsel for such Holders or underwriters may reasonably request.
(m) Cooperate with the selling Holders of Registrable
Securities and the underwriters, if any, to facilitate the timely preparation
and delivery of certificates representing Registrable Securities to be sold and
not bearing any restrictive legends, and enable such Registrable Securities to
be in such lots and registered in such names as the underwriters may request at
least two business days prior to any delivery of Registrable Securities to the
underwriters.
(n) Provide a CUSIP number for all Registrable Securities not
later than the effective date of the registration statement.
<PAGE> 6
(o) Prior to the effectiveness of the registration statement
and any post-effective amendment thereto and at each closing of an underwritten
offering, (i) make such representations and warranties to the selling Holders of
such Registrable Securities and the underwriters, if any, with respect to the
Registrable Securities and the registration statement as are customarily made by
issuers to underwriters in primary underwritten offerings; (ii) obtain opinions
of counsel to the Company and updates thereof (which counsel and which opinions
shall be reasonably satisfactory to the underwriters, if any, and to the Holders
of a majority of the Registrable Securities being sold) addressed to each
selling Holder and the underwriters, if any, covering the matters customarily
covered in opinions requested in underwritten offerings and such other matters
as may be reasonably requested by such Holders and underwriters or their
counsel; (iii) obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the selling
Holders of Registrable Securities and the underwriters, if any, such letters to
be in customary form and covering matters of the type customarily covered in
"cold comfort" letters by underwriters in connection with primary underwritten
offerings; and (iv) deliver such documents and certificates as may be reasonably
requested by the Holders of a majority of the Registrable Securities being sold
and by the underwriters, if any, to evidence compliance with clause (i) above
and with any customary conditions contained in the underwriting agreement or
other agreement entered into by the Company.
(p) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make generally available
to its security holders earnings statements satisfying the provisions of Section
11(a) of the Act, no later than 45 days after the end of any 12-month period (or
90 days, if such period is a fiscal year) (i) commencing at the end of any
fiscal quarter in which Registrable Securities are sold to underwriters in a
firm or best efforts underwritten offering, or (ii) if not sold to underwriters
in such an offering, beginning with the first month of the first fiscal quarter
of the Company commencing after the effective date of the registration
statement, which statements shall cover such 12-month periods.
6. Furnish Information. It shall be a condition precedent to
the obligations of the Company (a) to take any action pursuant to this Agreement
that the Holders shall furnish to the Company such information regarding them,
the Registrable Securities held by them, and the intended method of disposition
of such Registrable Securities as the Company shall reasonably request and as
shall be required in connection with the action to be taken by the Company and
(b) to cause any registration pursuant to this Agreement to have become
effective for the Holders to have exercised their rights of conversion with
respect to any Registrable Securities proposed to be registered.
7. Suspension of Disposition of Registrable Securities. Each
selling Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any
<PAGE> 7
notice from the Company of the happening of any event of the kind described in
Section 5(e) hereof, such Holder will forthwith discontinue disposition of
Registrable Securities until such Holder's receipt of copies of a supplemented
or amended prospectus contemplated by Section 5(e) hereof, or until it is
advised in writing (the "Advice") by the Company that the use of the prospectus
may be resumed, and has received copies of any additional or supplemental
filings which are incorporated by reference in the prospectus, and, if so
directed by the Company, such Holder will deliver to the Company (at the expense
of the Company) all copies, other than permanent file copies then in such
Holder's possession, of the prospectus covering such Registrable Securities
current at the time of receipt of such notice. In the event the Company shall
give any such notice, the time periods mentioned in Section 5(a) hereof shall be
extended by the number of days during the period from and including the date of
the giving of such notice pursuant to Section 5(e) hereof to and including the
date when each selling Holder of Registrable Securities shall have received the
copies of the supplemented or amended prospectus contemplated by Section 5(e)
hereof or the Advice.
8. Expenses of Registration. All expenses incurred in
connection with a registration pursuant to Sections 2 and 3 (excluding
underwriters' discounts and commissions), including, without limitation all
registration and qualification fees, printing and accounting fees, fees and
disbursements of counsel for the Company, and the reasonable fees and
disbursements of one counsel chosen by the Holders of a majority of the
Registrable Securities being registered shall be borne by the Company; provided,
however, that the Company shall not be required to pay for any expenses of any
registration proceeding begun pursuant to Section 2 if the registration request
is subsequently withdrawn, unless the Holders agree to forfeit their right to a
demand registration pursuant to Section 2; and provided further that if there
has been a material adverse change in the business or prospects of the Company
after the date of any demand for registration made pursuant to Section 2, which
change has caused such request to be withdrawn, then the Holders shall not be
required to pay any of the expenses for such registration and shall retain the
right to require the Company to register Registrable Securities pursuant to
Section 2.
9. Underwriting Requirements; Priorities.
(a) The Company and the Holders of a majority of the
Registrable Securities included in any registration under Section 2 shall
mutually agree on the selection of the investment banker(s) and manager(s) to
administer the offering, if any. The Company will not include in any
registration under Section 2 any securities that are not Registrable Securities
without the written consent of the Holders of a majority of the Registrable
Securities requesting such registration. If other securities are permitted to be
included in a registration under Section 2 which is an underwritten offering and
the managing underwriters advise the Company in writing that in their opinion
the number of Registrable Securities and other securities requested to be
included exceeds the number of Registrable Securities and other securities that
can be sold at the desired price in such offering, the
<PAGE> 8
Company will include in such registration (i) first, prior to the inclusion of
any securities that are not Registrable Securities, the number of Registrable
Securities requested to be included which in the opinion of such underwriters
can be sold, pro rata among the respective Holders on the basis of the amount of
Registrable Securities owned and (ii) second, all other securities permitted to
be included in such registration.
(b) The Company will have the right to select the investment
banker(s) and manager(s) to administer any offering to which Section 3 is
applicable, subject to the approval of the Holders of a majority of the
Registrable Securities included in such registration, which approval will not be
unreasonably withheld. If a registration under Section 3 is an underwritten
primary registration on behalf of the Company, and the managing underwriters
advise the Company in writing that in their opinion the number of securities
requested to be included in such registration exceeds the number which can be
sold at the desired price in such offering, the Company will include in such
registration (i) first, the securities the Company proposes to sell, (ii)
second, the Registrable Securities requested to be included in such registration
by the Holders and, if applicable, the securities requested to be included in
such registration by Sirrom Investments, Inc. (or any successor in interest),
pursuant the Stock Purchase Warrant dated December 18, 1997, on a pro rata among
the Holders thereof and Sirrom Investments, Inc. (or its successor in interest)
on the basis of the number of shares requested to be registered and (iii) third,
all other securities requested to be included in such registration. If a
registration under Section 3 is an underwritten secondary registration on behalf
of holders of securities of the Company other than a registration demanded by a
Holder under Section 2 (or is a combined primary offering by the Company and
secondary offering by the Company's stockholders) and the managing underwriters
advise the Company in writing that in their opinion the number of securities
requested to be included in such registration exceeds the number that can be
sold at the desired price in such offering, the Company will include in such
registration (i) first, the securities requested to be included therein by the
Holders requesting such registration and by other holders of Company securities
with contractual registration rights, pro rata among the holders of such
securities on the basis of the number of shares as requested to be included
therein, and (ii) second, other securities requested to be included in such
registration, including securities to be sold for the account of the Company.
(c) No person may participate in any underwritten registration
hereunder unless such person (i) agrees to sell such person's securities on the
basis provided in any underwriting arrangements approved by the persons entitled
hereunder to approve such arrangements and (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the term of such underwriting arrangements.
(d) After the date of this Agreement, the Company shall not
grant to any holder of securities of the Company any registration rights having
a priority greater than those
18
<PAGE> 9
granted hereunder without the prior written consent of the Holders of a majority
of the outstanding shares of Series A Preferred.
10. Termination of the Company's Obligations.
(a) The Company shall have no further obligations pursuant to
Section 2 with respect to any request or requests made by any Holder after the
Company has effected one registration pursuant to Section 2 in which the
registration statement has remained effective for at least 180 days or has
become effective and all Registrable Securities covered thereby have been sold
pursuant thereto.
(b) [INTENTIONALLY OMITTED.]
(c) The Company shall not be obligated under Sections 2 or 3
hereof to register or include in any registration Registrable Securities that
any Holder has requested to be registered if the Company shall furnish such
Holder with a written opinion of counsel reasonably satisfactory to such Holder,
that all Registrable Securities that such Holder holds may be publicly offered,
sold and distributed without registration under the Act pursuant to Rule 144
promulgated by the Commission under the Act (without recourse to clause (k)
thereof).
11. Reports Under the 1934 Act. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the Act and
any other rule or regulation of the Commission that may at any time permit a
Holder to sell securities of the Company to the public without registration, the
Company agrees to use its best efforts to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144, at all times subsequent to 90 days after
the effective date of the first registration statement covering an underwritten
public offering filed under the Act by the Company;
(b) file with the Commission in a timely manner all reports
and other documents required of the Company under the Act and the 1934 Act at
any time after it is subject to such registration requirements; and
(c) furnish to any Holder so long as such Holder owns any of
the Registrable Securities forthwith upon request a written statement by the
Company that it has complied with the reporting requirements of Rule 144 (at any
time after 90 days after the effective date of said first registration statement
filed by the Company), and of the Act and the 1934 Act (at any time after it has
become subject to such reporting requirements), a copy of the most recent annual
or quarterly report of the Company, and such other reports and documents so
filed by the Company as may be reasonably requested by any Holder in availing
any Holder of any rule or regulation of the Commission permitting the selling of
any such securities without registration.
<PAGE> 10
12. Lockup Agreement.
(a) Each Holder agrees in connection with any registration of
its Registrable Securities, upon the request of the underwriters managing any
underwritten offering of the Company' securities, not to sell, make any short
sale of, pledge, grant any option for the purchase of or otherwise dispose of
any Registrable Securities (other than those included in the registration)
without the prior written consent of the Company or such underwriters, as the
case may be, during such period provided for in the underwriting agreement for
such offering, provided that all officers, directors and any person or entity
that holds a percentage of the Company's outstanding capital stock equal to or
greater than the percentage held by such Holder also agrees to such restriction.
(b) The Company agrees in connection with any registration of
Registrable Securities (i) not to effect any public sale or distribution of its
equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the restriction period referred to in
Section 12(a) (except as part of such underwritten registration or pursuant to
registrations on Form S-8 or any successor form), unless the underwriters
managing the registered public offering otherwise agree, and (ii) to use best
efforts to cause each holder of at least 5% (on a fully diluted basis) of its
equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, purchased from the Company at any time after
the date of this Agreement (other than in a registered public offering) to agree
not to effect any sale or distribution of any such securities during such period
(except as part of such underwritten registration, if otherwise permitted),
unless the underwriters managing the registered public offering otherwise agree.
13. Certain Limitations in Connection with Future Grants of
Registration Rights. From and after the date of this Agreement, the Company
shall not enter into any agreement with any holder or prospective holder of any
securities of the Company providing for the granting to such holder of
registration rights unless such agreement:
(a) includes the equivalent of Section 12 of this Agreement as
a term;
(b) includes a provision that, in the case of a registration
involving an underwritten offering under Section 2, protects the Holders if
marketing factors require a limitation on the number of securities to be
included in an underwriting in the manner contemplated by Section 9 of this
Agreement;
(c) is otherwise not inconsistent with the rights granted to
the Holders of Registrable Securities in this Agreement; and
<PAGE> 11
(d) is approved by the Holders of at least a majority of the
Registrable Securities then outstanding.
14. Transfer of Registration Rights. The Holder may transfer
the rights under this Agreement in whole or in part at any time to any
subsidiary, partner or other affiliate of the Holder and, with the consent of
the Company (which consent shall not be unreasonably withheld, conditioned or
delayed), to any other party; provided, the Holder shall give the Company
written notice at the time of such transfer stating the name and address of the
transferee and identifying the securities with respect to which the rights under
this Agreement are being assigned; and, provided further, no transfer shall
increase the obligations of the Company under this Agreement.
15. Indemnification. In the event any Registrable Securities
are included in a registration statement under this Agreement:
(a) To the full extent permitted by law, the Company will, and
hereby does indemnify and hold harmless each Holder requesting or joining in a
registration, each director, officer, partner, employee, or agent for such
Holder, any underwriter (as defined in the Act) for such Holder, and each
person, if any, who controls such Holder or underwriter within the meaning of
the Act, against any losses, claims, damages or liabilities, joint or several,
to which they may become subject under the Act and applicable state securities
laws insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based on any untrue or alleged untrue
statement of any material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein in light of the circumstances under which they were made or
necessary to make the statements therein not misleading or arise out of any
violation by the Company of any rule or regulation promulgated under the Act
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration; and will reimburse each such
person or entity for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this Section 15(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability, or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld)
nor shall the Company be liable in any such case for any such loss, claim,
damage, liability or action to the extent that it arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged omission
made in connection with such registration statement, preliminary prospectus,
final prospectus, or amendments or supplements thereto, in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by or on behalf of any such Holder, underwriter or
controlling person.
19
<PAGE> 12
(b) To the full extent permitted by law, each Holder
requesting or joining in a registration under this Agreement will indemnify and
hold harmless the Company, each of its directors, each of its officers who have
signed the registration statement, each person, if any, who controls the Company
within the meaning of the Act, and any underwriter for the Company (within the
meaning of the Act), each other selling Holder and each person, if any, who
controls such other selling Holder within the meaning of Section 15 of the Act
against any losses, claims, damages or liabilities, joint or several, to which
the Company or any such director, officer, controlling person or underwriter may
become subject, under the Act and applicable state securities laws, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in such registration statement, preliminary or final prospectus, or
amendments or supplements thereto, in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and each such Holder will reimburse any legal or other
expenses reasonably incurred by the Company or any such director, officer,
controlling person or underwriter in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this Section 15(b) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of such Holder (which consent shall
not be unreasonably withheld).
In no event shall the liability of any selling Holder of
Registrable Securities hereunder be greater than the dollar amount of the
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
(c) Promptly after receipt by an indemnified party under this
Section 15 of notice of the commencement of any action or knowledge of a claim
that would, if asserted, give rise to a claim for indemnity hereunder, such
indemnified party will, if a claim in respect thereof is to be made against any
indemnifying party under this Section 15, notify the indemnifying party in
writing of the commencement thereof or knowledge thereof and the indemnifying
party shall have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties. The failure to notify an indemnifying party
promptly of the commencement of any such action or of the knowledge of any such
claim, if prejudicial to his ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party
<PAGE> 13
under this Section 15, but the omission so to notify the indemnifying party will
not relieve him of any liability that he may have to any indemnified party
otherwise than under this Section.
16. Remedies. In addition to being entitled to exercise all
rights provided in this Agreement and the Purchase Agreement as well as all
rights granted by law, including recovery of damages, each Holder of Registrable
Securities will be entitled to specific performance of its rights under this
Agreement. The Company agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the provisions
of this Agreement and hereby agrees not to raise the defense in any action for
specific performance that a remedy at law would be adequate.
17. Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Company has obtained the written consent of Holders
of at least a majority of the outstanding Registrable Securities, voting
together as a single class.
18. Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by personal delivery, by
nationally recognized overnight courier (with charges prepaid) or by telecopy
(with telephone confirmation) as follows:
(a) if to a Holder of Registrable Securities, at the most
current address given by such Holder to the Company in accordance with the
provisions of this Section 18, which address initially is, with respect to
Investor, the address set forth in the Purchase Agreement, with a copy (which
shall not constitute notice) to Investor's respective counsel as identified
therein; and
(b) if to the Company, initially at its address set forth in
the Purchase Agreement and thereafter at such other address, notice of which is
given in accordance with the provisions of this Section 18, with a copy (which
shall not constitute notice) to the Company's counsel as identified therein.
All such notices and communications shall be deemed to have
been duly given or made when personally delivered, the day of guaranteed
delivery by such overnight courier service or when transmitted to the specified
telecopy number and confirmed by telephone, in each case addressed to the
respective parties as set forth above.
19. Counterparts. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
20. Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
<PAGE> 14
21. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia.
22. Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
23. Entire Agreement. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Company with
respect to the Company Stock. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
24. Parties Benefited. Nothing in this Agreement, express or
implied, is intended to confer upon any third party any rights, remedies,
obligations or liabilities.
[The remainder of this page is intentionally left blank.]
<PAGE> 15
The parties have executed this Registration Rights Agreement as of the
date first above written.
TOWNE SERVICES, INC.
By: /s/ Bruce F. Lowthers, Jr.
-----------------------------------
Name:
Title:
CAPITAL APPRECIATION PARTNERS, L.P.
By: CAPITAL APPRECIATION MANAGEMENT
COMPANY, L.L.C., Its General Partner
By: /s/ Frank W. Brown
-----------------------------
Name: Frank W. Brown
Title: Managing Member
<PAGE> 1
EXHIBIT 10.20
TOWNE SERVICES, INC.
DIRECTOR'S AND OFFICER'S
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made as of __________, 1998, by and between Towne
Services, Inc., a Georgia corporation (the "Corporation"), and
_____________________________ (the "Executive").
WHEREAS, the Executive is a member of the Board of Directors and/or an
executive officer of the Corporation and in such capacity is performing a
valuable service to the Corporation; and
WHEREAS, the Corporation's Bylaws (the "Bylaws") provide for the
indemnification of the directors and executive officers of the Corporation
pursuant to Sections 14-2-850 through 14-2-856 of the Georgia Business
Corporation Code, as amended to date (the "State Statute"); and
WHEREAS, the Bylaws and the State Statute specifically contemplate that
contracts may be entered into between the Corporation and its executive officers
and members of its Board of Directors with respect to indemnification of such
individuals; and
WHEREAS, in order to provide to the Executive assurances with respect
to the protection provided against liabilities that he may incur in the
performance of his duties to the Corporation, and to thereby induce the
Executive to serve as a member of the Board of Directors or as an executive
officer, the Corporation has determined and agreed to enter into this contract
with the Executive.
NOW, THEREFORE, in consideration of the premises and the Executive's
continued service as a director and/or an executive officer of the Corporation
after the date hereof, the parties hereto agree as follows:
1. BOARD-AUTHORIZED INDEMNIFICATION. The Corporation hereby agrees to hold
harmless and indemnify the Executive to the full extent that the State Statute,
or any amendment thereof or other statutory provision adopted after the date
hereof, authorizes such indemnification by action of the Board of Directors
without shareholder approval. Such indemnification, and the conditions and
limitations thereon set forth in the State Statute, shall not in any respect
limit, condition or otherwise restrict the indemnification set forth in Section
2 hereof.
2. SHAREHOLDER-AUTHORIZED INDEMNIFICATION. Subject only to the exclusions set
forth in Section 3 hereof, and in addition to the indemnity specified in Section
1 hereof (but without duplication of payments with respect to indemnified
amounts), the Corporation hereby further
<PAGE> 2
agrees to hold harmless and indemnify the Executive against any and all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the Executive in connection with any
threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (including an action by or in the
right of the Corporation), to which the Executive is, was, or at any time
becomes a party, or is threatened to be made a party, by reason of the fact that
the Executive is, was, or at any time becomes a director, officer, employee or
agent of the Corporation, or is or was serving or at any time serves at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise.
3. LIMITATIONS ON SHAREHOLDER-AUTHORIZED INDEMNITY. No indemnity pursuant to
Section 2 hereof shall be paid by the Corporation:
(a) With respect to any proceeding in which the Executive is adjudged,
by final judgment not subject to further appeal, liable to the
Corporation or is subjected to injunctive relief in favor of the
Corporation:
(i) for any appropriation, in violation of his duties, of
any business opportunity of the Corporation;
(ii) for acts or omissions which involve intentional
misconduct or a knowing violation of law;
(iii) for the types of liabilities set forth in Section
14-2-832 of the Georgia Business Corporation Code; or
(iv) for any transaction from which the Executive received an
improper personal benefit;
(b) With respect to any suit in which final judgment is rendered
against the Executive for an accounting of profits, made from the
purchase or sale by the Executive of securities of the Corporation,
pursuant to the provisions of Section 16(b) of the Securities Exchange
Act of 1934 or similar provisions of any federal, state or local
statutory law, or on account of any payment by the Executive to the
Corporation in respect of any claim for such an accounting; or
(c) If a final decision by a court having jurisdiction in the matter
shall determine that such indemnification is not lawful.
4. CONTRIBUTION. If the indemnification provided in Sections 1 and 2 is
unavailable and may not be paid to the Executive for any reason other than those
set forth in paragraph (a) or (b) of Section 3, then in respect of any
threatened, pending, or completed action, suit or proceeding in which the
Corporation is jointly liable with the Executive (or would be if joined in such
action, suit or proceeding), the Corporation shall contribute, to the extent it
is not lawfully prohibited
2
<PAGE> 3
from doing so, to the amount of expenses, judgments, fines and settlements paid
or payable by the Executive in such proportion as is appropriate to reflect (i)
the relative benefits received by the Corporation on the one hand and the
Executive on the other hand from the transaction from which such action, suit or
proceeding arose, and (ii) the relative fault of the Corporation on the one hand
and of the Executive on the other in connection with the events which resulted
in such expenses, judgments, fines or settlement amounts, as well as any other
relevant equitable considerations. The relative fault of the Corporation on the
one hand and of the Executive on the other shall be determined by reference to,
among other things, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent the circumstances resulting in
such expenses, judgments, fines or settlement amounts. The Corporation agrees
that it would not be just and equitable if contribution pursuant to this Section
4 were determined by pro rata allocation or any other method of allocation that
does not take account of the foregoing equitable considerations.
5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of the
Corporation contained herein shall continue during the period the Executive is a
director, officer, employee or agent of the Corporation (or is serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise) and shall
continue thereafter for so long as the Executive shall be subject to any
possible claim or threatened, pending, or completed action, suit or proceeding,
whether civil, criminal or investigative, by reason of the fact that the
Executive was a director of the Corporation or serving in any other capacity
referred to herein.
6. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by the Executive of
notice of the commencement of any action, suit or proceeding, the Executive
will, if a claim in respect thereof is to be made against the Corporation under
this Agreement (other than under Section 2 hereof), notify the Corporation of
the commencement thereof, but the omission to so notify the Corporation will not
relieve the Corporation from any liability which it may have to the Executive
otherwise than under this Agreement. With respect to any such action, suit or
proceeding as to which the Executive so notifies the Corporation:
(a) The Corporation will be entitled to participate therein at its own
expense; and
(b) Subject to Section 7 hereof, and if the Executive shall have
provided his written affirmation of his good faith belief that his
conduct did not constitute behavior of the kind described in paragraph
3(a) hereof and that he is entitled to indemnification hereunder, the
Corporation may assume the defense thereof.
After notice from the Corporation to the Executive of its election so
to assume such defense, the Corporation will not be liable to the Executive
under this Agreement for any legal or other expenses subsequently incurred by
the Executive in connection with the defense thereof, other than reasonable
costs of investigation or as otherwise provided below. The Executive shall have
the right to employ its separate counsel in such action, suit or proceeding, but
the fees and expenses of such counsel incurred after notice from the Corporation
of its assumption of the
3
<PAGE> 4
defense thereof shall be at the expense of the Executive unless (i) the
employment of counsel by the Executive has been authorized by the Corporation,
(ii) counsel designated by the Corporation to conduct such defense shall not be
reasonably satisfactory to the Executive or (iii) the Corporation shall not in
fact have employed counsel to assume the defense of such action, in each of
which cases the fees and expenses of such counsel shall be at the expense of the
Corporation. For the purposes of clause (ii) above, the Executive shall be
entitled to determine that counsel designated by the Corporation is not
reasonably satisfactory if, among other reasons, the Executive shall have been
advised by qualified counsel that, because of actual or potential conflicts of
interest in the matter between the Executive, other officers or directors
similarly indemnified by the Corporation, and/or the Corporation, representation
of the Executive by counsel designated by the Corporation is likely to
materially and adversely affect the Executive's interest or would not be
permissible under applicable canons of legal ethics.
The Corporation shall not be liable to indemnify the Executive under
this Agreement for any amounts paid in settlement of any action or claim
effected without the Corporation's written consent. The Corporation shall not
settle any action or claim in any manner which would impose any penalty or
limitation on the Executive without the Executive's written consent. Neither the
Corporation nor the Executive will unreasonably withhold consent to any proposed
settlement.
7. ADVANCEMENT AND REPAYMENT OF EXPENSES. Upon request therefor accompanied by
reasonably itemized evidence of expenses incurred, and by the Executive's
written affirmation of his good faith belief that his conduct met the standard
applicable to Board-authorized indemnification pursuant to Section 1 hereof or
did not constitute behavior of the kind described in paragraph 3(a) hereof and
that he is entitled to indemnification hereunder, the Corporation shall advance
to the Executive the reasonable expenses (including attorneys' fees and costs of
investigation and defense (including the fees of expert witnesses, other
professional advisors and private investigators)) incurred by him in defending
any civil or criminal suit, action or proceeding for which the Executive is
entitled (assuming an applicable standard of conduct is met) to indemnification
pursuant to this Agreement. The Executive agrees to reimburse the Corporation
for all reasonable expenses paid by the Corporation, whether pursuant to this
Section or Section 6 hereof, in defending any action, suit, or proceeding
against the Executive in the event and to the extent that it shall ultimately be
determined that the Executive is not entitled to be indemnified by the
Corporation for such expenses under either Section 1 or Section 2 of this
Agreement. Any advances and the Executive's agreement to repay shall be
unsecured and interest-free.
8. AGREEMENT TO SERVE. The Executive hereby agrees to continue to serve as a
director and/or an executive officer of the Corporation faithfully and to the
best of his ability so long as he is duly elected and qualified in accordance
with the provisions of the Corporation's bylaws or until such time as he tenders
his resignation in writing.
4
<PAGE> 5
9. ENFORCEMENT
(a) The Corporation expressly confirms and agrees that it has entered
into this Agreement and assumed the obligations imposed on it hereby in
order to induce the Executive to serve as a director and/or an
executive officer of the Corporation and acknowledges that the
Executive will in the future be relying upon this Agreement in
continuing to serve in such capacity.
(b) In the event the Executive is required to bring any action to
enforce rights or to collect money due under this Agreement and is
successful in such action, the Corporation shall reimburse the
Executive for all of the Executive's reasonable fees and expenses in
bringing and pursuing such action.
10. MAINTENANCE OF LIABILITY INSURANCE.
(a) Subject to Section 10(c), the Corporation hereby covenants and
agrees that, so long as Executive shall continue to serve as a director
and/or an executive officer of the Corporation and thereafter so long
as the agreements and obligations of the Corporation shall continue in
accordance with Section 5, the Corporation, in good faith, shall seek
to obtain and maintain in full force and effect a policy of director's
and officer's liability insurance (the "D&O Insurance") in reasonable
amounts from an established and reputable insurer.
(b) In all policies of D&O Insurance, Executive shall be named as an
insured in such manner as to provide Executive the same rights and
benefits as are accorded to the most favorably insured of the
Corporation's officers or directors.
(c) Notwithstanding the foregoing, the Corporation shall have no
obligation to obtain or maintain D&O Insurance if the Corporation
determines in good faith that such insurance is not reasonably
available, the premium costs for such insurance are disproportionate to
the amount of coverage provided or the coverage provided by such
insurance is so limited by exclusions that there is insufficient
benefit from such insurance.
11. SEPARABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the others, so that if any provision
hereof shall be held to be invalid or unenforceable in whole or in part for any
reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof.
12. VESTED RIGHTS, SPECIFIC PERFORMANCE. No amendment to the articles of
incorporation or bylaws of the Corporation or any other corporate action shall
in any way limit the Executive's rights under this Agreement. In any proceeding
brought by or on behalf of the Executive to specifically enforce the provisions
of this Agreement, the Corporation hereby waives the claim or defense therein
that the plaintiff or claimant has an adequate remedy at law, and the
Corporation shall not urge in any such proceeding the claim or defense that such
remedy at law exists. The
5
<PAGE> 6
provisions of this Section 12, however, shall not prevent the Executive from
seeking a remedy at law in connection with any breach of this Agreement.
13. LIABILITY INSURANCE. In the event that the Corporation maintains D&O
Insurance, the Executive shall be covered by such policy or policies, in
accordance with its or their terms, to the maximum extent of the coverage
provided under such policy or policies in effect. Copies of all correspondence
between the Corporation and the company or companies providing such insurance
shall be promptly delivered to the Executive by the Corporation.
14. NON-EXCLUSIVITY, ETC. The rights of the Executive hereunder shall be in
addition to any other rights with respect to indemnification, advancement of
expenses or otherwise that the Executive may have under the Corporation's bylaws
or the Georgia Business Corporation Code or otherwise.
15. SUBROGATION. In the event of payment under this Agreement, the Corporation
shall be subrogated to the extent of such payment to all of the rights of
recovery of the Executive, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Corporation effectively to bring suit
to enforce such rights.
16. NO DUPLICATION OF PAYMENTS. The Corporation shall not be liable under this
Agreement to make any payment to the Executive hereunder to the extent the
Executive has otherwise actually received payment (under insurance policy, bylaw
or otherwise) of the amounts otherwise payable hereunder.
17. APPLICABILITY OF AGREEMENT. This Agreement shall apply only with respect to
acts or omissions of the Executive occurring on or after the effective date
hereof, and this Agreement shall continue in effect regardless of whether the
Executive continues to serve in such capacity, but only in respect of acts or
omissions occurring prior to the termination of the Executive's service in such
capacity.
18. GOVERNING LAW; SUCCESSORS; AMENDMENT AND TERMINATION.
(a) This Agreement shall be interpreted and enforced in accordance with the
laws of the State of Georgia.
(b) This Agreement shall be binding upon the Executive and the Corporation
and its successors and assigns (including any transferee of all or
substantially all of its assets and any successor by merger or otherwise by
operation of law), and shall inure to the benefit of the Executive, his
heirs, personal representatives and assigns and to the benefit of the
Corporation and its successors and assigns.
(c) No amendment, modification, termination or cancellation of this
Agreement shall be effective unless in writing signed by both parties
hereto.
6
<PAGE> 7
19. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
EXECUTIVE TOWNE SERVICES, INC.
By:
- ---------------------------------- ---------------------------
Name: Its:
--------------------------
7
<PAGE> 1
[ARTHUR ANDERSEN LLP LETTERHEAD]
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,536,439
<SECURITIES> 0
<RECEIVABLES> 146,566
<ALLOWANCES> 25,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,805,268
<PP&E> 602,755
<DEPRECIATION> 112,906
<TOTAL-ASSETS> 3,586,432
<CURRENT-LIABILITIES> 780,103
<BONDS> 0
0
0
<COMMON> 4,417,696
<OTHER-SE> (3,156,033)
<TOTAL-LIABILITY-AND-EQUITY> 3,586,432
<SALES> 0
<TOTAL-REVENUES> 722,364
<CGS> 0
<TOTAL-COSTS> 3,122,537
<OTHER-EXPENSES> (1,018)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,946
<INCOME-PRETAX> (2,495,101)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,495,101)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,495,101)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TOWNE SERVICES, INC. FOR THE THREE MONTHS ENDED MARCH
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,452,510
<SECURITIES> 0
<RECEIVABLES> 429,007
<ALLOWANCES> 70,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,481,777
<PP&E> 825,849
<DEPRECIATION> 138,486
<TOTAL-ASSETS> 5,476,001
<CURRENT-LIABILITIES> 1,370,238
<BONDS> 0
0
1,508,000
<COMMON> 10,670,872
<OTHER-SE> (9,715,271)
<TOTAL-LIABILITY-AND-EQUITY> 5,476,001
<SALES> 0
<TOTAL-REVENUES> 547,954
<CGS> 0
<TOTAL-COSTS> 4,731,903
<OTHER-EXPENSES> 2,205,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,289
<INCOME-PRETAX> (6,453,238)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,453,238)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,453,238)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
